Forex Trading Strategy

How to create a new forex trading strategy

When people are looking for a new forex trading strategy, what they really want to know is:

  • How do I create a strategy that works?
  • How do I develop the confidence to trade a strategy I believe in?

 

The first question almost goes without saying. Without a working strategy, there’s no use in attempting to trade in a consistent and profitable way. The second question, however, is more subtle. My opinion is that if you have a working strategy but don’t have a deeply rooted belief that you can trade this strategy, you will fail.

 

Confidence in a strategy will make or break your results.

 

Richard Dennis confidence in trading

 

Fortunately, there is an answer to both questions: testing.

 

Before I ever use a strategy, I will have tested it for weeks. For months. It’s not an extremely difficult process, but it does involve a lot of work. During the years, I’ve tested 100’s of strategies. Most of them failed. Some of them, I could make work. The best ones, I’m trading today. Here are the steps involved to make it happen.

 

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USDMXN forex outlook

Weekly Forex Outlook: April 9

Hi, traders! It’s (a beautiful!) weekend again, so I’m doing my usual routine: trade review, continuous improvement and writing my weekly forex outlook! Last week was a challenging but nevertheless good week. Not every setup from my previous weekly forex outlook did materialise, but that doesn’t matter since we use price alerts to get notified when something happens.

 

If you got in either the CADJPY trade or the AUDCAD trade (which I documented on TradingView), you could have made a nice profit! I did find the lower time frames a bit more random and less clean last week, so mostly stayed out of the 1H charts in favour of 4H and daily charts. Now let’s look at the upcoming week!

 

 

Current market behaviour

 

Last week was an interesting week. Lots of geopolitical events (Syria bombings, Trump-Xi meeting, etc), but the markets keep on going regardless. We also closed last week off with NFP, which must’ve been the biggest non-event of the week! The initial bearish reaction because of lower than expected payroll numbers was quickly faded because of lower than expected unemployment numbers.

 

The dollar kind of bounced around for the first part of the week but then moved sharply higher on Friday. Economic data was mixed but the biggest event (NFP) still managed to push the dollar higher.

 

Crude oil is continuing its trend (which starts to look quite nice on the 4H) and ended the week higher. Crude did mostly rise on the news of Syrian bombings. Syria is not a very big oil producer but its location in the Middle East still warrants carefulness with the traders, hence the push higher.

 

Market overview forex

 

Gold did end higher for the week but obviously turned lower on Friday as traders and investors moved away from risk-on assets after the non-farm payrolls. Gold is also in an interesting spot now, as you can see from the chart below:

 

XAUUSD

 

The price action on Friday resulted in a very nice pin bar on the daily. This pin bar coincides with a previous support-turned-resistance level and it’s now the second time price has tested this level. What happens next will depend for a large part of the geopolitical situation. Gold could move lower, but we need a strong dollar for this. Next week will tell us more.

 

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AUDCAD forex

Weekly Forex Outlook: April 2

Hello traders, happy Sunday! Last week was again an excellent week for reversal traders and there were many interesting setups in the market. I’ll review one trade I took in USDJPY and a sell in XAUUSD. Next week will be a little busier with non-farm payrolls on Friday and other economic news spread out over the week, but there are again many setups developing, so plenty to look at!

 

Current market behaviour

 

The dollar turned around this week. As you can see on the DXY chart, the dollar rallied for pretty much the entire week. Fuelled by positive economic news releases and a slew of FOMC member speeches, the dollar ended the week quite a bit higher.

 

DXY Daily

 

Although, we can see that the overall daily sentiment is still bearish, with the dollar index still making lower lows and lower highs. It wouldn’t be surprising if the rally of the past week was just a retracement in the larger timeframe picture, with the dollar continuing its path down soon again. On the other hand, if the dollar bulls can keep the momentum going, we might see more bullishness next week.

 

Market overview

 

Gold is inversely correlated to the dollar and so sold off for a major part of the week. However, Friday painted a different picture. Some FOMC member speeches were rather cautious, saying that the current positive market sentiment hasn’t yet resulted in improved economic figures. The market took this as dovish news and moved money to risk-off assets, such as gold. The result was a strong Friday rally on XAUUSD.

 

Finally, crude oil finally saw some improvement in trend structure. For the first time in a long time, we could see a clear trending market instead of the usual, skittish market behaviour we’ve been seeing in the past couple of weeks. Oil ended the week strongly higher.

 

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EURUSD

Weekly Forex Outlook: March 26

Another week has passed, so we take the time to look at how the trading week went and at the same time, make our outlook for the next week. The past week had many reversals happening and many of the setups I indicated last week played out really well. We’ll have a look at some of these in a moment.

 

This week, it was a little harder to find good setups. We see less trending markets and if they are trending, they’re either in between S&R levels or just not trending cleanly. Nevertheless, I have selected some pairs I find worth looking at.

 

Current market behaviour

 

This week, we could see the USD continue its path downwards. Wall street might keep betting on the infrastructure and regulation changes that the Trump presidency has promised, but for now, we see a weakening dollar, indicating that the initial rally high after the inauguration has largely worn off. By now, Wall Street wants to see some concrete evidence – not some vague promises – in order to get the dollar higher.

 

For now, this is good news for technical traders. In the absence of political news, the dollar is respecting the technical elements more than anything. Price is also nearing a previous swing low, which should act as support and might give us new opportunities to buy the dollar next week, but let’s see.

 

Market overview week 25 March

 

Gold had a good week, ending quite a bit higher than last week and oil had another very skittish week, ending the week a bit lower after higher than expected crude oil inventories.

 

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pin and drive

The pin and drive reversal entry trigger

As you might know, I’m mainly a reversal trader. I use other strategies as well, but my bread and butter setups revolve around swing trading reversals.

 

This article is about an entry trigger I often use for my reversal trades. I describe it in my trading plan as pin and drive, which basically means that if I see a pin bar followed by a drive in the opposite direction (a momentum candle, if you wish) AND some additional conditions are fulfilled, I have found that it is often a good trigger to enter a reversal.

 

But first, let’s make it clear what I mean with a chart:

 

Pin and drive reversal trigger examples

 

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AUDCAD

Weekly Forex Outlook: March 19

Hi traders, how’s your weekend going? I had a very short trading week since as of Wednesday, I was out of the country for a business trip, so no trading from then on. I did, however, have one trade in the beginning of the week that I want to go over with you and we’ll get to that in a minute.

 

Last week was also filled with fundamental news releases, so, on the one hand, it was a good time to be away since I don’t trade news releases. On the other hand, I saw most of the previous week’s outlook unfolding really nicely (like CHFJPYGBPCHF and NZDUSD) without being able to trade them. Then again, new opportunities will always present themselves, so I’m just looking forward to the new week!

 

On the US Fed rate hike

 

Last week finally had the much anticipated US Fed rate hike event, which went down a bit different than most people thought it would. A rate hike is basically a positive event for the USD, so many were expecting a rally after the hike. However, on Tuesday I mentioned this on Twitter:

 

 

And then on Wednesday, this happened:

DXY rate hike

 

An initial short run up when the FOMC statement was released and then a huge sell-off at the time of the FOMC press conference.

 

It makes sense. Think about it. The market was pricing in a 100% rate hike already, so the hike was no surprise. Everyone who wanted to had already positioned themselves. Additionally, there was one dissenter (Minneapolis President Neel Kashkari), so the decision to hike rates wasn’t unanimous.

 

And greedy as the market is, we were already looking for signs of even more improvement and potentially 4 rate hikes for 2017. Unfortunately, this didn’t happen. Fed chair Janet Yellen mainly kept the same tone as in previous statements and the Fed’s economic projections stayed pretty much the same as what they released in December. Hence the sell-off.

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NZDUSD

Weekly Forex Outlook: March 11

Another week has passed, so I’m back with my weekly trading outlook! Last week was quite interesting, with a couple of nice opportunities in the market. Most of the setups I mentioned last week didn’t yet materialise, though, so we needed to be patient. Since we always want to see some confirmation first, I just didn’t take any of those setups, which is fine. There were some interesting other opportunities in the market too.

 

Current market behaviour

 

The US dollar index saw some up and down this week. Initially, there was plenty of positive momentum to drive the dollar higher against the basket of other currencies. However, as the rate hike was priced in as an almost certainty (over 90%), there wasn’t a lot of news that could push the dollar higher. The NFP release on Friday was quite good – better than expected – but we saw a classic “buy the rumour, sell the fact” reaction. The dollar ended the week a bit lower than it opened.

 

Forex market outlook

 

Often, gold and the dollar will have an inversely correlated price pattern, but this week was different. Markets felt quite risk-on and equities have risen in the past week. This leaves money flowing out of the safe havens such as gold and the Japanese yen, which we could clearly see in the past week. Gold sold off almost the entire week to end sharply lower.

 

Finally, oil dropped below $50 a barrel in quite a strong move. In fact, we haven’t seen these prices since the OPEC production cuts were announced and it was the worst week for oil since November. This might be a move that’s not over yet, but we have to see what next week brings.

 

 

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GBPCHF

Weekly forex outlook: March 4

Hi traders, I’m back with another weekly outlook! Lots of nice setups lining up for next week so even though the weekend has just started, I’m already looking forward to next week. Last week, I moved to a new place (in Brussels), so I was a little busier than usual, but it was an interesting week nonetheless.

 

Current market behaviour

 

A general observation is that the markets seem to be more skittish than usual, mainly fuelled by various fundamental factors in the world right now. Just yesterday (Friday), we could see the euro taking off on news about an early poll on the French election. Tuesday was focussed on the Trump speech to congress, which was the first time president Trump gave such a long speech since the inauguration. Markets were hoping for some details on the proposed tax cuts and infrastructure spending, but Trump was remarkably vague on details. In all, it was a rather uneventful speech and a rehash of the promises he made during his presidential campaign.

 

Let’s have a look at the overall market last week. The dollar initially surged on hints by Fed officials that a March rate hike would be likely. In the second part of the week, it made a market top and seems to have set in a downtrend. Even though almost every Fed official including Yellen indicated that a March rate hike was on the table and that the US economy had met Fed objectives, the DXY ended the week little changed. This could indicate that the rate hike was already largely priced in and the market was more focussed on other, mixed economic news.

 

Gold has ended the week quite a bit lower, continuing the downtrend initiated by the double top from last week. Even though the dollar was down for the second part of the week, the market seems to believe in dollar strength. This risk-on environment is the likely reason gold is selling off.

 

Finally, oil has moved down for the week. Better than expected crude oil inventories couldn’t prevent the commodity to sell off, but it rebounded near the second part of the week to around 53.20 a barrel.

 

Market overview

 

 

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Mirror lake

Fighting a continuous market bias

After using a trading journal for a while, I noticed something remarkable. For one specific reversal strategy I trade, around 75% of my trades were sell orders. Unknowingly, I seemed to have a bearish market bias.

 

 

Have you ever experienced something similar?

 

 

You might think that this sounds very similar to what people call a “permabear”, an investor who continuously acts in the expectation that stocks will fall. However, I don’t believe this is the same thing. In contrary to these investors, I don’t have a strong overall bullish or bearish feeling to any market. I will buy just as easily as I will sell. I do, however, have a harder time “seeing” certain bullish reveral setups.

 

I found this a bit unusual, so I looked into it. I found it easier to discover the bearish setups on my charts. I would often look over bullish setups that are exact mirror images of their bearish counterparts, but fail to either spot them or don’t find them convincing enough to trade. After I started monitoring this more closely in my weekly reviews and watchlists, I decided to do something about it.

 

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