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Published On: Mon, Dec 17th, 2012

Improving Forex Strategies using Confirmation Techniques

By developing a trading strategy based on your choice of time frames, technical indicators and currency pair you will then be able to identify good quality trading opportunities possessing minimum risks and optimum profits. However, you then need to safeguard your account even further by providing increased protection against false signals. You can do this by designing a confirmation technique which you can then readily integrate into your trading strategy.

You can be accomplished this task by experimenting with other technical indicators that complement your primary selection and which can generate verification signals. You must not omit this important step because it will provide vital protection for your account.

Many traders use support and resistance levels to act as confirmation tools. If these levels are produced on trading charts using the daily time-frame, then you can be assured that they will provide very strong indications whether or not price has the potential to proceed further in its current direction. The following chart demonstrates this technique in action by clearly identifying key resistance and support levels.

You should adopt these extra measures in order to vitally safeguard your account from serious price reversals and fakeouts. This important step can provide you with the essential levels of increased confidence to ensure your new positions will possess the maximum potential to register wins.

1.   Activating Support and Resistance Levels

This is a simple procedure to implement which you will have no trouble mastering. Locate and click the ‘Technical Indicators’ symbol located on your broker’s trading platform.

          Next, click on the ‘Pivot (Pivot Lines)’ option and the following pop-up box will appear.

Now all you need to do is click the ‘OK’ button and your support and resistance levels will appear on your trading chart.

2.   Rules for Opening and Closing Positions

Your next task will be to define a set of rules which you can readily apply to identify the entry and exit points of new trading opportunities. For example, a strategy could impose the following very simple and easy-to-use set of entry and exit rules detecting the openings and closings of new trading positions:

 1.  BUY positions will only be entered when the currency pair is moving in a BULL trend. You will be able to detect such situations everytime EMA9 is above EMA50 as shown in the next chart.

2.  Under bullish conditions, you should then open a new position once price has broken through Resistance Level 1 by an additional 20 pips.

3.  You must close your position once price touches Resistance Level 2.

The following chart shows point 2 and 3 in action.

 

4.  Sell positions must only be entered when price is in a BEAR trend which you can confirm by detecting that EMA9 is below EMA50 as shown in the next diagram.

 graph showing forex trend

5.  Under bearish conditions, you should then open a new position once price has first broken below S1 by an additional 20 pips.

6.  You must close after price reaches S2.

The following chart demonstrates points 5 and 6 in action.

 

7.  Only risk a maximum of 2% of your account equity per trade.

The following examples will show you how a trading strategy can be utilized to trade forex effectively.

Example 1:

On the following EUR/AUD chart, you will first observe that EMA9 is lower than the EMA50 which implies that you must only open SELL positions. Such a trade was activated on the 27th October after price broke below the S1 level at 1.3301 by a further 20 pips.

On the 28rd October, the position was closed after price hit S2 at 1.3256 realizing a profit of 25 pips.

 

 

Example 2:

In the next example, you can confirm that price is in a bull trend because EMA9 is above EMA50 on the USDCHF daily trading chart. You should then note that a new BUY position was opened on the 3rd October after price rose above R1 at 0.9160 by a further 20 pips. On the 4th October, the trade was terminated after price touched R2 at 0.9229 achieving a 49 pip profit.

 

The above examples clearly demonstrate that if you merge confirmation techniques into your trading strategies that you will provide your new positions with optimum protection against fakeouts. In addition, you will also dramatically improve the reward-to-risk ratio of your strategy.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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