Saturday, February 25, 2012

An Effective Swing Trading Strategy


‘The proper execution of your trades is one of the most fundamental components of becoming a successful trader and probably the most difficult to learn. Most traders find it is much easier to identify something in the market that represents an opportunity, than it is to act upon it.’’ - Mark Douglas


Can you experience triumph in turbulent markets? In turbulent markets, it is better to be a proficient trader rather than be a long-term investor. When the markets become highly volatile and irrational, long-term investors would probably suffer. For instance, permabulls tend to be worse off in bear markets, and therefore, it would be in the interest of traders to use strategies that work both in bull and bear markets. For you to become triumphant in turbulent markets, you would need a set of high probability Indicators that generate high probability trades (with at least, 40% accuracy). You would need to carry out consistent execution of those trades, and finally, you would need to manage those trades successfully.

Using the Strategy

This strategy comes with a risk-to reward ratio of 1:2.5 – something called a magic formula by one trader and author. With this kind of risk-to-reward ratio, you would be victorious even with a long-term hit rate of 40%. Occasionally, there would be a few losses in a row or a few profits in a row, but you would still be a victor in the long run. The indicators used are Exponential Moving Averages (EMAs), the Relative Strength Index (RSI), and the Force Index (FI). Currency pairs and crosses that tend to trend well have been chosen. You may check the section titled ‘Strategy Snapshot’ in order to check the ‘buy’ and ‘sell’ rules applicable to this trading approach, plus its money and risk management and exit rules. All entry criteria must be met before a trade is opened. Once this has been done, the trade should be exited only according to rules (there are only four exit conditions). These rules are made clear in the trade examples below. Please note that, on each chart, the red vertical line on the left shows where the trade was entered while the red vertical line on the right shows where it was exited.

Strategy Snapshot

Strategy type: Trend-following

Suitability: Good for full-time and part-time traders

Time horizon: Hourly charts

Indicators: EMA 5 (color blue), EMA 12 (color red), RSI 14 period, and FI 14 period


Buy rule: Enter long when the EMA 5 crosses the EMA 12 to the upside, and the RSI 14 is above the level 50, and the FI 14 is above the level 0.00

Sell rule: Enter short when the EMA 5 crosses the EMA 12 down, and the RSI 14 is below the level 50 and the FI 14 is below the level 0.00

Position size: Use 0.01 lots for each $2,000 (thus making it 0.05 lots for $10,000 and 0.5 lots for $100,000)

Risk per trade: 0.5%

Stop loss: 100 pips

Take profit: 250 pips

Breakeven: Move the initial stop to breakeven after you have gained up to 80 pips

Trailing stop: Apply a custom-set trailing stop of 100 pips after you have gained up to 190 pips

Risk-to-reward: 1:2.5

Survivability: Long-term triumph is possible with 40% hit rate

Exit rule: A trade is closed when the stop loss or breakeven or trailing stop or take profit is hit

Recent Trade Examples

The examples below include a trade that did not reach its target. All trades cannot be profitable, yet traders can be permanently victorious. The vertical red line on the left shows where a trade was entered while the red vertical line on the right shows where it was exited. You would be shown how risk is controlled effectively in the unpredictable markets. Spreads were not considered in the examples below.

Example 1

In this example, there was a nice northbound movement after a ‘buy’ signal was generated on the AUDNZD (Aussie versus the Kiwi). But the price action did not reach the take profit target at 1.3140. A trailing stop of 100 pips was set once the profit reached about 190 pips. The price reversed and hit the trailing stop, thus making the order to be closed with 100-pip profit.

Instrument: AUDNZD

Order: Buy

Entry date: October 24, 2011

Entry price: 1.2890

Stop loss: 1.2790

Trailing stop: 1.2990

Take profit: 1.3140

Exit date: October 26, 2011

Exit price: 1.2990

Status: Closed

Profit/loss: 100 pips

Example 2

On the EURJPY, a long trade was opened upon the generation of a ‘buy’ signal from the strategy. The price first went up by over 200 pips and the trailing stop was set at 100 pips. The market entered a period of consolidation after this, something that brought some retracement. This retracement did not reach the trailing stop level before there was a sudden thunderous bullish outbreak on all JPY pairs – something that resulted in a nice profit. Besides, you would do well to observe that the subsequent ‘sell’ signal that was generated after this (on October 31, 2011) moved very well in the forecasted direction.

Instrument: EURJPY

Order: Buy

Entry date: October 27, 2011

Entry price: 105.90

Stop loss: 104.90

Trailing stop: 106.90

Take profit: 108.40

Exit date: October 31, 2011

Exit price: 108.40

Status: Closed

Profit/loss: 250 pips


In order to be capable of investigating the currency market situations more closely, we want to determine exactly when certain signals in market mechanics trends are more successful and when they’re not. Whenever the market mechanics allow signals to be generated, then you enter your positions without being hesitant. From this point on you give the market room, because the swing trading idea becomes a mid-term trend follower. And because you paid a very attractive price for each of your position, it would be a pity to close a favorable position too early. Run your gains.

I’d like to conclude this article with a quote from Steve Ward:

“One of the key aspects that seem to distract traders is excessive focus on P&L and the outcome and results of the trade. That is the trader is so distracted by thoughts around outcome and money to be made/lost that they do not have sufficient focus on the key components of executing their trade to achieve the best outcome. Likewise traders who are low in confidence fail to execute their trades and take opportunities when they arise losing valuable potential profits.”

NB: Please watch out for my coming articles with these titles: ‘The Joke about a Cough Medicine Applied to Trading,’ ‘Angry Traders,’Traits of Successful Traders,’ ‘How the MACD Generates Good Trading Signals,’ ‘A News Trading Strategy,’ ‘Analyze the Markets with the Aroon Indicator,’ ‘A Brief Introduction to Point and Figure Charts,’ ‘Does High Hit Rate Work Always?’ ‘My Typical Trading Day,’ ‘A Trader’s Trick Entry Technique – Sighting Golden Trading Opportunities,’ ‘Making Money out of Losses – A Blessing in Disguise,’ ‘Achieve a Better Hit Rate with Gap Trading (Using the Logic Yourself),’ ‘Play the Markets Victoriously with Nano-cent Accounts,’ ‘Why It’s Difficult to Do the Right Things in the Markets,’ ‘How to Identify a Sideways Market – Be Safe!’ ‘A Negative Expectancy System – Pushing Against the Wind?’ ‘Trading Signals,’ ‘An Intraday Moves Catcher – A Wealth Generating System,’ ‘Unlock the Power of Everlasting Triumph in the Markets (Parts 2 - 12),’ ‘How to Handle Uncertainties in the Markets,’ ‘The Issue of Stops (Come Back! Oh Come Back!),’ ‘A Hedge Funds Strategy,’ ‘My Hedge Funds Strategy Update,’ ‘Experiment with Different Exit Tactics,’ ‘Mastering the Market Equilibrium Zones – A Time-sensitive Method,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple Positive Expectancy System – Trading Effortlessly,’ ‘Testimonies from My Subscribers (2),’ ‘Best-case Scenarios – The Beauty of Trading,’ ‘Gap Trading Revisited,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses – Part 4 (Losses Aren’t Abnormal) ,’ ‘The True Holy Grail – The Long Sought for,’ ‘Forex Trading Vocabulary,’ ‘ Clarifying Some Issues – Part 6,’ ‘Navigating Turbulent Markets – A Double Timeframe Analysis,’ ‘Before You Open that Trade,’ ‘Cogent Trading Biases,’ ‘Overview of My Signals Strategies – Can You Become a Super Trader?’ ‘Winning Trades, Losing Trades,’ ‘The Cost of Discipline,’ ‘Monthly Market Review,’ ‘Uncertainty Has Become My Ally – An Interview with a Dogged Market Speculator,’ ‘I Can’t Express How Grateful I’m to You!’ ‘Yearly Trading Update (2012) – The Big Picture,’ ‘What We’ve Decided to Do in the Markets - Trend Following It Is!’ ‘Yearly Trading Results (2012)’ ‘Monthly Trading Report (December 2011),’ etc.

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC


Yahoo! Messenger ID: saazalmu

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