Forex Trading: A Simple but Effective Daily Swing Strategy with Examples

• SIGNAL BAR: ‘Pin Bar Reversal’ bar with the open and close prices for the day in the lower half or third of the price bar for the day (which has been preceded by 3 or more consecutive days of price increases (or ‘buyer’ bars). The green arrow on the chart below points to a bearish pin bar 'signal' bar which has also formed after a run up of a few days worth of bullish daily bars. This is the signal bar that triggers the rest of the trade setup chaeck below.
  Note: I have deliberately cut off the currency pair in the image below... it's irrelevant. What you are concerned with here is price action, not the currency pair.

Pin Bar Reversal Trade Setup Confirmations

Typically you can trade the Pin Bar Reversal setup at either a horizontal level or in a 'trending' market, trending up or down. Sometimes you may see the signal bar at both a horizontal level and in a trending market, as in the example trade above

• FIBONACCI RETRACEMENT

Every Forex chart will have a Fibonacci retracement drawing tool with which you can draw the Fibonacci retracement onto the price chart to show natural 'retracement' levels that are often play out in the price action.

• HORIZONTAL 'ZONE' SUPPORT/RESISTANCE: In the trade example above, the red arrow below points to a 'soft' level of resistance where price action has come down from in the past. So this is where sellers have come in caused the price to decrease. (A.K.A a 'supply' zone).
  A 'soft' horizontal level of resistance represents one or more rejections of a price level over a period of between about 3 months to a year.
  A 'hard' horizontal level of resistance represents one or more rejections of a price level over a period of between about 2 years and above.  These are ‘hard’ levels typically seen better if you switch to a weekly or monthly time-frame on the chart.
  (A horizontal level of support is where price action has bounced up from as opposed to resistance where price action has bounced down from)

• LOWER TIMEFRAME PRICE ACTION CHECK: Always check the lower timeframe price action as further confirmation that the price action will go in the favour of the trade. We are looking for a bullish pattern for a long trade and a bearish pattern for a short trade. As we are trading the daily chart then we must switch out chart timeframe to the  hourly chart.
  So if we are trading short (a.k.a 'selling'), we are looking for a bearish pattern of a ‘double top’ or a ‘head and shoulders’ or maybe just a trend (hourly chart lower highs and lower lows) to confirm the trade.

RISK MANAGEMENT

Trade Position Sizing

In the example (EUR/USD) below we don't have horizontal levels so we are trading purely in a trending market with higher highs and higher lows.

This trading strategy can also work for non-currency pair markets such as stocks and stock indexes like the FTSE 100 in the UK and the SP500 in the US. I personally don't trade these markets and stick mostly with the major and minor currency pairs. If you trading properly and keeping a trade log, then you can experiment with these non-currency pair markets and see if you get good results. That's why it's important to keep a trade log.

Trade Management - Trailing Stoploss

From the pin bar entry into this trade you have the option of moving the stop-loss on each second seller bar. i.e. at the end of the second day after entering the trade, move the stop loss just above (1 pip) the 'high' for that day. Rinse and repeat for each second seller bar (the red bars) as shown in the diagram below.

The final buyer bar on the diagram triggered our stop-loss, but ensured that our trade was profitable even if not hitting out target. As ever, if we are y=trading properly we are keeping a trade log and at the end of the month checking what happened to out trades that we managed in this manner...

• Did they go on to actually hit our target? In which case we left profit on the table.

• What was the MFE (Maximum Favourable Excursion) on the trade? i.e. how far did the trade go after we exited the trade. Did it hit out target? Did it exceed our target and if so by how much? Out trade log will alert us if we are not setting the target properly or maybe if we might adjust out target down for example if we get close but just miss out on achieving the target.

Daily Swing Trading Non-FX Markets

• The bullish pin bar reversal is the furthest red pin bar on the chart. Even though it finished lower on the day than it started (hence red) it was in the upper range of trading for the day and is therefore still a bullish pin bar reversal.

• As can be seen in the image, this is the 3rd test on the lower trend line, so in an upward trend, a bounce off this on the upside is likely.

• the Fibonacci retracement from the most recent swing low is near the classic 0.618 level of support, and from the first swing low. In this trade there also a second Fibonacci retracement indicator 0.382 from the former swing low, which is termed a ‘cluster FIB retracement‘ backing up the case for a move higher to continue the trend.

• One final check on the trade is on the hourly chart which can be see in the blue box on the chart diagram above. The rightmost green bar on the hourly chart shows a second higher low showing that on an hourly basis the trend is up. This backs up the call to go long and place the trade.

ORIGINAL PAGE BELOW

The Forex market is huge. In fact it is the biggest 'market' in the world with literally the equivalent of trillions in currencies traded every day in . It’s a highly liquid (always buyable and sellable) market enabling traders to make consistent gains when following a sound trading strategy.

There is no better way to learn than with an example trade so that’s what we are going to do below. The trade below will take you step by step through a ‘pin-bar reversal‘ trade which is a decent swing trading strategy. 

So, the idea with this strategy is that you can do it alongside a day job by trading 10 to 15 minutes in the evenings. You spot the 'trade setup',  set the trade and forget about it. It either hits your target or your 'stop loss'. It’s a ‘daily chart’ strategy, so there is no need to stay glued to a screen all day. The Daily timeframe is more reliable than the lower timeframes such as the hourly chart.

Why Trade the Daily Chart?

• It's more reliable

• Requires low effort and maintenance

• You can get higher reward

• It is less emotional

The higher the timefame, the stronger the trend. Trends on the daily chart hold a lot more strength and probability than the lower timeframes. The daily chart Is resistant to most forms of intraday noise and inexplicable price spikes.

Trading the daily chart in such a hands off manner is a far more peaceful and relaxing style, where you do not have to constantly tend to your trades. Temptation to place trades out of boredom, anger and frustration is seriously reduced you only look for opportunities and manage open positions once a day, the temptation to trade for trades sake is greatly diminished.

Before you start trading Forex you need to understand the basics. You need to know what the basic terminology is and what these words and concepts mean.

What are PIPs

• PIP stands for Price In Points

• Currency is usually quoted to 4 decimal places

• A PIP is therefore 1/1000th of the currency. So if GBP/USD moved from 1.5500 to 1.5570 then this represents an increase of 70 PIPs (i.e. the Pound is going up against the Dollar). If your stake size was £1 per PIP you would have made £70 profit.

• There is also something called a pipette, which is a tenth of a PIP (see the cyan blue ‘2’ below). You might see this after the 4th decimal but you don’t need to pay too much attention to it. It’s the PIPs that count!

Trade Size & Risk:Reward

This is best illustrated with colour in the image below:-

GOLDEN RULE - ALWAYS USE A STOPLOSS

example below... target level of the short trade is just below the previous swing low where it says "Target@ 20541"...

Key horizontal levels can be used in markets that are not in a clear trend up or down. These are somethimes called "Power Zones as price action oscilates between the lower 'support' line and the upper 'resistance' line

You want to target a reward of at least 2x (or 2:1) to make a trade worth your while…

I recommend trading the Daily and Weekly charts without spending too much time on it so that you can still do this as a supplement to your day-job

WHY END OF DAY DAILY TRADING...

Trade Risk Management

THE GOLDEN RULE: Never risk more than 1% of your trading account

1% (trading account size)

DIVIDED BY

the number of PIP’s we could lose if the trade goes against us

EQUALS

The Stake Size. The Max trade per PIP we can afford to bet on the trade.

For simplicity, an example risk management calculation for a trade on a £100 account with a 20 PIP stop loss would be as follows:-

1% (trading account size) = £1

DIVIDED BY

the estimated number of PIP’s we could lose if the trade goes against us (20 PIPS)

EQUALS

5 pence. The Stake Size.

This is the Max trade per PIP we can afford to bet on the trade.

Risk & Reward

We are looking for a target of at least 2:1 Reward to risk in order to place a trade. There must be the potential of a greater size of the reward compared to the size of the risk, each time we place a trade. Clearly, the higher the better. A sweet spot might be something like 5:1.

Reward to Risk Ratio Calculation:-

Entry price – Target Price (Reward)

DIVIDED BY

Entry price – Stop Loss Price (Risk)

So, for any trade, you take the stake size calculated during risk management and plug it into the Reward to Risk Ratio Calculation. If this is 2:1 or more then the trade can be placed if the criteria below are met.

Swing Trading Strategy

Most strategies out there are either a ‘bounce‘ strategy or a ‘break out‘ strategy. We will concentrate on trading the bounce as it has been shown to have a higher probability, and has a higher risk-reward return than the breakout.

Price action breaks out about 30% of the time but bounces 70% of the time.

Even a dogmatic disciplined approach to trading the bounce can on the balance of probabilities pay off better than second-guessing a breakout. So we Trade the Bounce.

We trade longer-term trades on the daily charts with consistently high reward to risk trades. This frees up time compared to intra-day traders who sit in front of a screen all day waiting for shorter-term trades.

Trade in the direction of the trend

If the trend is up we trade long. If the trend is down we trade short. This gives us higher probability trades...

IDENTIFY THE TREND

In an upward trend, the 20-day Moving Average (MA) is above the 50-day MA which in turn is above the 200-day MA. The reverse must be true to identify a downward trend…

Trade the Trend: If you identify a series of higher highs AND higher lows it is usually an ‘upward trend’. We look to trade the ‘bounce’ on the ‘higher lows’. In an upward trend, ‘buy the dips‘ (trade 'long' the dips). In an upward trend, we do NOT trade the start of the pullbacks from the trend, just the bottom of the pullbacks when they switch back to the upward trend.

We want to trade the resumption of the trend as indentified above but with the following confirmations in addition to the signal bar (Pin Bar, Engulfing bar etc): -

The MA check above could be the 20 day MA, 50, 100 or higher.

Example trade (GBPEUR) - downtrend

• We have a trendline of lower highs lows with multiple touchpoints on the trendline including the current.

• We have a horizontal line touch with the down trend causing previous support to become resistance

• We have a reversal bar (an engulfing bar)

Not only do we have a Fibonacci retracement to the 0.618 level from the previous swing high to the current swing low, we have a Fibonacci cluster from the second previous swing high to the current swing low of 0.5. Both of these are classic retracement levels where reversion to the trend is often seen.

To add to our case to make the trade we have a head and shoulders bearish topping pattern on the storter time frame on the hourly chart 

The case summary to make this trade...

Example trade (EURAUD) - uptrend

• We have a trendline of higher lows with multiple touchpoints on the trendline including the current.

• We have a horizontal line touch with the uptrend causing previous resistance to become support (see horizontal lines below)

• We have a reversal bar (a pin bar reversal bar)

We have multiple touch-points on the vertical trendline and on the 20 day Moving Average line 

We have 0.618 Fibonacci retracement to the trendline...

Keep you eyes peeled for a 'Fibonacci cluster' which adds more weight to the case to make the trade. The previous swing low to the current swing high below shows a touch point at the 0.618 retracement level. The previous previous swing low to the current swing high, shows a touch point at the 0.382 retracement level. 

On the hourly chart we have an "inverse head and shoulders" pattern which is another sign the reversion to trend upwards is likely. So we have multiple reasons to place this trade 

Trade Example : Downtrend GBPCHF

Swing Trade price action is seen across all markets from currencies to commodities and stocks...

FTSE 100 Uptrend Trade Example

Trade Example 1: Pin Bar Reversal

A ‘Sell’ Trade Example (USD dollar / CAD – Canadian dollar)

The image below is the example trade that we will use to illustrate the entire trade with calculations for trade size, stop loss etc. If you are new, don’t worry about these terms, they will be clearly shown in the example trade

(1) Identify the trend

Firstly, identify the overall trend on the currency pair. As explained above, if the 50-day Moving Average (the red line in the diagram below) is below the 200-day Moving Average (the green line in the diagram below) we have a downtrend, which also reveals on the chart as a series of lower ‘highs’ and lower ‘lows’:-

You can also draw in other moving averages such as 20 day or 100 day but the 200 day and 50 day moving averages (MA) are the best two MAs for identifying the trend on the daily charts. The 20 day MA can add weight to the trend confirmation:-

exponential

(2) Draw The Trendlines

Take the ‘straight line’ tool on the daily chart and draw diagonal trendlines onto the chart joining recent highs and lows over the period of two or more months. Draw them from the daily trade ranges, not from the bars themselves, but not all highs/lows will hit the trendlines but most will be there or thereabouts. (I have seen some traders draw from the top of the open/close bars so there it’s not a ‘must’ to draw from the very top/bottom of the trading ranges for the peaks and troughs. Somewhere in between the two should be fine.)

In our trade example diagram above (USD/CAD), the lower highs and lower lows made over the period of a few months along with the 200 then 100 then 50 day MA confirms our downward trend.

(2) Identify the ‘Rally’ (for a downward trend) / or the ‘Dip’ ( for an updward trend)

In a downward trend scenario, we are looking to sell the rallies in anticipation of the rally losing momentum and continuing the downward trend, so, we are looking for AT LEAST three daily buyer bars (green bars, or blue bars in the image above, that closed higher on the day than they opened).

We can see in our example trade that we have 4 buyer bars before our pin bar reversal day.

(3) Wait for the ‘Pin Bar Reversal’

Once we have identified our rally, we are waiting to see two things in the rally:-

* 3 consecutive buyer bars/days. i.e. 3 days where the price went up.

* the subsequent day showing us a ‘pin bar reversal‘ i.e. a bar where the open and close price is in the lower third (or half) of the bar (regardless of it being a green bar or a red bar).

NOTE: When we say ‘bar’, this is simply the open and close prices traded on the day.

We can see in our example trade that we have our pin bar reversal day.

Of course, the converse applies to the upward trend with a bullish daily bar ‘signal’ (open and close prices in the top third of the daily bar) after at least three ‘seller bar’ days, but I will cover this in the Buy trade example below.

Strictly speaking, it’s not mandatory to have 3 consecutive days of buyer/seller bars. If other factors below check out then the trade can still be made on seeing the pin bar reversal.

(4) Draw Horizontal Lines of Support and Resistance

Pin Bar Reversal on ‘Hard’ or ‘Soft’ Level?

Hard and Soft Levels are horizontal lines drawn at the peaks and troughs on the Weekly and Daily charts over a longer period of time, from a year to maybe 5 years, 10 years, or even longer.

• Hard level is one that has been ‘respected’ during the past year. i.e. one or more peaks or troughs that have not been broken.

• Soft level is one that has NOT been ‘respected’ during the past year. These are usually drawn within Hard levels and will be respected sometimes but broken through at other times (i.e. not respected)

TIP: A quick horizontal line check on a ‘signal’ pin bar is to draw the horizontal bar at the bottom of the pin bar (if its a bullish/buy signal bar) and see if it has been rejected (bounced up from) before. If so, this is an indication of a support level and provides legitimacy for the bullish pin bar.

Both Hard and Soft levels, however, make strong points at which to trade a pin bar reversal, if the pin bar is at or very near the Hard/Soft level. In fact, if you see a pin bar reversal at either of these levels which is also confirmed by the smaller timeframe hourly check:-

* bearish formation for downwards momentum sell trade off of a peak OR

* bullish for upwards momentum, buy trade off of a trough…THEN...

… you do not need the additional ‘technical confirmation‘ trade checks (see step 8)

• Trend(line) Trade (without drawing horizontal lines): YOU NEED:-Pin-bar Reversal + Hourly Chart check + TWO technical confirmations = Trade can be placed

• Hard/Soft Level Trade: YOU NEED:-
  Pin-bar Reversal + Hourly Chart check = Trade can be placed

(5) Identify the Trade Risk to Reward (Stop-Loss and Target)

In an ideal world, we would be looking for a large reward for the potential risk and these can be taken if the setup exists. Reward:Risk of 5:1 and even 10:1 can be taken but 3:1 is a happy medium whereby the probability of achieving the target is in the sweet spot which gives us enough of a consistent return on our trading.

Our trade example image above shows the Entry price, Stop Loss, and Target Price for the trade.

• Entry Price: Just below the pin bar reversal day range lower price

• Stop-Loss: Just above the pin bar reversal day range higher price

• Target Price: …is at the level of the previous ‘swing low’ level of ‘support’ (from which the rally started). If there has been no dip withing the rally itself then just set the target at swing low of the current rally)

The stop-loss is critical to prevent any losses becoming too large. Add the stop loss when you place your trade. The diagram below illustrates the long (buy) trade stop-loss scenario.

Calculate Reward to Risk

As can be seen on our main example trade diagram:-

Entry Price – Target Price (Reward = 245 pips)

DIVIDED BY

Entry Price – Stop Loss (the Risk = 86 pips)

REWARD/RISK RATIO:- 2.8:1

(6) Identify the Trade Size

As can be seen in the full image in step 1 above, we have a fictional trading account size of £10,000. So if we risk 1% on each trade (£100) divided by our risk of 86 PIPs, we place the sell trade at £1.16 (per PIP).

If the trade goes against us and we hit our stop-loss then we loose the £100. If the trade goes in our favour and we hit our target, then we make a profit of £280.

(7) Hourly Chart Confirmation

This is the main additional check and if you don’t see it then probably best to reject the trade. So, for our SELL trade setup confirmation, you can check for the bearish formation on the hourly charts. We are looking for a bearish pin bar reversal to confirm the trade. Either a ‘double top‘ or ‘head and shoulders‘ on the hourly chart:-

(8) Two additional Technical Confirmations (if Pin-bar not on ‘Hard’ or ‘Soft’ Horizontal level)

(a) Fibonacci ‘Retracement’ Check

If you’re on the daily chart, select the Fibonacci tool and draw from the most recent major swing low to its corresponding swing high (in an upward trend, converse for a downward trend). If the pin bar is at or near the 0.618 level, it is a common level at which the price action will turn in favour of the trend.

The Fibonacci check can be strengthened by drawing from the previous swing low/high (from the one you have just drawn from) to the current swing low/high. If there is a rejection, in particular at 0.382 or 0.5 in addition to the 0.618 Fib check above, you have what is known as a ‘Fibonacci cluster’ and is a strong confirmation of the first Fibonacci level drawn to indicate a movement back to the trend.

In order not to make this article too long we have a separate article just on the Fibonacci trade check:- CLICK HERE (opens in new tab)

(b) Moving Average Bounce Check

If a pin bar is on or near the 20/50/100 day MA and previous price retracements towards the trend have ‘bounced’ off the same Moving Average level, it is an indication that the same retracement will occur with the current pin-bar.

(d) Weekly or Monthly pivot point?

Try to select the weekly  and/or monthly pivot points indicators in your chart as shown in the horizontal purple and orange lines below...

For our current downward trend scenario then, when the conditions above are met and you see the signal bar (pin bar reversal) you place the sell trade with stop loss just above the signal bar high (signal bar high + spread + 1 pip) and the entry (limit order) just above the low of the signal bar (signal bar low + spread + 1 pip):-

(10) Manage your trade

MANAGE THE STOP-LOSS

The stop-loss level can ‘trail’ your trade if the trade is going in your favour. This moves the stop loss in the direction of a winning trade in order to lock in gains.

Quit the Trade if…

IF THE TRADE HAS NOT BEEN TRIGGERED IN THE FIRST 24 HOURS, SCRAP THE TRADE

Manage the trade objectively. If the trade is triggered, Trail your stop loss as follows:-

Move the trailing stop loss on every second seller bar until you hit the target or are stopped out by hitting your stop loss

MOVE THE TARGET

The exit/target level can also be moved if desired, particularly if the trade is moving fast. As can be seen below, the initial target of the previous swing low was achieved quite rapidly. The trailing stop loss was moved as described above and then eventually stopped out for a good gain.

Example Trades: Building a case for a trade using technical analysis.

SHORT TRADE EXAMPLE...

Trade checks: -

• The trendline connecting the lower highs in the downward trend has been touched and rejected once again in the latest bearish daily candle.

• This bearish candle is also in 'inside' bar which means the price action/range on the bar is inside the previous days price action/range (It is also a 'high test bar' which means it is testing the swing high to see if actually wants to come down again as sellers take back control.)

• The Fibonacci retracement level from the most recent swing high (Fib level 1 above) to the most recent low (Fib level 0 above) has retraced near to the classic 0.618 level.

• A key horizontal level of previous support that has been breached has now been rejected on the way back up which is a classic switch where support becomes the new resistance in a downward trend.

• A check on the lower timeframe hourly chart shows a 'topping pattern' such as a 'double top' or as in this case, more of a 'head and shoulders' pattern....

LONG TRADE EXAMPLE...

Trade checks: -

• The trendline connecting the higher lows in the upward trend has been touched and rejected once again in the latest bullish daily candle.

• The blue 20 day MA has been touched and rejected by the bullish candle.

• This bullish candle is Pin Bar reversal

• Previous Horizontal resistance breached and now therefore has potential to become support... 

• The Fib retracement measured from the most recent swing low to the most recent swing high is 61.8%...

• the hourly chart shows a head and shoulders bottoming pattern...(which is also intersecting, or near to, the key horizontal level and the trendline

KISS

On the daily charts, you just don’t need loads of different strategies to make consistently profitable trades. One simple strategy can be enough.