Trading Plan

Successful trading requires a good trading plan that outlines the steps taken when identifying, entering and exiting trades. Here’s the one I developed. It helps me to avoid making impulsive trades.

Summary: The forex markets often move in trends that last several days. My strategy is to identify and trade these trends using chart pattern analysis, trend lines, moving averages, price channels, support and resistance, Fibonacci retracements, and the RSI indicator. I use the daily charts to determine the long term trend (if any) and the hourly charts to time my entry and exit. If the market is trading in a range on the daily charts, I use the RSI indicator and price channels to identify overbought and oversold conditions to trade the range.
One of my main tools is comparative chart pattern analysis. Comparing the current price action with periods of past price action that have similar patterns and technical indicator dynamics allows me to improve my odds of predicting the next market move.

Trading Guidelines:

  • Start by looking at the long term chart (daily chart), and only trade in the direction of the long term trend, if any. Use 10 and 20 day exponential moving averages (EMA) to determine the presence and direction of a trend. Also plot 100 and 200 day simple moving averages. If the market is going sideways, or is in the middle of a trend reversal, trade both directions with low risk entries near the hourly channel boundaries only.
  • Use the hourly chart as your intermediate time frame, and for identifying trades. Use exponential moving averages (10 and 48 hours) to determine hourly trends, and use an Envelope Trading Band, or price channel, above and below a 10 hour moving average, with a width that encompasses about 95% of price action. When the daily trend is up, buy at or below the hourly EMA48, when the daily trend is down, sell at or above the hourly EMA48. Set entries near the channel boundaries to catch highly overbought (RSI>80) or oversold (RSI<20) conditions.
  • Before entering a trade, characterize each potential entry using the following checklist of favorable criteria. Only enter if at least 5 of those apply, this avoids impulsive trades:
    • Long term trend is present and supports our trade
    • Buying/selling near historical support/resistance
    • Buying/selling near Fibonacci retracements
    • Buying/selling near Trendlines (daily and hourly)
    • Buying/selling near channel boundaries and hitting it at a steep angle
    • Buying at oversold (RSI<20) or selling at overbought (RSI>80) conditions
    • RSI at midlevel when buying a breakout (trade has room to run)
    • Entering a trade when divergences happen on the RSI
    • Entering a trade supported by a chart pattern
    • Early trend after long period of consolidation (on daily or hourly chart)
    • Looking strong/weak, Instinct
    • Risk/Reward ration better than 50/50
  • Enter with momentum, and with the trend. Never try to catch bottoms or tops. For instance, when going long near a potential bottom: wait for momentum to turn up, make a higher high, then turn, make a higher low, and turn up again. THEN enter, right after the turnaround of the higher low and when momentum picks up. Always trade in the direction the price is going, never against it. If the market keeps running past the previous low, get out (set your stop a few points below that low.)
  • Set stop below/above at least one major support/resistance, preferably two. For risky or uncertain trades, place a tight stop below/above the nearest critical-turning-point support/resistance.
  • Pick a reasonable target based on support and resistance levels. Use channel boundaries as upper limits for target selection. Keep change of channel boundaries and EMA’s in mind, when using them to determine the target, extrapolate into the future based on the expected time it may take the market to hit your target.
  • Move stop up after a clear move past the first resistance/support has occurred, and only move it to the support/resistance at which you placed your entry. Don’t move it to the break-even point too soon. Give the trade room to develop, between your stop and target. Avoid stops that are too tight and get caught by regular market volatility, but look for low risk trades that allow placement of tight stops. Never place a trade without a stop.
  • When trading a trending market: use pyramiding of trades to get the most out of the trend. That allows you to let your profits run for each trade, and to make multiple entries within the trend during corrections. When the market finally turns, the last trade may get stopped out, but the profits for the other trades will be great. Use trailing stops for all trades that trail at a reasonably safe distance allowing for corrections around the hourly EMAs (determine the size of these trailing stops by studying past trends.)
  • When trading a ranging market: Enter near channel boundary, just after the market has turned again, but not at the very bottom. If there was a previous trend that was strong, preferably trade in the direction of that previous trend. Place conservative profit targets (take small safe sections out of the range, don’t go for profits that are too large, like the other range boundary). Keep the average daily swing in mind.

Technical Indicators:
Daily Charts

  • 10-day exponential moving average
  • 20-day exponential moving average
  • 100-day simple moving average
  • 200-day simple moving average
  • 10-day/2% moving average envelope (price channel)
  • 10-day RSI

Hourly Charts

  • 10-hour exponential moving average
  • 48-hour exponential moving average
  • 100-hour simple moving average
  • 10-hour/1% moving average envelope (price channel)
  • 10-hour RSI