Serious traders know that each trade they place should fit the current market type.
It’s no good range trading in a trending market, and vice versa.
But if you look at retail sentiment data, traders love to fade trends and buy breakouts in ranges.
Oops.
So how to be different from the crowd?
The first step is to wait patiently
You need to wait for the price to be at the edge of the range.
Note this strategy is designed for sideways normal and volatile market types and not sideways quiet market types (more on how to trade these in an upcoming post.
Rule #1: Identify sideways normal or volatile market types on the weekly charts (this should be done as part of your weekly processes.
Rule #2: Identify key support or resistance levels on the weekly charts. Hint: These will be near the outer Bollinger Bands.
Stalk entries around the key level
Once the price reaches the key level, you then go to the daily timeframe to stalk an entry.
You only want high quality entries, so there needs to be a strong rejection of the level. If the level is “busted” prior to the reversal, even better.
Rule #3: Move to the daily charts and wait for a candlestick reversal pattern.
A reversal pattern on the weekly chart is also acceptable, but only if the risk/reward profile of the trade remains at least at 1:1.5.
Rule #4: Only take trades if the reward is 1.5 times greater than the risk.
Play defence first
Another point to note, from looking at retail sentiment analysis, is how many more traders hold onto losing positions, compared to how many traders hold on to winning positions.
You can see it here, this time on USDCAD.
hey have forgotten the basic lesson of playing defence first. In this type of trading, because you wait for a reversal, rather than simply stick an order on a level, you have a logical place to put your stop-loss—0.5% behind the entry candle.
Rule #5: Place a stop-loss 0.5% behind the entry candle.
If the price reverses right after entry, then you can get out and live to fight another day.
Rule #6: If you get a daily or weekly reversal candle right after entry (within the first 3 bars/candles), then get out.
Once the price moves in your favour a fair amount, then you don’t want to have a losing trade.
Rule #7: Once the first profit target is hit, move the stop to break-even.
Once the trade goes for you, you don’t want to give it all back on one news event (which is wont to happen in Forex).
Trail your stop to protect profits, but not too closely.
Rule #8: Trail your stop 0.25% behind the low or high of the 2nd weekly candle.
Farm profit to improve consistency
To improve consistency and to make the strategy easy to trade, you can take profit multiple times. To keep this simple:
Rule #9: Take 30% profit on the opposite Bollinger Band on the daily chart.
Rule #10: Take 30% profit on the opposite Bollinger Band on the weekly chart.
Rule #11: Take the remainder on a reversal signal at the opposite Bollinger Band, or otherwise trail per rule #8.
You can also take profit if the price gets close to the Bollinger Band and reverses. This is the classic 1:1 stop discussed here.
Rule #12: Once the price gets within 0.5% of the profit target, then tighten the stop on that portion of the trade to 0.5%
You must like the trade
Even if all the above conditions are met, there is no requirement to take the trade.
Trust your analysis processes , and if you don’t like the trade for whatever reason, then don’t trade it.
Serious traders also don’t play. They wait for the best opportunities, when things line up, before going in.
Different, not difficult
As you can see, being different from the crowd does not have to be difficult.
Good trading requires disciplined application of a carefully crafted set of rules for that work in the current market type.
Got questions? Let me know.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.
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