Short-term trading techniques for the Forex market

author unknown

For eight years I worked as a scalper in the stock market, I was often asked if scalping techniques are applicable to the Forex market. First, it is important to define the term "scalping"first. When I worked as a stock trader in the 90's in the stock market, the definition of this technique was to make a profit in very short periods of time using a combination of 1-and 5-minute charts, as well as certain methods of reading from the tape. When I started working exclusively on Forex in 2001-2002, it seemed to me that this Hyper strategy has two disadvantages:

1) It is not scalable

2) It is not suitable for the Forex market.

Of course, the second point can be disputed, but it is unlikely that anyone will argue that there is a certain amount of capital in short-term strategies that you can bring to the market without influencing it.
 
In this thread, I want to show how some of the techniques and indicators that are used in scalping techniques can also be used for swing trading in order to optimize the entry and exit levels. As a starting point, we will make several assumptions:

- We select trades using a combination of 60 and 240-minute charts, as well as daily charts. Weekly charts are only used to determine long-term support and resistance levels.

- We will discuss several indicators, the main level of stochastics, RSI, as well as trend lines, Fibonacci levels, and wave analysis.

- The duration of the transaction is several days.

- I work not only with G10 pairs, but also with some other crosses.

- The risk for each trade and the lot size are based on the stop loss.

Any technical approach involving a combination of a certain degree of freedom of choice and strict entry rules can lead to skipping trades. However, the efficiency and accuracy of entry techniques usually helps us avoid costly drawdowns during trading.

Below we see a great example of how you can use the "big picture" for General analysis, but then refer to a smaller time range to determine the entry point to get confirmation of our analysis.



Figure 1

In this case, I predict that repeated testing of the bullish trend line will be unsuccessful, but in the "ideal" scenario, it would be good if the daily stochastic pointed down to confirm the bearish momentum. But, as you can see on the graph, this is not the case. However, what if we switch to a smaller time frame, it is quite possible that it will give us the long-awaited signals?
 
240-minute chart as an ideal example of this technique

I often use daily charts for analysis, but when making decisions about opening positions, I use 60 and 240-minute time frames. Turning to a 240-minute schedule in this case gives us a perfect example of this method of work.

Please note the following:

- The top suggests that a u-turn is imminent.

- Crossing the stochastic down indicates a bearish momentum.

- A breakout of the trend line (115.53) offers an ideal entry.



Figure 2.

However, there is one question about this entrance as well. The fact is that on a 240-minute chart, the trend is upward. The trend is determined by two parameters:

1) What is the slope of the 20 BAR to the last 6 bars?

2) is the price above or below the EMA?

When do we lock in a profit? In this case, given the uptrend in this time range, you should not allow yourself the luxury of holding a position for a long time, and allow profits to grow. In this example, the logical input is either a 50% Fibo rollback at 115.12 or an oscillatory maximum of 115.24. These levels are easily reached.
 
Short position on AUD/NZD.



This is a cross that I work on quite often. In this scenario, we have a situation where the daily chart gives a number of signals for the possibility of opening a short position, but these signals are not enough to ensure the probability in your favor.



At first glance, this is not an ideal setup for opening a short position. Stochastics are in the oversold zone, but we see their intersection down, indicating a bearish momentum. In addition, there is a "top" above 50% on the chart.Let's turn to a smaller time frame to check our guesses.







Figure 3.



- The completion of wave 4 is confirmed by the intersection of the stochastic lines down and the breakdown of the trend line.

- Goals are calculated using the Fibonacci extension of wave 3 using the settings 1.25 and 1.50. Goal 1.1740 or 1.1615. Stop loss on 1.2015. Rollback to .618 of wave 3.







Figure 4.



What happened next is shown in figure 5. Regardless of the trade, we must always respect the time range in which we trade. In this case, the entry is based on the analysis of a 240-minute chart, so the exit points must be calculated in the same range.



Given that our first target is 1.1740, we can give the price an opportunity to continue moving down. But already here our profit is almost 100 pips and stochastic indicates that the price pressure of sales is drying up. Therefore, I would recommend closing at least part of the position here, and then moving the stop loss to the break-even level or another level that corresponds to your risk tolerance.











Figure 5.
 
Short position on NZD/SEK

The following charts give us a clear example of how combining two time ranges allows you to identify fantastic trading opportunities. In this case, on the daily chart is clearly visible bearish signals, it remains only to find the entry point, which would be optimal for you, allowing to earn maximum pips but not letting go too early, the price went against you. However, 60-minute stochastics do not provide reliable confirmation. It is better to wait for a pullback to the 5.2450-5.2500 Fibonacci resistance, where the stochastic should probably give a bearish signal.

 
Short-term reversals

Mihai Nichisoiu

More and more complex technical analysis is now designed to solve the task set decades ago: to understand the market in its smallest details and nuances and monitor it around the clock.

In real relationships with the market, however, I take a different approach: I wait for the market to meet a certain set of conditions, almost without attracting intuition, and not Vice versa. My method is in the speculation, not control.

It all starts with a simple observation , which is what I do most of the time. I am particularly interested in watching markets that are considered overvalued, becoming parabolic from time to time, experiencing an increasingly serious imbalance between market forces and the interests of bulls or bears.

However, constant observation does not mean constant transactions. Only when I identify an 'abnormal' element in an established trend can I decide to bet against that trend. Such an 'abnormal' element can be a precursor to a rapid and strong change in market direction-especially if supply and demand can change places with little or no intervention from 'external' triggers (economic news, for example). This is why I regard the study of these extremely specific and infrequent situations as technical analysis in its purest form, since the price change is caused mainly or exclusively by extreme conditions embedded directly in the price.

Within the framework of this paradigm of my technical perception, just described, a reversal of the 'base 2B' type can be considered an 'anomaly' that occurs within the established and confirmed trend.

The above daily chart shows a 'base 2B' reversal as a specific chart formation in a market that has been moving down for a certain period of time. The market sets an initial low, then rises rapidly for several days, only to resume falling again, re-testing the recent low. At this point, as the bears become overconfident, there is an influx of offers to sell and the day comes when the price slightly breaks the recent low of the market, but still finds the strength to rise and closes slightly above this just tested low.

So, for a fairly short period of time, speculators have the opportunity to observe a specific kind of graphical model of the classic 'double bottom' (also known as the popular '1-2-3 reversal'), in which the market starts an unexpected upward movement from the level of the second minimum. The bull pressure is so unexpectedly strong that I often see the financial media 'questioning' it for a significant period of time, despite the positive recovery that is gradually becoming more apparent on the chart.

Notable 'base 2B' reversals in the Forex market were also found on the USD/CAD pair on may 31 (this year) or on the GBP/USD pair on July 20 last year (see the following charts).





Another '2B base', although not so recent, occurred on EUR / USD on August 4, 2004 and was followed by a stunning recovery of the currency pair just 48 hours later. I remember very well how this setup literally exploded upwards on August 6, coinciding with the us NFP data; on that day, the spike up at the beginning of the us session was so strong that the price jumped over my profit taking level.

Especially noteworthy, and perhaps not only in my opinion, was the 'base 2B' reversal shown by the USD/CHF pair - on a larger, weekly time scale, at the end of December 2004-the chart then showed a sudden threat to the long-established downtrend of the dollar.
 
Example of a one-year dollar correction

This 'anomaly' was followed by a one-year upward correction of the dollar not only against the Swiss franc, but also against other currencies (see the following chart of USD/CHF).



There are also varieties of "base 2B", when, for example, the market begins a rapid recovery from the second low of the model not on the same day, but a few days later.

An illustration of this variation could be seen on EUR/JPY in June last year (see the following EUR/JPY chart).



It is quite interesting that I spent my first trade on the ' 2B basis 'playing inside the day in 2004 on the USD/CAD pair - at that time I called this setup a' bear trap', not knowing that it has a common name.

Very often, a sharp and rapid reversal of the market direction that follows the '2B base' is caused by a powerful wave of purchases that occurs as soon as self-confident bears realize that they are relying on the wrong assumptions. Bears suddenly start to feel like they are' trapped 'because of the powerful layers of stop orders placed in close proximity to the second low of the' base 2B', which trigger leads to a forced price recovery.

By 'inverting' the graph and the psychology of' base 2B', we get a reversal called'top 2B'.

One of the recent '2B tops' occurred just a few months ago on the EUR / USD pair-on June 5, it was widely commented on in the media when the bulls tested the round 1.30 level (see the following EUR/USD chart).



'Base 2B ' and 'top 2B' are not specific exclusively to currency dynamics.
 
Identification of short-term market reversals

This pattern is an excellent tool for finding short-term reversal points. It is based on the market facilitation index Market Facilitation Index (MFI).

The index shows the price change per tick. The absolute values of the indicator themselves do not mean anything, only changes in the indicator make sense. Bill Williams also attaches great importance to the comparison of the change in the index values and volume.

The indicator allows you to determine the effectiveness of price reversals and the ability of the market to move the price in a certain direction. This indicator was first introduced by bill Williams in his book "Trading chaos".

The indicator is calculated using the formula:

BW MFI = (HIGH - LOW) / VOLUME

Where:

HIGH - the maximum price of the current bar;

LOW - the minimum price of the current bar;

VOLUME - the volume of the current bar.

To add an indicator to the chart of the MetaTrader 4 information and trading terminal, select the menu command "Insert - > Indicators - > bill Williams -> Market Facilitation Index"



The proposed trading strategy is based on comparing the index value in relation to the value on the previous bar and the volume change.

To identify potential pivot points, the most interesting bar is the one that registers a decrease in MFI relative to the previous bar and simultaneously an increase in volume. In such cases, the price usually moves quite slowly, but interest in the market is growing, which is reflected in the growth of trading volume. At turning points, such a pattern can be a messenger of a powerful movement in the opposite direction. In most cases, when forming such a model, we should expect a short-term price reversal. Sometimes, if we use long-term time frames, the model can also detect medium-term reversals.

We have the following formula for identifying the signal bar:

MFI(volume) > MFI(volume)[1] and volume > volume[1].

Williams called it a " squat bar."

There are many methods of using "squat" bars in practice. In this thread, we will look at a combined tactic based on the use of a" squat " bar and oscillators that determine overbought/oversold levels, in particular stochastic. These examples will help you understand the characteristics of "squat" bars and help you understand how to use them. In the future, you can use them yourself with a wide variety of filters, oscillators, etc.and adapt the concept to your trading style.
 
The rules for opening a long position using this method are as follows:



Stochastic is in an oversold state.

A "squat" bar appears.

Entry is made on the next candle at the breakdown of the maximum of the "squat" bar.

The first stop loss is placed under the minimum of the "squat" bar.



The method can be applied in different time ranges. Trailing stop is used for fixing profits on short-term trades. The position is usually held for several bars. For short positions, the specified rules are expanded.



The "squat" bars are colored red on the charts. A fast stochastic oscillator was used to determine overbought/oversold zones. In the first example (figure 1), on the Emini s&P futures chart, a squat bar appeared at point A, while the stochastic was in the oversold zone. The setup has been formed. The next day, you place a buy-stop order above the high and a stop-loss order below the low of the previous candle. The deal is opened (marked with a blue line). The first day brought a good profit. By applying a trailing stop, you can stay in the position for several days.







Figure 1

Figure 2 shows the 1-minute Emini s&p futures chart. At point B, a "squat" bar appears at the end of the upward movement, and the stochastic is in the oversold zone. On the next candle, a breakout of the previous bar's low initiates the opening of a short position. Trailing stop allows you to hold a position for the next 3-4 bars.







Figure 2.
 
Short-term techniques in the Forex market



Dave Floyd



Given my eight years of experience as a scalper in the stock market, I am often asked if the same methods apply to the Forex market. First, it is important to determine what scalping is. In the 90's, when I was a trader directly on the stock exchange, this was a technique by which a trader could profit from very short-term market movements using a combination of 1 and 5-minute charts, as well as considerable flair when reading the quotes feed.



When I switched exclusively to Forex in 2001-02, I knew for sure that this type of strategy has 2 disadvantages:



1. There can not be averaged

2. The technique of scalping in the stock is not suitable for Forex



While the second point is open to discussion, it cannot be argued that short-term strategies have enough capital that You can tap at any time without affecting the market.



With this in mind, I decided to write an article in which I want to illustrate how some of the methods and indicators used in stock scalping can be superimposed on a swing approach to maximize exit and entry points. First , some assumptions for the upcoming analysis:



- Trade selection is performed using one of the 60-minute and 240-minute charts or a combination of the daily chart. The weekly chart is only used as a way to identify long-term support and resistance levels.

- I will talk about several indicators, mainly stochastics, Fibonacci levels, trend lines and RSI, Elliott wave analysis

- The average transaction duration is several days

- I use pairs not only from the big ten, but also some crosses

- The risk is determined before each trade, and the lot size is calculated based on the stop loss



As with any technical approach that allows for a certain degree of subjectivity, there are limitations here, since unshakable entry principles can sometimes hinder the transaction. However, the efficiency and accuracy of entry methods will help you avoid costly drawdowns.
 
Example of using big picture analysis

Here is a perfect example of using big picture analysis with a down-to-a-smaller time scale to pinpoint the entry point.



In this case, I was expecting re-test of rising trend line fails, however, in 'ideal' scenarios should be present daily stochastics turning down to support us downside momentum. As You can see in the daily chart above, this is not the case. However, what if we could speed up the analysis by moving the time scale a step or two lower and essentially predict a downward reversal of this stochastic?

When making trades, I rely mainly on 60 and 240 minutes, often doing analysis on a daily schedule. As for the 240-minute chart below, it provides a perfect example of using a smaller time scale. Please note the following:

- The top suggests that a u-turn is inevitable

- Crossing the stochastic down indicates a downward momentum

- A break of the trend line (115.53) gives an ideal entry

If there is any doubt at this entry, it is only that the existing trend on the 240-minute chart is an upward one. The trend is determined by 2 parameters:

1. What is the slope of the 20-period ema over the last half-dozen bars?

2. The price is above or below the ema?

Ideally, for short positions, the price bars are located below the downward-sloping average, and Vice versa - for long positions.



Well, what now, where will we take the profit? In this case, given an uptrend on the time scale that was used for the transaction, we cannot afford the luxury of allowing profits to grow. Here, the logical exit points are either the 50% Fibo recovery level at 115.12 or the swing maximum at 115.24. These levels are easily achievable.
 
Long by AUD/JPY



1. Bearish trend-the channel is broken

2. the Price rebounds from the swing high at 85.00 and forms the right shoulder of the inverted head with shoulders

3. the Fibonacci Retracement from the move up from 5/23 offers the 'ideal' entry point to the top for trying to break the neck line

4. In the stochastic expected pullback; the bullish reversal to confirm point 3

5. all items together will confirm that the price goal is achievable

If all of the above points work, the price will go straight to the target at 85.60
 
Catching short-term trends in the currency market



Market trends are rarer than trading ranges. But this does not mean that they should be ignored. In this article, we will look at trading tactics based on the use of two time charts, two indicators, and a money management system to protect profits.



Many technical trading strategies are based on the assumption that markets are in certain ranges most of the time. This assumption has a very solid Foundation. 70% of the time, the price fluctuates between support and resistance levels, or we can say that we observe a random fluctuation. The remaining time the price movement is characterized by price movements or trends that break through the support and resistance levels.



While these basic assumptions work against traders who try to exploit trends, the potential gains are worth the risk. It is possible to increase your chances of capitalizing on trends by placing special trend signals that identify market entry points after the trend is formed and using money management techniques to limit potential losses.



In subsequent posts we will explain how a trading system based on these principles operates in the markets, and especially well it works in the Forex market or foreign exchange market, particularly with "major" currencies: U.S. dollar, Euro, Japanese yen, British pound, Swiss franc, canadian dollar and Australian dollar.



More than 85% of the Forex market transactions, which amount to $ 1 trillion per day, are made with the main currencies indicated by us.
 
Tools and rules



The strategy uses 2 charts with different time periods (10-minute and one-hour), as well as two technical indicators: the moving average with a period of 200 and slow stochastics with a period of 14.



Step 1. Identify the trend.



Compare the moving averages on the 10-minute and hourly charts. A trend is considered to be a situation when the price on both charts was above or below the moving average.



Step 2. Define the input.



When you have identified a trend, we analyze the 10-minute chart to see if it meets two conditions (they must be met at the same time):



1) the price must be no more than 20 points higher (for buying) or no more than 20 points lower (for selling) than the moving average.

2) the fast stochastic line must cross the slow stochastic line below level 20 (for buying) or cross the slow stochastic line below level 80 (for selling).



These conditions indicate the following: 1) the currency is currently in a short-term uptrend or downtrend; 2) the currency has slowed down or rolled back a little (reflected by a higher minimum on the stochastic and the fact that the price is within 20 points of the MA), and intends to turn in the direction of the trend (because the fast stochastic crossed up or down the slow stochastic).



Step 3. Grab the trend.



After you log in, set a stop-loss. If the position is long, place a stop loss order 10 points below 200 MA on the 10-minute chart. If you open a short position, place a stop loss 10 points above the MA on the 10-minute chart. If the price goes in your direction, we raise or lower it (depending on whether you hold a long or short position) stop to protect your profit. For simplicity, in the following examples, we used a trailing stop with a move of 25 points from each new top or bottom. The graphs in the next section will help you understand how this strategy works. We will give examples for two currency pairs.
 
Trading examples.



We will look at the first example on the chart of the Euro/dollar currency pair. The transaction occurred in the fourth week of July 2002. First, we compare the hourly and 10-minute charts of EUR / USD. We are waiting for the moment when the price will be above 200 MA on both charts.



On the hourly chart (figure 1), the price is almost always above 200MA, which indicates a constant uptrend. On the 10-minute chart (figure 2), the price crosses up 200MA in the last third of the chart. The next step is to determine the entry point, when the market will be within 20 points of the MA on the 10-minute chart, and there will be an intersection of stochastic lines.









Figure 1. Hourly chart. The price is constantly above 200MA, which indicates a prevailing uptrend.











Figure 2. 10-minute chart. The price is also above 200MA in the last third of the chart. The entry is signaled by the intersection of stochastics under level 20 at about 20: 00.



After 13: 00, the market is almost always within 20 points of the MA, and the intersection of stochastics occurs at 20: 10. It is the intersection of the fast stochastic up the slow stochastic in a situation when the indicator is below the level of 20 that serves as a signal to open a position. We open a long position at the price .9883 with a stop loss of about .9858 (10 points below the 200-period moving average, which is at .9868). The stop is then dragged up after the price forms new peaks. The pair forms a top near .9992, so the stop moves to .9967, where the position closes with a profit of 84 points ($840).



Figures 3 and 4 show an example for the dollar/yen pair. The hourly chart (figure 3) shows that the pair was trading under the 200-hour MA after June 21. On the 10-minute chart (figure 4), the price crossed down the MA after 10:00 on June 27, which gave the first signal that a short position could be opened. The price was also trading within 20 points of the MA.









Figure 3. Hourly chart. The price is constantly under 200MA.









Figure 4. 10-minute chart. The intersection of stochastics around 17: 00, when the price was under the MA, but in the range of 20 points from it, gave a signal to open a short position.



The short position was opened around 17: 00 at the price of 119.57, after the fast stochastic crossed down the slow stochastic when the indicator was above the 80 line. The trade was protected by a stop loss placed around 119.86. in this case, the stop remained intact throughout the next day, when the pair started to decline. After moving the stop loss, the profit was fixed at the price of 118.58 (25 points from the minimum at 118.33), with a profit of 99 points.
 
Looking for further.



This short-term trading method works well in the Forex market, but it can also be used in other markets. Each step of the system helps you identify areas where you can make effective deals. If one of the criteria is not met at one stage or another, then you should not make a deal. This model gives you the freedom to experiment with different time intervals on the charts. When you are equipped with a system that will help you catch the trend, you have the opportunity to get ahead of other players.
 
Example of short-term trading technique analysis



In trading, confirmation is usually considered a positive factor, but it also has obvious disadvantages, especially for traders with a counter-trend approach. For example, a typical reversal pattern may consist of a sharp downward movement followed by an upward movement with a higher close or a close above the high of the previous bar, which confirms the completion of the" puncture " down and the return of buyers to the market.



This kind of pattern has a certain value, but waiting for confirmation, you automatically lose part of the price movement that you were hoping to catch. Also, there is always the possibility that the confirmation is false – a pullback that occurred before the final market reversal down. In this case, if you buy on confirmation, then you buy on top.



Assuming that a reversal is occurring, would you want to enter the market when it is moving down, as close to the bottom as possible? Of course, however, there is an unavoidable problem: such a decision is very difficult psychologically, regardless of whether the market has the potential to move down. Unfortunately, during strong uptrends, pullbacks/reversals that are convenient for trading are infrequent, whereas with strong downtrends, you encounter them again and again, and they are followed by new waves of sales.



Let's take a simple pattern that is the result of analyzing a certain type of reversal pattern: a bar that closes with a strong movement in one direction, followed by a bar of similar size but closing in the opposite direction. The analysis shows that such patterns are regularly found on some tops and bottoms (further price movement occurs in the direction of closing the second bar), but they are even more common in the middle of strong movements. It's just that in the second case, they are camouflaged by the fact that they don't signal u-turns.
 
The figure below shows two examples of this type of pattern on the daily chart of the us dollar/Swiss franc (USD/CHF) pair. In both cases, the first bar opens near the daily high and moves towards the daily low, followed by a bar that opens near the low and closes near the high. The first pattern (in may) was followed by sales, and the second pattern was followed by an" expected " rally (note that the close the day after the pattern was negative).



Reversal inversion.

A reversal pattern consisting of two bars-directed against each other. In one case, the pattern worked, but in the other it didn't.

Since the second bar of this pattern is a reversal of the first bar, why don't we try to enter the market on the first bar of the pattern and add the movement of the second reversal bar to our profit?
 
Pattern.



Of course, this is easier said than done, but we have identified some basic parameters and analyzed results of 60-minute bars for the dollar/Swiss franc pair. Determination of the parameters of the pattern:



1) the Current low must be at least 0.0020 lower than the previous low.

2) Opening in the upper 30% segment of the bar range.

3) Close in the lower 30% segment of the bar range.





The formula according to these rules:



1. L[1]-L >= .0020

2. (O-L)/(H-L) > = 0.70

3. (C-L)/(H-L) 0).



It would be useful to conduct an analysis to see how far the price can go down for x bars, but still make a profit for y bars. For example, it is possible that if the price falls more than 30 pips below the entry price (or the minimum entry bar), the probability of a profitable trade after 12 bars decreases sharply.
 
Making money on short-term currency trends



Trends are less common in the market than sideways periods, but this does not mean that they can not be traded. In this strategy, we use two time ranges to identify the trend, an overbought/oversold indicator to find the entry, and a trailing stop to protect the profit on profitable trades.



Many technical trading strategies revolve around the assumption that the market will move within a certain range – and this is not a bad approach. 70% of the time, the price moves between support and resistance levels or moves randomly. The rest of the time, market behavior is characterized by constant price movements-trends - during which support and resistance breakouts occur.



Although this basic pattern plays against traders who try to make money from trends, the potential profit is usually worth the risk. We can increase the probability of earning on trends by developing valid trend detection signals, identifying entry points within the trend, and using risk management techniques to limit losses.



Here we will look at an example of a trading system and its operation in the Forex currency market, in particular its operation with the "main" currencies: the us dollar, Euro, Japanese yen, British pound, Swiss franc, Australian and canadian dollars, which are called the main currencies. More than 85% of transactions in the Forex market, which exceeds $ 1 trillion per day, are related to major currencies.
 
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