Every forex trading day is a different one. A trader will never find two days in the market that follow exactly the same course. Having said that even if each day is not equal to another one, there are clear patterns that do occur over and over again and that do explain what looks random daily price movements.
Here at TopTradingPlatforms.co.uk we have followed those carefully and identified that there are 5 day trading setups (entry strategies) that tend to occur almost daily. By learning those trade strategies you will be able to start exploiting their profit potential.
Patterns Within Context
Recognising that there is a pattern and watch it developing is not enough to day trade in the best possible way. The patterns that we will present here do happen regularly but they can only be exploited when they do appear within a certain context.
If you want to be successful as a forex day trader you have to understand how price is moving. You will need to figure out when a group of traders (who decided to go long or short) are trapped. This situation will cause the price to change in a determined direction as they are forced out of their trades.
The trade setups will happen at these precise ’emotional’ points: this is when a group of traders are either feel pain or greed. It is not as easy tough as it looks: those patterns will not necessary occur before all big forex price moves. Also, when these pattern occurs it doesn’t necessary result in big price movements. The main issue is that we don’t know exactly when other traders are doing or thinking. By watching price movements that occur regularly and that normally produce similar results you can increase your chances of executing a profitable trade.
Remember that getting into a trade is only a small part of the battle. Having a profitable exit strategy is also very important and the same can be said about managing risk with a correct stop loss.
A forex trade normally start with a strong move in one direction. This normally happens in the first 5 to 15 minutes after a stock opens for trading. This pattern is called impulse wave. After that the price pulls back and stalls out with a consolidation where the price will move sideways for few minutes. Normally the consolidation occurs within the range of the impulse so if the price do fall off at the open than the pullback and the consolidation should happen below the open price. If there is a breakdown in the opposite direction of the impulse than it is not advisable to trade.
Also you should note that the consolidation should be rather small compared to the impulse wave that happened just before. There should be a very distinct impulse wave, a distinct pullback and a distinct consolidation during the pullback: if you cannot clearly identify the three parts than the pattern is a lot less effective and it should be avoided.
This pattern is normally visible in forex but generally applies to most markets. Usually the most powerful moves in a market happens near the open so catching the first trade of the day will have a major impact on overall profitability. If the same patterns occurs later on in the day it will only produce rather smaller price moves and therefore will be a lot less profitable for traders.
Not all the impulse are followed by a smaller pullback and some consolidation. In some situations you get a massive move in one direction and than you get an even bigger move in the opposite direction, immediately after. This type of behaviour is called reversal.
But let’s make an example to get this more real: let’s imagine the price drops $0.20 off the open. It then rallies $0.30. In this case don’t be mislead by that first drop as that doesn’t count anymore because you do have an impulse to the upside. The trader should now fully focus on watching the price to decline a bit (pullback) and only then consolidate. If the price will break above the consolidation than you should go long.
So we are going to wait for a pullback in the opposite direction of the impulse. The pullback has to be smaller than the impulse. Then we will be waiting for consolidation and a breakout of that consolidation in the impulse direction.
Reversal at Support/Resistance
Support or resistance could be an horizontal line or a diagonal line. It is a point that indicates that the price has reversed off at least two times before.
We need to notice that support and resistance are normally areas and not an exact price. For this reason when you are looking for a trade setup near support or resistance, the setup is not happening exactly at support or resistance but it can occur slightly above or below. So what the support or resistance is telling us is to be ready because a reversal could be close at hand. So with that info we are going to wait for a consolidation that will happen near support or resistance. If the signal will then break above a consolidation near support or it breaks below a consolidation near resistance than we do have a proper trade signal.
If a reversal signal do happen, enter the trade when price moves over the consolidation near support or below the consolidation near resistance. The price will be expected to bounce off support or fall off resistance if this pattern do happen. If however the price do not behave in this way but instead breaks above the major resistance area (and consolidation) or breaks below the major support area (and consolidation), than get out of the trade immediately and consider taking a breakout trade if needed.
Strong Area Breakout
Surely trading a breakout above a major resistance area or below a major support area is a popular strategy but it is very difficult to execute. This is why we prefer the ones we have explained above however having this strategy in your ammunition is a good idea for when special situations will arise.
The strategy is to wait for levels that pushed the price back in the other direction multiple times. After the price has tested that area more than 3 times you can be sure that a big number of traders have noticed this.
A breakdown however doesn’t give guarantee that a big move will come. This is the reason why you should use this strategy only sometimes as normally the price can break important boundaries without producing a big move.
Final Word on Forex Day Trading Strategies
Here we have presented a number of trade situations but you need to also think why they work. It is important you do so as if you get why they are behaving in the way we have analysed you can adapt them to the different situations: as we have said at the very start in forex day trading everyday will be different to the other.
It is important for you to think why these patters cause prices to swing in one direction or another. The questions you should be asking: are many traders stuck in a worrying position that is about to get even more painful?
If you don’t have lots of conflicting information and signals and things looks a bit confusing it is probably a good idea to step aside and wait for signals to clarify. There are many patters that happen on a daily basis: there is nothing special or magical however in skilled hands they can deliver very good results.
The best way is to practise these patterns day after day: check how the price has reacted to those and see what are the situations that have delivered the best results. Are those conditions present now? Also if the conditions didn’t pay off it is best to avoid trading them if similar patterns will appear.
Context in trading is a fundamental thing. It is important that we do practise to trade each pattern in the right context. If we do so we will get more opportunities and also it will help us to analyse how the price is moving when it is trending. It will also give us indications on when it will reverse and also when it will be stuck between support and resistance.