Today we are going to discuss a strategy, which is widely known among traders.
Trading strategies for the short-term timeframes
Some traders prefer to trade on the longer-term timeframes. It helps them to check the positions no more than once a day and have more time for making a final decision. However, if you prefer to be a more aggressive trader and earn money within a day, you will probably try trading on the H1 and H4 charts. In this article, we will explain the most popular strategies for this kind of trading.
Advantages and disadvantages of trading on the smaller timeframes
There are pros and cons of trading on the smaller timeframes. Among the advantages, we can mention lower pressure on the investor’s deposit and the possibility of earning more money due to the increased number of opened positions.
At the same time, there are certain disadvantages in trading on H1 and H4. The first one is, of course, the increased amount of time you need to spend in front of the trading platform. Also, take into account that the emotional pressure is higher while trading on the smaller timeframes. Thus, the strategies for intraday trading must be simple in their usage, but effective at the same time.
Strategy for trading on the H1 chart
You need to apply several moving averages to the chart to implement the following trading strategy.
- Exponential moving averages of 38 and 48 periods (colored in brown).
- Linear weighted moving average of 5 and 8 periods (colored in violet).
The rule is simple. When the linear weighted MAs cross the exponential MAs upside down, it signals us to open a short position. Alternatively, when the linear weighted moving averages cross the exponential ones from bottom to top, we may open a long position. Signal will be stronger if the distance between two linear weighted moving averages is lower or they cross each other. At the same time, the bar of the candlestick following the crossover should close below the crossover (if it’s a signal for the short position) or above the crossover (if it’s a signal for the long position).
You close your position when the exponential MAs cross each other.
Let’s consider the example.
On the H1 chart of AUD/USD linear weighted MAs crossed exponential MAs from bottom to top on November 1. We waited for the candlestick to close above the moving averages and the levels of the previous consolidation. After that, we waited for the next candlestick and opened a long position at its closing price at 0.7131. Our stop loss is placed below the levels of consolidation at 0.7047. We waited for the exponential MA to cross each other at 0.7242. We earned 111 pips (0.7242-0.7131).
Strategy for trading on the H4 chart
The strategy described below requires the usage of two indicators: MACD with settings 12,26,2 and Commodity channel index (CCI), which period equals 14.
You need to open a long position when:
- CCI crosses the upper border of MACD from bottom to top;
- When it happens, MACD should be placed higher than the 100 level.
We place our stop loss here below the levels of the previous consolidation. Our take profit depends on price action. However, we must close our position if CCI falls below the 100 level.
Let’s look at the H4 chart for AUD/USD.
On January 11 we saw the CCI rising above the MACD. We waited for the next candlestick and opened the position at 0.7381. Our stop loss is placed below the levels of the previous consolidation at 0.7326. We closed the position when CCI tested the 100 level upside down at 0.7508. As a result, we earned 127 pips.
When should you open a short position?
- CCI crosses the lower border of MACD from top to bottom.
- When it happens, MACD should be placed lower than the -100 level.
Finally, let’s consider the example of the short position on the same H4 chart for AUD/USD.
CCI crossed MACD upside down. We opened a short position at 0.7160. Our stop loss is placed above the levels of the previous consolidation at 0.7205. We waited until CCI tested the -100 level and closed the position at 0.7069. We earned 91 pips.
Trading on the smaller timeframes may provide you quicker profits. At the same time, it requires a lot of attention that is why you need to be careful while trading on them.
You may not know the type of analysis, which combines both fundamental and technical practices. This approach is called VSA (volume spread analysis).
Imagine, that you were trading in Forex and suddenly the news about large option expiry comes out. How should you react to this news and what does it mean for the Forex market?