The Forex market moves fast… very fast. This strategy can help traders focus on, and enter trades in the strongest short-term trends that may be available. Many traders coming to the Forex market look to day-trade; and by day-trade, most of these traders are thinking of holding trades for a few minutes to a few hours — at most.
The allure of such a strategy is understandable. By not holding positions overnight, the trader can feel an element of control that they may not feel otherwise. When a child first finds the finger-trap, they often insert their fingers only to find that that the bamboo weaving prevents them from being able to get out.
The key is to be relaxed, and feel your way to success; much like short-term trading. The reason these short-term charts can often be puzzling is because we are looking at so little information as compared to the longer-term charts, such as 1 day, or 1 week.
To do this, I use 2 Exponential Moving Averages: The 8, and the 34 period EMA. Below you will see the trend chart with the 2 Moving Averages added.
Many traders using 2 moving averages will look to trade crossovers. So I instead focus on stronger elements to constitute a trend; and I want to focus my efforts to the strongest portions of these trends. I will do this by noticing the location of the moving averages; and looking for price agreement before moving on to place entries.
The chart below will illustrate this concept. The chart below will illustrate further: Once this criterion is met, I feel comfortable enough to move down to the short-term chart to enter into the trade. When the trend-side momentum comes back in the pair — I will look to enter my trade.
Traders can handle these situations through lot sizing. For instance, I can take a stance of looking to enter up to 5 positions. So, for each of the first 5 crosses of the 8 period EMA, I continue to add to my lot. Or perhaps, I can look to only take the first, place my stop, and wait for the trade to either move in my direction or hit my stop. In the case of short positions, we are looking for exactly the opposite occurrence than we had looked at a moment ago. Each time price crosses below the 8 period EMA, I have another opportunity to open up a short position.
If you notice the right side of the above chart, you may see that price begins to find support on the 8 period moving average — indicating that we may have a reversal of trend; and that brings us to one of the most beneficial parts of the Finger-Trap trading strategy: If we are placing trades on the 5 minute chart, and looking to only take part in strong moves in the direction of the trend we had identified on the hourly chart; we have quite a bit of flexibility in how we want to consider risk.
In the article Price Action Swings , we had identified a mannerism of capping risk when trading trends. When placing a long trade, I want to ensure that price remains supported for the duration of my trade.
If short-term support is broken, I run the risk of the pair continuing to move against me, further draining my account. To a scalper, this can be extremely dangerous as fast markets can exhaust an account balance very quickly. Once again, in the event of short positions, we would be looking at the opposite scenario; looking to place stops just outside of the recent swing-high so that if price reverses the down-trend that we were looking to take part in, we may cut the loss early.
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