The Forex Chronicles

Archives for November 2023

Gold Multi-Timeframe Trade Example – 28 November 2023

by Leave a Comment

Introduction

I was recently asked to provide a few more examples regarding the multi-timeframe strategy that I like to use to trade the forex and commodity markets, so in this article I want to break down a gold trade from earlier this week that was based on this strategy.

Just to reiterate what I said in the previous USD/JPY trade example, what you are looking for with this strategy is for a market to be trending strongly in the same direction on two or three different timeframes, and temporarily pulling back on a shorter time frame.

Then you want to wait for a strong signal that the longer term trade has resumed on this shorter time frame so that you can then jump in and take the trade with the underlying trend.

Although there will always be false price moves, the reality is that when four different timeframes are in alignment in terms of the overall trend, the odds of success are greatly enhanced.

Underlying Gold Trend

Diving straight into the trade breakdown of gold, if we take a look at the weekly, daily and 4-hour charts, we can see that the price was above my two preferred moving averages, the EMA(10) and EMA(20), on all three of these timeframes as we started the week:

Indeed it was actually above the EMA(50) and EMA(200) on all of these timeframes as well, which just underlines how strongly the price of gold has been trending upwards in recent times.

Waiting For a Pullback

The next step is to drop down to the 1-hour chart and wait for a pullback to the EMA(10) and EMA(20) moving averages. Ideally we want to see the price actually dropping below these moving averages before breaking upwards once again and starting a new upward leg on this lower timeframe.

As you can see from the chart below, the price did just this on Tuesday morning, and there was subsequently some very nice consolidation within a very tight band between the 10 and 20-period moving averages:

When this happens, there is often a strong breakout about to emerge, and in this case it was an upward breakout just before the US market opened later that day, which is exactly what we wanted to see because the trend was already bullish on the three higher timeframes mentioned earlier.

Then it is just a matter of entering a long position on the close of this strong breakout candle, which I have highlighted on the chart, or taking a chance that there will be a slight pullback after the close of the candle that will allow you to enter at a slightly better price.

Trade Outcome

If you entered at the close of the 1-hour breakout candle at $2021.56, you could have banked up to $21.53 profit because the price hit a high of $2043.09 later that afternoon, and actually hit a high of $2052 overnight.

So this demonstrates the effectiveness of this multi-timeframe strategy if you wait for a pullback on the shorter timeframe and then enter a position on a resumption of the underlying trend from the three higher timeframes.

Not every trade will work out of course, but if you always trade with the trend, you should hopefully win more times than you lose if you wait for the best entries.

The Funded Trader’s Stats From August, September, October 2023

by Leave a Comment

Introduction

It is always interesting when prop firms put out some statistics from all of their traders’ trading activity because you can instantly get an idea of which markets are currently the most profitable, and which are potentially worth avoiding.

One of the most popular prop firms right now is The Funded Trader, and they have just released their latest stats from August, September and October 2023, and as always, they make for some interesting reading.

Most Profitable Markets

According to their comprehensive statistical analysis, the most profitable market to trade during the last three months was the Nasdaq 100.

This will come as a surprise to many because a lot of people find this to be one of the most volatile markets to trade, and one of the most challenging.

This is a market that can move fast, and can easily whipsaw in both directions in a single trading session, and it hasn’t been an easy market for longer-term traders to trade either because it basically moved sideways for two months prior to its recent rally this month.

It was also a little surprising to see that the EUR/NZD pair was one of the most profitable pairs to trade too.

This is not a pair that many traders like to trade because the spread may be a little too high at around 2-3 points with some brokers, and it is not as actively followed as the EUR/GBP or the EUR/USD pairs, for example.

However with an average daily trading range of between 107 and 145 points during these three months, it does still offer a lot of profit potential for day traders, and so it is easy to see why some traders have made some decent returns trading it recently.

Least Profitable Markets

With regards to the least profitable markets, the two most challenging markets to trade during August, Septemnber and October 2023 were the Dow Jones (US30) and gold.

It is not necessarily surprising that gold was one of them because this has always been a widow maker kind of a market to trade. Gold has the potential to blow up your account in no time at all, with big price swings that can come out of nowhere.

It is more surprising that the Dow Jones was so unprofitable for many traders because this is generally regarded as being easier to trade than the Nasdaq 100, but the stats would suggest that the opposite was true this time around. Maybe this was just a one-off occurrence.

Average Pass Rates

The average pass rates were fairly high at 27% for phase 1, and 42% for phase 2. I think this is higher than many other prop firms because the overwhelming majority fail to get past phase 1 of their respective challenges.

It is natural for the phase 2 pass rate to be higher because if a trader has the ability to pass phase 1, they should find it easier to pass the less demanding profit level of phase 2.

Average Reward to Risk Ratio

The general advice is that you should always aim for a reward to risk of over 1 so that your potential gain is always greater then your potential loss, and these latest stats would bear this out.

The average reward to risk ratio was between 1 and 1.77 for those people who passed the phase 1 and phase 2 challenges, and the average reward to risk of those who didn’t pass was around 0.5.

Drawdown

According to these stats, 71% of people failed the challenges by hitting the daily drawdown and 29% failed by hitting the maximum drawdown.

This suggests that the majority of traders are taking quite large positions in an effort to pass the challenges quickly, and are not overly worried if they end up losing the challenge by taking this bold approach.

Indeed it was revealed that out of all the traders who passed the challenges and received a payout, most of these traders will have paid for seven challenges on average prior to getting to this point.

This just shows that it can get quite expensive chasing the dream of having a fully funded prop firm account, and it is definitely not as easy as the trading furus on X make it out to be.

USD/JPY Multi-Timeframe Trade Example – 8 November 2023

by 3 Comments

Introduction to Multi-Timeframe Trading Strategies

The golden rule of trading is to always trade with the trend because this will tilt the odds in your favor and give you a greater chance of success in the long run.

The problem is that a currency pair could be trending upwards on one timeframe and trending downwards on another.

The solution to this is to look at multiple time frames, and more specifically, you want to find a pair that is trending upwards on two or three longer term timeframes to confirm that the underlying trend is bullish, and then wait for a good opportunity to go long on a shorter term timeframe.

For instance, if a pair is trading upwards on the monthly, weekly and daily timeframe, you would be looking to enter on the 4-hour timeframe.

Shorter term traders could also wait for a pair to trade in the same direction on the daily, 4-hour and 1-hour chart, and enter trades in the same direction on the 15-minute chart.

To give you an idea of how you could execute this type of trading strategy, here is an example from the USD/JPY pair that occurred earlier today.

Identifying the Underlying Trend

For this example I will be using my preferred EMAs (exponential moving averages), the 10, 20, 50 and 200-period EMAs, to indicate the trend.

More specifically, I want to find pairs where the price is trading above (or below for shorting opportunities) all four of these moving averages on at least two, but ideally three longer term timeframes, and that’s what we saw here.

Here are the daily, 4-hour and 1-hour charts of the USD/JPY pair to highlight this:

You can see that the price was above all four moving averages heading into the London market open at 8 AM.

Trade Execution

Once we established that this pair was in a very strong upward trend, the next step was to drop down to the next logical time frame, which in this example would be the 15-minute chart if we are continuing down from the 4-hour and 1-hour charts.

The key here is to wait for some temporary weakness on this timeframe followed by a continuation move in the same direction as the prevailing trend on the higher timeframes, ie upwards.

There are a few different ways you could trade this strategy. You could wait for a bounce off the 10 or 20-period EMA, or indeed the 50-period EMA, or you could wait for a bounce off the VWAP indicator.

You could also use a 5-period EMA instead of a 10-period EMA, and wait for the 5-period EMA to cross the 20-period EMA in the direction of the trend, which is another popular strategy.

It’s important to note that whichever strategy you use, you need to see the price move strongly higher after a period of weakness (preferably back above the EMA(5) or EMA(10)), and you should avoid entering early in anticipation of a possible bounce.

So with that in mind, I have circled four possible entry points on the 15-minute chart below where you could have entered a long position:

Final Thoughts

As you can see, 3 out of 4 of these trades would have been profitable and even the losing entry would have eventually moved into profit (if your stop loss wasn’t triggered first) thanks to the strength of the underlying long-term trend.

That’s the message I want to get across. Your entry points don’t always have to be perfect. If you always trade with the underlying trend, your overall win rate will be much higher, and by using a multi-timeframe strategy such as this one, it is not hard to find some high probability set-ups.