Forex Pullback Trading Strategy

Pullback-Trading-Strategy

I still remember the days when I was first introduced to forex trading. I started learning forex like a mad scientist. Obviously, the first indicator I learnt was the Moving Average. Then I looked at a moving average cross over strategy.

I was closely observing two moving averages plotted in a chart, then I said to myself “Damn, I’m gonna be a millioannaire!” Sure enough, the bubble didn’t last too long.

Then I learnt how all indicators are lagging. Leading indicators exist only in our dreams, although some of them are actually called leading. It doesn’t mean that indicators ain’t helpful at all. It only means that we have to use them for the right reasons, rather than trying to use them as some sort of a crystal ball that predicts the future.

Some traders might argue that picking tops and bottoms is a dangerous prospect. I say its exactly what we have to do. Its absolutely safe if you are taking trades along with the overall direction. I know, you are probably confused by now.

How could I possibly pick tops and bottoms at the same time trading along with the overall trend? It just seems conflicting concepts. In fact they are harmonious concepts. The strategy is called buying dips and selling rallies… Oh I forgot to warn you at the beginning, its not the holy grail! But it might just give you an edge. An edge is all we traders need. Right?

This strategy works best as a swing trading strategy. Here it goes…

Indicators:

20 EMA
50 EMA
Stochastic (MT4 dafult settings – SMA 5,3,3)

Buy entry:

If the 20 EMA crosses 50 EMA to the upside, wait for the stochastic to be oversold (below 20.) Enter at the first candle when stochastic main line crosses the signal line to the upside.

Sell entry:

Opposite of the buy signal, obviously!

Stoploss:

The last higher low or the lower low below the entry price for the buy entry and the last lower high or the higher high above the entry price for the sell entry.

Takeprofit:

Minimum TP level (TP 1) is set at 100% fibonacci extension of the last swing. If the TP falls below a 1:1 RR, then minimum TP is at the same distance as the SL, because we are looking for at least a 1:1 RR. 1.27 and the 1.68 fib extension levels are set as the 2nd and the 3rd TP levels respectively. 3 takeprofit levels are optional and its totally up to you, how you want to manage the trades.

And that’s it. Remember the part where I explained about the reasons why we ought to use indicators. The market does not have to move in any direction just because all the indicators are synced in one direction. It works the other way round. Indicators follow the price not vice versa.  We are just playing with the probability of some price movement taking place after an entry signal, that’s all.

This strategy was not developed by me and I read about it on the internet a while ago. However, the important thing to remember is the concept. It doesn’t have to be exactly these settings for indicators. If you play with the concept enough, you might find even better indicators and settings to increase the probability. Even better, hunt for different combinations that work on different timeframes. Make it your own.

Pick tops and bottoms but remember to stay in the direction of the trend!

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