Beating Alpha

iterating towards truth


Keep it simple – hourly 200SMA strategy for Forex trading

I believe in price action. I wanna go with the flow. I don't believe in long term technical predictions. I like fundamental analysis but I hate those who do precise predictions of where the price would be and I find them silly. I like short-term technical analysis but I don't blindly obey it. I believe in psychological patterns & technical barriers(S/R). Markets are about people and people are behaving according to their emotions. These emotions are then mirrored into the markets.

One part of the strategy I use for technical analysis is H1 chart and one simple moving average (SMA 200). The reason why I like hourly charts is because they are universal. Versatile. They start and end wherever on earth you are. Are you trading with server time from Tokyo or London. It doesn't matter. They will be the same not like daily or hourly charts. Different time-frames different closing prices different shapes.

Second part of this technical approach is SMA200. Simple and easy to follow. Plot the SMA 200 on your HOURLY charts and you will be amazed. But of course this by itself doesn't mean anything. This approach is just one part of the puzzle. The other part would be entry and exit strategy.

First we are gonna focus on the exit strategy. Because that's what separate winners from losers and vice versa. I would normally use either TP(take profit) on some part of the position and for the rest I would use dynamic moving of S/L. TP would be around the area of previous S/R(support & resistance). After the TP is hit then I can move to dynamic S/L and assign a new position for my S/L. It's not a complex strategy but very effective. First by TP we guarantee that we will get some satisfaction in form of immediate gain after our TP is hit and afterwards we can freely move our SL according to current situation. It's like you have eaten a main course but you still want a dessert :).

Secondly we can focus on a trade management. It would be foolish to think that the trade has got only beginning (entry) and end(exit). The process in the middle is THE most important aspect of the whole trade. That's the part of the trade when we usually decide not to obey our rules and break them. Part where emotions are taking place and our mind is blind. For this part I have something what I call: "IF>THEN SITUATIONS". Of course you can't specify every single situation but you can prepare yourself for the most tricky questions you will ask yourself when the trade gets to the position you have to decide. Nassim Taleb has in his book Black Swan a great comment about George Soros: "Similarly, the speculator George Soros, when making a financial bet, keeps looking for instances that would prove his initial theory wrong" I will repeat it again "… that would prove his initial theory wrong". Repeat it several times again and again. That's the key. We have to look for something what would prove us wrong. Unfortunately we usually look only for answers which would prove us right (confirmation bias). Think about it.

Finally we have our entry technique. This technique is based on assumption that after the price broke the SMA200 we have a change in a trend. But when exactly we would enter the trade? Well, I would usually wait for the break then wait for a small retrace and then enter below/above (depends on the direction LONG/SHORT) the previous break on some previous important support or resistance. I have one simple rule: "Never take the first price". It is simple but effective. Sometimes you lose the opportunity because the price action was too fast and you didn't catch the trade. But as my other sayings goes:"I would rather loose opportunity of a good trade then loose money in a bad trade".

So if you get yourself here you are probably saying:"Ok, cut the BS and show me some trades. Well just for example I have taken every single break in randomly chosen currency in last two months. For example AUDJPY, … let's have a look"

PS: It all looks great on the pictures but you might ask where is the catch? Well the catch is in the MIDDLE of the process. Looking back in time every chart looks nice and simple but to remain under uncertainty in the trade takes a lot of practice and strict rules. Next time I will try to explain when the trade might have gone wrong and I will paint the REALITY check on today's posted charts. How it might look if you wouldn't follow the plan. Then it might be a totally different story.


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