Forex Phase Change Detector Strategy
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Forex trading strategies: Phase change, ultimate how to guide

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Forex market has its trends and phases. The most important question in forex trading strategies is how to detect trends and phases. In this post I will explain to you how to detect the phase change point and how to use it as your forex trading strategy. Keep reading to find out how it works.

Price charts can be trending or side moves. Trending markets are always a better option for trading than the side move market. Trending markets have phases. Phase one is the period when price goes in the same direction as a current trend. Phase two is the period when price goes in the opposite direction compared with the current trend. Our goal is to detect phase change points, when the price chart changes its direction from phase two to phase one. After many years of experiments I finally have the ultimate Phase change forex trading strategy, which I will share with you here.

Forex Trading Cycles & Phases

Used chart indicators and tools

The indicators we will use in this strategy are:

  • To indicate current price move trend we will use:
    • Exponential Moving Average 200 periods (EMA200).
    • Exponential Moving Average 50 periods (EMA50).
  • For indicate right moment to place order (entering point):
    • Exponential Moving Average 20 periods (EMA20).
    • Exponential Moving Average 8 periods (EMA8).

And ring low bar pattern for bullish trend or ring high bar pattern for bearish trend.

Forex Trading: Detect the current trend direction

The first step in my Phase Change Forex trading strategy is to determine what is the current price moving trend. There is three possible situations:

Forex Trading: Bullish trend

Bullish trend is when the price chart goes up or so called up trend. To detect a bullish trend it is necessary to clearly see on the chart two or more consecutive HL (higher low) and HH (higher high) points, as it is shown on the picture below. At the same time it is necessary that the current price is above 50 periods exponential moving average line (EMA50) and 200 periods exponential moving average (EMA200). And, noramly, EMA50 has to be above EMA200, at the same time.

Summary conditions for bullish trend are:

  • Two or more HL (higher low) points and HH (higher high) points on the price chart.
  • Current price is above EMA50 and EMA200 in same time, and finally
  • EMA50 is above EMA200
Bullish trend detection

Forex Trading: Bearish trend

Bearish trend is when the price chart goes down or so called down trend. To detect a bearish trend it is necessary to clearly see on the chart two or more consecutive LL (lower low) and LH (lower high) points, as it is shown on the picture below. At the same time it is necessary that the current price is below 50 periods exponential moving average line (EMA50) and 200 periods exponential moving average (EMA200). And, noramly, EMA50 has to be below EMA200, at the same time.

Summary conditions for bearish trend are:

  • Two or more LL (lower low) points and LH (lower high) points on the price chart.
  • Current price is below EMA50 and EMA200 in same time, and finally
  • EMA50 is below EMA200
Bearish trend detection

Forex Trading: Side moving market

Side move market is the market condition when the situation of price movement is not clear. If the price goes up or down, according to the conditions described above? Or, in other words, you can not clearly identify all three conditions to mark market movement as bullish or bearish. Usually, at the side move market conditions, the price moves as consecutive up and down waves between up and down limits.

Side move market.

Please be careful with side move markets. It is very difficult to trade during market moves sideways. Phase Change Forex trading strategy is not suitable for side move markets, only trending markets, no matter bullish or bearish, just trading. I tried several times to use this strategy on the side move market but with no results. So, my advice to you is to never use Phase Change strategy during market moves sideways.

Higher time frames in Phase Change strategy

Before you continue with Phase Change Forex Strategy implementation, you must check the market direction on the higher time frame. For example if you look at a one hour chart and detect that price goes up or a bullish trend on that one hour chart, that is not enough information to decide that trend is bullish. You must check trend direction on at least one step higher time frame chart, 4 hour time frame, even one day chart.

If all time frame trends are consistent, you can be sure about price movement direction.

Example:

  1. Trading at: USA100 hourly time frame chart.
  2. EMA50 is above EMA200 on the 1 hour chart? If the answer is Yes, the current trend is potentially bullish.
  3. If the current price is above EMA50 and EMA200 on hourly chart? Yes => potentially it is a bullish trend.
  4. EMA50 is above EMA200 on a 4 hour chart? If the answer is Yes, a bullish trend is confirmed on a higher time frame.
  5. EMA50 is above EMA200 on a 1 day chart? If the answer is Yes, a bullish trend is finally confirmed.

Steps from 1 to 4 if required, step 5 is optional but if possible try to use all 5 steps to be sure in your decisions.

Phase Change strategy: Long setup

For long setup it is necessary to identify following conditions on the chart:

  • We need to identify the bullish trend on the current time frame, and confirm it on the higher time frame, before even we will start looking for an entry point for a long setup.
  • The 8 period exponential moving average (EMA8) is above the 20 period moving average (EMA20), as further confirmation of a bullish trend.
  • There should be a ring low pattern. The ring low pattern consists of two consecutive bars (or candles) on the chart, with lower high and lower low on the second bar, as shown on the picture, below.
  • The entering point will be the highest point of the second par.
  • The stop loss will be the lowest point of the second bar.
  • The take profit / stop loss ratio will be 1 : 1.

The point of Phase Change strategy is to identify the point where Phase 2 changes into Phase 1 of the current bullish trend.

Let’s pay our attention to the pictures below, because a picture can tell us more than thousands of words.

Phase change Forex strategy: Ring Low candles pattern.
Long setup Entering point, Take profit and Stop loss

If the next bar (candle), just after a low ring pattern, makes a new lower high and lower low or new ring low pattern, we will cancel the current order and make a new order with an even better price.

Long setup Update order with better price

If new bar, just after ring low pattern not trigger order and not make new ring low pattern we will cancel order.

Long setup Cancel order

Phase Change strategy: Short setup

For short setup it is necessary to identify following conditions on the chart:

  • We need to identify the bearish trend on the current time frame, and confirm it on the higher time frame, before even we will start looking for an entry point for a short setup.
  • The 8 period exponential moving average (EMA8) is below the 20 period moving average (EMA20), as further confirmation of a bearish trend.
  • There should be a ring high pattern. The ring high pattern consists of two consecutive bars (or candles) on the chart, with higher high and higher low on the second bar, as shown on the picture, below.
  • The entering point will be the lowest point of the second par.
  • The stop loss will be the highest point of the second bar.
  • The take profit / stop loss ratio will be 1 : 1.

The point of Phase Change strategy is to identify the point where Phase 2 changes into Phase 1 of the current bearish trend.

Let’s pay our attention to the pictures below:

Phase change Forex strategy: Ring High candles pattern.
Short setup Entering point, Take profit and Stop loss

If the next bar (candle), just after a ring high pattern, makes a new higher high and higher low or new ring high pattern, we will cancel the current order and make a new order with an even better price.

Short setup  Update order with better price

If new bar, just after ring high pattern not trigger order and not make new ring high pattern we will cancel order.

Short setup Cancel order

Risk management

The basic thing you need to consider when trading on the forex market is risk management. Please remember, if you place an order without a good risk management plan, that is a sure way to ruin your account very quickly. There is two main rules of risk management in Phase Change strategy:

  • General rule for any trading strategy is: “do not risk more than 2% of your account in one single trade.
  • Specific risk management rule for Phase Change strategy is: keep Take Profit / Stop Loss ratio always 1:1. You need to do it that way even if it is obvious to you that the ratio can be bigger than 1:1. It is better to earn a smaller amount of money then lose it.

The difference between good and not so good traders is risk management. Yes, it is possible to earn a lot of money without risk management but the chance to burn out your account in just a couple of trades is incredibly big without risk management.

Conclusion

There is couple key items for the Forex trading Phase Changer strategy:

  1. Determine if the market is bullish, bearish or side move market, on desired time frame (e.g. 1 hour), by using EMA200 and EMA50.
  2. Phase Change strategy is usable only for trending markets (regardless if bullish or bearish). Do not use this strategy on side moving market.
  3. Confirm market trend on a higher time frame (e.g. if you are trading on a 1 hour chart, you must confirm current trend on a 4 hour chart, too, even one more step on 1 day chart).
  4. Use EMA20 and EMA8 for further confirmation of the trend.
  5. Use Phase Changing strategy, only in the same direction as the current price trend. Always look for a long position on the bullish trending market, or a short position on a bearish trading market. If you act in the opposite manner you will be on the right way to lose money almost in one hundred percent.

Disclaimer

The article above is not advice for trading. Article is just information, how to use some tools and techniques for forex trading. Accordingly, the author of this text disclaims any liability for losses incurred by using this trading strategy.

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