Day trading Forex strategies | LiteFinance (ex. LiteForex)

2021-11-26 2021-11-26
Day trading Forex strategies

Oleg Tkachenko

Forex trading systems based on multiple indicators of technical analysis: basics of indicators, principle of application, conditions to enter and exit trades.

There are hundreds of Forex strategies based on fundamental and technical analysis. Some traders prefer developing trading systems, based on one or two simple basic indicator, some traders like complex combined tools. It is thought that multiple lines in the chart distract and over-charge traders, but I will prove that it is not so by practical examples. Form this review, you will learn about Spud stochastic thread theory, Rainbow range indicator, with a controversial indicators like Alligator, AntiAlligator, and the strategies based on them.

When “multiple” is good. Examples of original strategies, redundant with indicators.

Tell me, how many indicators do you think are appropriate to trade a relatively successful intraday or long-term Forex strategy? I mean, can you, for example, apply three moving averages, but with different periods; or you must always have a set of compatible trend and forecasting indicators and confirming oscillators?

I am sure there won’t be a single answer, although I’d like to learn the readers’ opinions in the comments. From what I found on the Internet:

1. It makes no sense to trade only with one indicator, also applying patterns, important levels and candlestick analysis. Such strategies are originally loss-making
2. An optimal combination of indicators includes lagging and leading ones. They form the golden mean.
3. Multiple indicators for intraday trading are bad for a few reason

• It is simply useless. You can simultaneously attach stochastic, RSI and other oscillators, and then got surprised, “These are all oscillators, indicating overbought and oversold zones, why are they sending different signals?” The answer is logical; a particular oscillator is selected for each market situation, so it is useless to combine them all.
• It is difficult to analyze. The more different lines are in the chart, the more you need to focus (it’s about intraday trading, where signals often appear) and the more you are likely to miss a signal or make an error. Many traders even prefer arrows and sound alerts, not to monitor the screen all the time.

I think all these ideas are rather controversial, so, I again welcome the readers to discuss it in the comments. I myself will offer a few interesting tool and strategies based on them, which apply multiple basic indicators and I will prove by real examples with screenshots that strategies with multiple indicators can well be rather efficient.

Best Forex strategies with multiple indicators

Another question. Tell me how you see developing an indicator of technical analysis? After all, to develop it you need to not only have experience in trading, but also to understand mathematics and statistics, not to mention writing the code and correcting it. In fact, things are much easier. There’s never a new fashion but it’s old. And the old was far not always developed for Forex. For example, a stochastic oscillator was designed to calculate the amount of lime in steelmaking. It was applied to Forex trading much later. Many complex indicators are based on moving averages, stochastic and so on. The strategies, presented below, are no exception.

1. Spud Stochastic Thread Theory

This trading system was offered on one of trading forums in 2007. It is interesting because it offers a little unusual way to use a stochastic oscillator. Strategies with two oscillators are quite common. But developers went even further, they decided to use multiple oscillators with different parameters of period %D, but with the default value of Slow and %К. Basic strategy applies 18 stochastic oscillators (of course you can change their number on your own), which should splice in a visual “rope”, finally forming its peak at the high or the low.

You need 18 stochastic %K lines from 6 to 24 (6, 7, 8…24) in the same timeframe. The principle is that in most cases the stochastic lines will form a web, that is be moving in different directions. The recommended timeframes are 1H and 4H. You might apply M30, but not a shorter one, because you may fail to assess the market sentiment and mistake a signal.

All stochastic lines conventionally come in three groups:

• Lower time frame stochastics LTFS (%К: 6-13);
• Base Stochastic, the BS line with %К = 14;
• Higher Time Frame Stochastics HTFS (%К: 15-24).

As a matter of fact, there can’t be an ideal rope, raveled by the lines. But, the thinner the rope is, the better. In perfection, the lines should be as closely attached to each other as possible, without spaces, crossing and random moves. As experience proves, the rope starts forming one or two candlesticks before a peak appears.

Now, I’ll tell you how this Forex trading system works in practice.

For this strategy we will use a modified complex indicator SpudStochastic. The indicator contains 8 Stochastic oscillators making a kind of stochastic rope. They have the same values for Slow and period %D, but different values for %К. A signal to enter will be when all 8 lines converge into a single rope. When they are visually close to each other and are about to reverse, you may enter a trade.

To important moments:

• The convergence point of stochastic rope must be in the top or in the bottom zones. If the rope was formed above level 20 or below level 80 and then started to unravel, you don’t enter a trade.
• When the rope is formed long before its peak (that is the lines go in parallel with a minimum space) suggests a strong trend. Even if SpudStochastic enters over sold or over bought area, you’d better avoid entering.

Another tool, applied here is a kind of filter, a market analysis indicator Cycle Koufer Extremus. It is seldom used in strategies, but in this case it is quite suitable. It identifies the end of trend waves and serves here as and additional complementary tool.

Requirements of the strategy:

• Timeframe is M30. You’d better not set short intervals.
• Asset is almost any currency except for exotic (exotic currencies are more suitable for long-term strategies).

You can switch on/off visual arrows and sound alerts as you like (many switch off these functions). Value of %D and Slow is left 3 for all the eight stochastic. %K will change from 6 to 24 like this: 6, 9, 12, 14, 16, 19, 21, 24.

I also recommend to change the common levels of 20 and 80, setting a narrower range for over bought and over sold zones – 15 and 85. It reduces the number of signals and filters off false entries. There are variations to use as the channel borders Fibonacci levels, in the original Spud theory, the author suggests the levels of 23.6% and 76.4%.

Settings for Cycle Koufer Extremus: fast moving average (МА) = 12, slow moving average = 24, Crosses = 50.

Based on what currency pairs you are going to trade, you adjust the indicators’ parameters. The offered setting should be taken as basic ones, as a profit was made with these settings for the EUR/USD pair. This strategy should be constantly optimized. You can download the templates of both indicators following this link

Requirements for opening a long position:

• All Stochastic lines are gathered together forming a kind of rope. That is their values are almost equal with each other.
• Most of oscillators (the more the better) at the signal candlestick are below level 15. Signal candlestick is the one where all the requirements are met simultaneously.
• Cycle Koufer Extremus paints a red dot close to level 0 in the chart.

As soon as most stochastics exit over sold area (i.e. it enters the corridor between level 15 and 85), you open a position. It is important that the rope shouldn’t unravel when it exits the zone, otherwise you shouldn’t enter (after all it is up to you). Stop loss is at a distance of 20-30 points. The Forex trading strategy allows to gain on the trend reversal, providing 40%- 60% of accurate entry signals. You close the position after most of oscillators (about a half) reached the opposite level of 85.

The screenshot above shows that stochastics gathered below level 15 into a single line, a red dot is painted at zero level, and stochastics started exiting the bottom zone (the levels of the candlestick, preceding the signal one, are in the yellow box on the left). The signal candlestick is highlighted with pink.

Requirements for opening a short position:

• Stochastic lines gathered together making a kind of rope. That is their values are roughly equal.
• Most of oscillators (the more, the better) at the signal candlestick are above level 85.
• Cycle Koufer Extremus paints a red dot near level 100

Open a position when oscillators exit the overbought area. The strategy is remarkable because it allows picking up a strong directed price movement. If you have a loss from a few consecutive trades (it happens sometimes), it is covered by one profitable trade. And one more tip: you’d better avoid trading at the time of news releases because of volatility. The best time to trade is day sessions, as trading flat is often at night.

2. Rainbow – universal indicator for any timeframe

The Rainbow indicator is a good example of how one basic tool helps to develop a comprehensive graphic analysis of the Forex market. It is also convenient from a visual point of view. Based on it, you can come up with more than one strategy, but that is its difficulty for beginners. Rainbow is ideal for any currency pairs, as well as for different timeframes. It is based on exponential moving averages (more than 60 curves, forming separate areas), according to which you can develop strategies from scalping to long-term ones.

To make Forex trading with the indicator more convenient, it is important to choose the right colours for the areas, so that they won’t merge with each other, being contrast. In the basic version of Rainbow, the colours are following:

• Yellow. ЕМА is built with the value Period from«2» to «15» with increment «1» (2, 3, 4…15).
• Blue. ЕМА is built with the value Period from «17» to «41» with increment «2» (17, 19, 21…41).
• Green. ЕМА is built with the value Period from «44» to «74» with increment «3» (44, 47, 50…74).
• Red. ЕМА is built with the value Period from «78» to «122» with increment «4» (78, 82, 86…122).
• Pink. ЕМА is built with the value Period from «125» to «200» with increment «5» (125, 130, 135…200).

So numerous moving averages, broken down into particular areas allow you to see the entire depth of the market, ranging from short-term to long-term trends. The yellow area is short-term trends that may be of interest to scalpers. The blue area presents short-term trends for intraday trading. The green area is for those who prefer middle-term trading, the red one is for long-term traders, and the pink one will be interesting for those who have been investing with a horizon of several years.

Practical application of the indicator for beginner traders. (you can download the template here)

• No random movements of the moving averages in all areas. EMA should be as close to each other as possible, they shouldn’t not cross or look like sharp waves. Each zone in the signal area should have roughly equal thickness, that is, the channels’ borders should not be visually narrowed or broadened.
• The moving averages should be facing in the same direction. Once the chaotic meeting of the zones turned into a directed row in the chart, you can enter a trade.
• A buy signal: the zones are arranged from top to bottom in the order, they are listed bulleted list above (starting with the yellow zone at the top).
• A sell signal: the zones are arranged from bottom to top in the same order (yellow zone is the bottom one).

Interweaving of moving averages means uncertainty (volatility or flat). To make sure, you can add an oscillator to the indicator or use a candlestick signal as a confirmation. For example, if the price has been trading under the moving averages for a relatively long time and then goes up, breaking through even the slowest moving averages, it means the breakout and it makes some sense to enter a long. The timeframe, suitable for the strategy, can be any, but it is better to use timeframes, starting from Н1 and longer.

It is clear from the figure how investors’ sentiment is formed at the very beginning: the zones have uneven thickness, channels’ borders are not parallel; on the contrary, they either meet together or move apart. At some point, the general Rainbow channel gets narrower, after that the bunch of the moving averages starts falling apart in the same direction (downwards). Separate colored zones become clearly outlined. The red box highlights the zone where you can open a short position. Gold zones marks the “chaos” zone. In fact, you need to close the position once the yellow zone marked the lows and went upside, breaking down the general downward direction (marked with arrow).

Main (general) settings of the Rainbow indicator

• FastEMA – settings for the periods of fast exponential moving averages.
• SlowEMA – settings for the periods of slow exponential moving averages.
• SignalSMA – the period for a common slow moving average (it is sometimes included into some indicator versions, though, I think it is not necessary).
• Thresh – a signal when the main flow of moving averages changes its direction (it is rather a complementary signal than the main one, since it is better to observe the indicator visually).

Rainbow is a complementary tool of the Forex market analysis. When you get used, you may apply only it (after all, there strategies, based on two or three moving averages, where the entry signal is sent when the moving averages meet at rising or falling candlesticks). Or, you can just place it on a separate screen and study the chart as the information environment.

3. Alligator or AntiAlligator?

3.1. Alligator

Most of time, the markets isn’t moving anywhere or makes chaotic movements, which are used only maybe scalpers to make profits, Any trends appear on average 15-30% of the total time, and the best Forex strategies are aimed precisely at identifying these trends and giving signals at the very beginning. The Alligator indicator, developed by Bill Williams (by the way, he is the author of many technical tools, for example, the Awesome Oscillator), just serves for these purposes.

Alligator indicator uses three smoothed moving averages, and the calculation formula is based on combining Balance Lines, which are calculated according fractal geometry and nonlinear dynamics. Instead of the closing price, it uses the averages price value – (High + Low)/2. Anyway, I won’t go too deep into details of the Alligator formula. The indicator was called so as the moving averages look like an alligator’s jaws, when they go apart after meeting at one point. It looks like an alligator opens its mouth, indicating a strong trend appearance.

The basic version of the indicator includes the following elements:

• Blue SMA (Jaws). Main smoothed SMA of the indicator starts with the 13-bar SMMA and is smoothed by eight bars on subsequent values.
• Red SMA (Teeth). First additional SMA starts with the eight-bar SMMA and is smoothed by five bars on subsequent values.
• Green SMA (Lips). Second additional SMA starts with the five-bar SMMA and smoothed by three bars on subsequent values.

Indicator applications:

The indicator applies convergence-divergence relationships to build trading signals with the Jaw making the slowest turns and the Lips making the fastest turns. 

• Alligator is awakening: red and green lines start moving upwards or downwards relative to the blue MA after a decline. The blue line is at the longest distance from the price. It signals the initial phase of a trend.
• Alligator is eating with mouth wide open: the trend line is about to cross the green one, which is referred to the peak of the trend.
• Alligator is sated. Red MA is going down to the lower range, which signals the end of the trend.
• Alligator is sleeping: All the lines are close to each other and moving gradually in the same direction or are constantly meeting so that it is impossible to identify the direction. The trend has exhausted.

Trend identification according to Alligator indicator

Alligator provides the following signals:

• When all the lines meet at the same point or with a minimum distance in-between, the market is trading flat. It follows the meeting of the lines, suggesting the need to exit the trades.
• The lines diverge after that flat, indicating the start of a new trend. The wider is the divergence, the stronger is the trend. If the blue line is at bottom, the trend is upwards, if it is at the top, the trend is downward.
• The longer Alligator lines aren’t meeting (i.e. moving relatively in parallel), the longer the trend is.

Forex trading strategies, based on Alligator, are sometimes criticized for being late. That is why, you must be very careful: monitor the price direction all the time and try to pick up long-lasting trends (here, fundamental analysis may be of use). The recommended timeframes are H4 and longer.

Alligator is thought to be quite a popular indicator, so, I’ll use its mirroring, AntiAlligator, to describe a practical trading strategy with real screenshots.

3.2. AntiAlligator

AntiAlligator indicator is the opposite of Bill Williams’ Alligator. It is also a trend indicator, but, based on the description, recommends doing the opposite. What is it for? It is a rhetorical question. I do really wish to learn the opinions of readers and advanced traders. You will find the link to the AntiAlligator template below, compare the two indicators and do share your opinions.  

Alligator based strategies recommend to Sell, while Anti Alligator will give a signal on Buy. It is said that AntiAlligator signals are not late, but I’d argue with that in practice.

AntiAlligator based strategy also uses a complementary tool TrendWave indicator. It is an oscillator for day trading strategies that is thought to be rather controversial. It uses simple and exponential moving averages, which indicate the start of a strong trend. The opponents of MA convergence-divergence theories avoid this indicator, but, again, there are no perfect indicators. So, let’s download the templates here and study the strategy.

Trading conditions:

• Timeframe – M15. Unlike with Alligator, you can trade in short-term timeframes here.
• Currency pair – EUR/USD
• AntiAlligator settings: Jaws Period (13), Jaws Shift (8), Teeth Period (8), Teeth Shift (5), Lips Period (5), Lips Shift (3). Type MA (2), Type Price (4), Level 0.001
• НTrendWave settings: WavePeriod (set the period according to timeframe) – 10, AvgPeriod (period for both moving averages) -21, Levels: -50, 50, -60, 60.

Requirements to open a long position:

• TrendWave paints a blue dot in the chart below level – 50.
•  AntiAlligator paints a green column at the same candlestick.

We enter a trade at the next Japanese candlestick. Confirming signals will be a blue dot below level -60 and several consecutive green columns. We set a stop at a distance shorter than 20 pips, after a profit of 10 pips is reached, we fix 50% of the trade, and the rest is protected with a trailing stop

It is clear from the screenshot that the indicator is painting the column when the price is at the lowest level, the Alligator’s mouth is opened as wide as possible. Another moment: the first column looks bigger than the second one, but just a few consecutive columns send a strong signal, irrespective of the last column size. There is no third column, so we enter a trade.

Requirements to open a short position:

• TrendWave paints a blue dot above level 50.
• AntiAlligator paints a red column at the same candlestick.

We enter a trade at the next candlestick.

Here, I’d like to note a remarkable fact. Although AntiAlligator is the opposite of Alligator, you can enter trades in both directions with it. After all, there different versions of oscillator, aren’t there?

Why not. These systems are simple trailing strategies, so, download indicators, install them in MT4, test on demo accounts and share your reasoned opinion in the comment section.

Conclusion. The feature of all these Forex strategies is that they don’t send many signals. And it is clear why. Nevertheless, they will suit day trading strategies. I just recommend applying them to multiple currency pairs. Remember, there are no perfect trading systems. Everything depends on the constantly changing market conditions, so, any strategy needs testing on the history and analysis of the statistics. You can learn more about the ways of backtesting and optimization here.

I hope these strategies to trade Forex will be of interest to you. If you want to order an Expert Advisor based on these systems, you can learn about how to do it in this article. I’m looking forward to your feedback! Please, do share your positive and negative comments and your results of testing the strategies!

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” 🙂

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

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Price chart of EURUSD in real time mode