The four hour chart strategy makes use of the trend. It makes use of a mixture of the moving averages, support and resistance, market volatility and other forex trading tools to increase the profit that the trader makes. Similarly, the strategy also minimizes stop losses and drawdowns. Although this forex trading strategy is functional on all timeframes, the best time to use it is on the 4h timeframe and for this reason, it is a very suitable trading strategy for swing traders.
To trade this strategy, use the 4hour chart as the base chart where trading signals may manifest and the 1h timeframe is used as the signal chart, or the trade chart for order execution. The main foundations of this strategy are:
To discover the existence of a trend
You need trend behavior to trade this strategy and without a trend behavior, the trading strategy would not be utilized. To discover the existence of a trend, make use of a mixture of two moving averages. One of them need to be a 34 period and the second one would be a 55 period Moving Average. However, you can experiment with various forms of MA like simple, exponential and weighted MAs with this trading strategy. To confirm an uptrend, the trend must fulfill the following:
- Price action is beyond the two moving averages
- Price position is on top of the moving averages
- The 34 MA is more than the 55 MA and remains beyond the 55 MA
- The MAs slant in upward direction for the majority of time while they follow the trend
To confirm a downtrend, the opposite conditions are the case:
- Price action is underneath the two moving averages
- Price remains underneath the moving averages
- The 34 MA is under the 55 MA and remains under the 55 MA
- The MAs slops in the downward direction for the majorities of the time while they trail at the back the trend
The chart below is an illustration of a downtrend with the moving averages: EURAUD 4h chart– A strong downtrend that occurred in 2016 offered a lot of excellent opportunities for trading with the strategy. From the chart, you will observe that the price of the EURAUD bounced off the two MAs. The MAs are commonly the support zone during uptrends and they act as resistance zone during downtrends.
The best trade chances exist within the moving average zone.
- The trend must occur on the 4h with the moving averages aligned as previously mentioned.
- We ought to wait for a retracement to begin and for the price movement to approach towards the two moving averages.
- As soon as the retracement approaches the zones in the region of the MAs and between the moving averages we toggle over to the 1h timeframe to search for entries.
- There must be a retracement trendline moving opposite to the trend and this must be touched no less than three times as we illustrated in the example below
- This will normally be a continual chart pattern concurrently on the 4h chart as obtained in a triangle or a channel.
- On the 1h chart, wait for a breakout with a close of the retracement trendline in the direction of the larger trend (on the 4h timeframe).
- Enter the market on the breakout as soon as the price closes after the trendline on 1h chart.
An illustration of how to enter the market with this trading strategy: In the above example, we would place the stop at 30% of the daily average actual range underneath the point of entry. The ATR was 72 pips for the AUDUSD pair on the chart thus, 30% of 72 is 21.6. What this implies is that the first stop would be at 22 pips + the spread. You need to also know the rules for initial stop placement and take profit rules and effectively apply them.
It is better to get proper knowledge of how to trade this strategy by practicing with a demo account before trading live. Trying a few backtesting on earlier period price data will assist you to have a good grasp of this forex trend and how to trade effectively with the strategy.