Short-term trading techniques for the Forex market

[Андрей Сырбу]

Time range



In our strategy, we will use two charts with different time periods (10-minute and hourly), as well as two main indicators: the moving average with a period of 200 and the slow stochastic with a period of 14.



Step 1. Identify the trend. Compare the moving averages on the hourly and 10-minute charts. We will assume that the trend is present in the market if on both charts, the price is above/below the moving averages for a significant period of time.



Step 2. Identify the input. Once we have identified the trend, we need two conditions to be met simultaneously on the 10-minute chart: 1) the price must not be more than 20 points higher (for buying) or 20 points lower (for selling) than the moving average; and 2) the fast stochastic line must cross up the slow stochastic line below level 20 (for buying) or the fast stochastic line must cross down the slow line above level 80 (for selling).



These conditions indicate the following: 1) the currency pair is currently in a short-term uptrend or downtrend, and 2) the pair has taken a break in its movement and rolled back (as indicated by the position of the stochastic at the top or bottom of the range and the fact that the price is within 20 points of the moving average) and intends to turn around (because the fast stochastic line crossed up or down the slow stochastic line).



Step 3. Saddle the trend. Setting a trailing stop after the first entry. When opening a long position, we place a stop loss order 10 points below the moving average with a period of 200 on the 10-minute chart. If a short position is opened, we place the initial stop loss 10 points above the moving average. If the trade moves in your direction, raise (for a long position) or lower (for a short position) the stop to protect the profit. For the sake of simplicity, in the following examples, we will use a stop with a step of 25 points from each new top or bottom. The charts in the next Chapter will help you understand how to work on the strategy using the example of two currency pairs.

 

[Андрей Сырбу]

Examples of transactions.



Example of the first trades on the Euro/dollar chart in June 2002. First, we compare the 10-minute and hourly charts of our currency pair. Pay attention to the time that the price spent above the 200-period moving average on both charts. On the hourly chart (figure below), the fact that the price is always above 200 MA indicates a constant uptrend. On the 10-minute chart (figure 2), the price moved (and remained above 200 MA) in the right third of the chart. Our next step is to identify the entry zone-when the market will be within 20 points of the moving average on the 10-minute chart and there is an intersection of stochastic lines.

An hourly chart the uptrend.



The price is constantly above 200 MA, and the hourly chart gives us an idea of the prevailing trend in the market.

Figure 2. 10-minute chart.



In the last third of the chart, the price is above 200MA, between 13: 00 and midnight on June 27, the market was within 20 points of the MA. The entry signal was given when the fast stochastic line crossed the slow line up (a sign of the resumption of bullish momentum), when the indicator was below the level of 20. This happened around 20: 00.



The time range is between 13: 00 and midnight. June 27 meets these requirements. The entry point appears when the fast stochastic crosses the slow stochastic line when the indicator is below level 20. A long position was opened at the price .9883 around 20: 00 with a stop loss at the price .9858 (10 points below 200 MA, which was at .9868 at the time). Then, when the formation of new peaks, we moved the stop up. The Euro / dollar pair formed a peak at .9992, after which the stop was moved to .9967, where the position was closed with a profit of 84 points ($840).

 

[Андрей Сырбу]

Example on the chart of the dollar / Japanese yen currency pair



In figures 3 and 4, we see a similar example on the chart of the dollar / Japanese yen currency pair. The hourly chart (figure 3) shows that the price has been under the moving average for a long time, which indicates a downtrend. On the 10-minute chart (figure 4), the price fell below the moving average after 10:00 on June 27, indicating the possibility of opening a short position. Also, the price was at this time at a distance of less than 20 points from the moving average. The short position was opened around 17: 00 at the price of 119.57, when the fast stochastic line crossed down the slow stochastic line when the indicator was above the 80 level.

Figure 3. on June 27, the USD/JPY pair was under 200 MA.

Figure 4. 10-minute chart.



On the 10-minute USD/JPY chart, the stochastic intersection (which occurred above 80) occurred around 17: 00, when the price was lower (but within 20 points) from 200 MA, which gave a signal to open a short position.



To protect the trade, a stop loss order was set at 199.86. in this case, the stop remained intact until the next day, when the USD/JPY pair began to decline. After we moved the stop down on the back of the fall, the profit was fixed at 188.58, 25 points above the low of 118.33, we earned 99 points.





The 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 us identify areas where we can make effective deals. If at a certain point in time one of the criteria is not met, then it is clear that you should not make a transaction. This model usually gives you the freedom to experiment with different time intervals. When you have a system that helps you catch trends in their initial stages, you can safely watch other traders follow your example.