This winning forex strategy has provided me with consistent profit for the last 15 years. The basics are to identify the trend, wait for a pullback, and then enter a trade and ride with the trend.
This winning forex strategy performs best on higher timeframes. I use a daily (D1) or weekly (W1) timeframe to identify the trend and then enter trades on 4 hour (4H), 6 hour (6H), 8 hour (8H) , or daily (D1) timeframes. I prefer trading higher timeframes so I don’t have to watch charts all day and just check them a few times a day.
The strategy has 3 main points:
- Identify the overall trend using a higher timeframe
- Wait for price to pull back and reach action area
- Wait for a candlestick pattern confirmation
Let’s break these points down in more detail.
Identify the overall trend using a higher timeframe
The first step is to understand where the price is heading in a big picture. I use daily (D1) chart to determine if there is a trend and to which way it is heading. We want to see a nice clear trend not ranging market.
One indicator that can help you find out the trend is 200 EMA (Exponential Moving Average). When the price is above it, then I look only to buy. And when the price is below 200EMA, then I only sell. This indicator works so well because the banks and other trading institutions also use it.
Some trend examples below.
Very clear uptrend. Price is climbing higher and higher. Also above 200EMA. 200EMA is represented as a yellow line. We only buy in this scenario.
This is an example of a downtrend. Here we are only looking to sell.
I avoid trading when there is no clear trend like in the picture below. This is called ranging market. I want my trades to have a higher probability to be a winner.
If you are new to trading and have trouble determining trend then I suggest checking out ForexTrendy, it will show you which currency pairs are trending so you can realize maximum profit from this winning forex strategy.
Wait for price to reach action area
The action area is where we are looking to enter trades. I use this term to describe an area where the price is going to hit some kind of “barrier”. It can be a support/resistance area, moving average, or trend line. Some examples below.
Support and resistance areas
The green line is where I drew my resistance area. You can learn more about the support and resistance here and I also go into more detail how to draw the support/resistance in our forex reversal trading system. We can see that buyers pushed the price through (red arrow pointing up) the resistance area and now the price is returning (red arrow pointing down). The green line is now acting as a support area (resistance turned into support) and is also an area of action. When the price gets close then we start looking for trade entries.
There is a similar situation in the picture below. The red circle represents the action area. This is where we actually entered a long trade. As you can see price is already heading in the direction we want.
Moving average aka dynamic support/resistance
When the price is trending strongly then sometimes it is wise to use 20EMA (exponential moving average) as support or resistance. We can see how the price is bouncing off the 20EMA (red circles). This means that it respects the EMA as support. Then we should look to enter trades on the bounces.
The trend line is also very good indicator to enter trades. Red circles are possible trade spots.
Now we have covered all action areas in this winning forex strategy, so now you know when to start looking for entry signals.
Wait for a candlestick pattern confirmation
Okay, now we know that we should trade with the overall trend and also when to start looking to enter trades. But when exactly is the right time to enter? What signals should we look for? I’ll explain right away.
We are looking for the right kind of candlestick patterns. If you dont’t know what candlesticks are then read here. Specifically reversal patterns. There are many of them, but the main ones are:
- shooting star
- bullish engulfing
- bearish engulfing
- small upper wick or no wick at all
- big lower wick (2 or 3 times the body size)
- price opens and closes at the top part of the candlestick
Hammer wants to tell us a little story. Hammer tells us that first sellers took control and pushed the price down, but then the buyers gained a lot of strength and rallied up and even higher than the candle open. A big sign that the price is reversing.
Some examples below.
- small bottom wick or no wick at all
- big upper wick (2 or 3 times the body size)
- price opens and closes at the bottom part of the candlestick
As you can see shooting star is exactly the opposite of the hammer. So the story it tells is exactly the opposite – seller have taken control.
This is a 2 candle pattern.
- first candle is bearish
- second candle’s body is bigger than the first
- second candle is bullish
This pattern’s story is that buyers have strongly taken control from sellers.
Also 2 candle pattern.
- first candle is bullish
- second candle’s body is bigger than the first
- second candle is bearish
The first candle is controlled by buyers, but the second candle tells us that sellers have taken control because the candle is bigger and of the opposite direction.
We only enter trades when we have 3 conditions favoring us. We have a trend. The price is making a pullback and returning to an action area. There is a favorable candlestick pattern.
Some real life examples below.
AUD/USD long order (support area)
This trade was taken on a 4-hour chart. First, we saw a nice trend going up on the daily chart and then switched to 4 hours. Now we know to look for buy entries only. In this case, the action area is the support line (green line). We entered a trade on the close of the second candle that is inside the drawn red box. It has a long wick which tells us that sellers tried to push below support but were unable and buyers took control. So the candle closed as blue – hence we should be buying. It is not a picture perfect candlestick pattern, but you rarely get them in real life.
EUR/USD long order (trend line)
Here we also checked the trend and know to look for buy entries only. We use the trend line as an action area. There is a bullish engulfing pattern appearing on the trend line. This is a signal for us to enter a trade.
Risk to reward ratio
I should also mention that I always put my stop loss and take profit levels so that I get at least 1.5-to-1 risk to reward ratio. This means that for example, I put 150 pip take profit and 100 pip stop loss. This ensures that I can lose more trades than win and still make a profit.
The charting platform I use is TradingView. I recommend their product because it is the best on the market at the moment and it has a free version with plenty of options. I like that it has great charts on mobile, so I can check my trade setups anywhere. Of course, you can use your broker’s charting software, but it’s usually very limited.
If you have any questions just post them here.