The forex blockade trading strategy is one of the simplest ways for disciplined independent traders to profit from currency price moves. It’s a great strategy for mechanical trading systems because it relies on a polarity oscillator and only a few other indicators and parameters, which can easily be programmed. It’s well suited for trading on 5-minute time frames.
Best of all, when the blockade strategy is traded in combination with the related reversal strategy, experienced traders can profit by “scalping” the polarity oscillator.
The forex blockade strategies use the twenty-day exponential moving average (20 EMA) by itself or in combination with the middle Bollinger Band, as a polarity oscillator to indicate likely test and retest price levels. Depending on the market, this combination usually provides the mechanical trading system with the most accurate assessment of forex blockade points.
Traders should also look for confirmation of signals from nearby round-number price levels, pivot points, and support and resistance.
This strategy is called a “blockade” because the 20 EMA or polarity oscillator acts as a price barrier on either side. If the price is over the EMA and staying above it, and then the price retests the EMA, it will probably bounce off and continue higher.
Likewise, if the price is under the 20 EMA and then retests it, the trading system’s bias is “short” and the price will probably reject and move lower.
Trading blockades using the polarity oscillator
A typical polarity oscillator combines the EMA and the Bollinger middle band together. On the charts accompanying this article, the 20-EMA is shown as a solid yellow line, while the combined polarity oscillator appears as yellow streaming. For example, on the chart below, the circle shows a bullish signal at the polarity oscillator.
Of course, the retest of the 20-day EMA is the meat of the signal. Using the polarity oscillator as a combined EMA-Bolly Band indicator increases reliability of the signals, and gives forex traders a clearer picture of the market.
Below are more sample charts showing the forex blockade strategy:
Changes in polarity and bias
At the far right side of the chart above, if the currency pair price convincingly closes above the 20 EMA, this means it has switched polarity and the trading system now changes to a long bias.
Going forward, the mechanical trading system will be prepared to sell when the currency price drops down and touches the 20 EMA.
When to trade the blockade
The forex blockade strategy can be applied to any currency pair. It can be traded on any of several time intervals, yet some of the most-successful blockade traders work on 5-minute time frames.
And, this strategy can be traded anytime during the trading session, but some time ranges offer more reliable trades. As an example, there may be a good breakout and retest, so the forex trader enters the trade.
Yet, the afternoon session in Asia may be very slow. Then, at the opening in London prices may be too volatile for entry. Finally, after the initial flurry of volatility from news announcements, the price may settle so that it’s once again tradable.
So, the trader must adjust the forex blockade strategy to fit each market and session.
Time of day
For best success, the forex blockade strategy should be traded during the optimal liquidity times. The time-of-day in a particular currency market is critically important: The blockade requires liquidity, so it’s best applied when the major trading centers are most active.
In Asia, the best times to trade the forex blockade are after Tokyo and Singapore begin trading currencies. And, when trading during the European session, both London and Frankfurt should be open before entering any trades.
Basic trading rules for the blockade forex strategy
• Establish trend or bias using the 20 EMA or other polarity oscillator
• When price is comfortably higher than the polarity oscillator indicator, the trend is bullish
• When price is trading lower than the indicator, then the trend is bearish
• The price tests the polarity indicator, then rejects it and moves away
• Once further confirmation is shown through nearby round-number price levels, pivot points, or support and resistance, the trade is entered
• Enter trades by using buy-stop or sell-stop orders set one or two pips in front of the price
• It’s best to set the stop-loss order above the polarity indicator for sell-stops, and below the polarity indicator for buy-stops
• Set the profit target at twice the amount at risk on the trade
• Once the price reaches a profit amount equal to the initial risk, move the trailing stop to break-even
How to quantify a successful retest?
If the currency price is over the 20 EMA it must rebound from and remain above it. And, when the price is under the EMA, it must bounce off and remain below it.
For programming mechanical forex trading systems, the signal rule is: The first candlestick to touch the 20 EMA is expected to close on whichever same side that it originally approached from.
This first candlestick is the trading signal. Once the price has rejected away from the 20 EMA, the trading system waits for a possible confirmation by the next candlestick. If the candlestick of the next time period shows a continuing move away from the 20 EMA, the trade signal is confirmed.
The more confirmations of a forex blockade, the better
The mechanical forex trading system should use multiple confirmations before entering any trade. Beyond relying on the retest and rejection at the 20 EMA to show blockade, this strategy is more reliable when several other indicators and parameters are used. These include confirmations such as nearby round-number price levels, pivot points, and support and resistance levels.
It’s important that the mechanical forex trading system never take a trade based purely on a price rejection from the 20 EMA. Ideally, nearby support and resistance levels, round-number price levels, and any other significant price point should also confirm the direction and timing of the trade.
Forex traders should also be careful to filter out the effects of pending business announcements and news. Successful forex blockade traders often decline trades within thirty or forty-five minutes before a scheduled press conference or news announcement, and wait at least fifteen minutes after the announcement before considering whether to accept trades.
Likewise, the reliability of a winning outcome is enhanced if the forex blockade trade is in the same direction as the current trend. This can be determined according to which side of the 20 EMA or polarity oscillator the currency price is currently located on.
Entry qualifications and orders
• The price is trending – It breaks out of a range or consolidation before the entry signal
• The price successfully retests the 20 EMA
Some forex traders divide their entries across two or more orders so they’ll have more flexibility, while others simply place a single entry order.
For long entries, using multiple entry points:
• Place 2 buy-stop orders at an entry point 2 pips above the high of the confirmation candle;
• Set orders to expire at the beginning of each new candle. So, for example, when trading based on a five-minute charting time frame, if limit orders are set they will expire at the beginning of the next five-minute candlestick unless triggered by price action during the current five-minute candlestick;
• Place the stop-loss orders 2 pips under the signal candlestick, which was the one that touched the 20-day EMA;
• The stop-loss orders can also be placed just behind a nearby swing point or support-resistance level;
• When trading multiple orders at the same entry price, set the profit target for the first order at the equivalent amount of the risk in pips. So, for example, if the forex trader’s total risk in the trade is 20 pips, the profit target for the first order is set at the same 20 pips;
• The profit target set for the second order is calculated at double the risk in pips. Continuing the above example, the profit target for a second order would be 40 pips;
For short entries, with multiple entry points:
• Place 2 sell-stop orders at an entry point 2 pips below the low of the confirmation candle;
• As with long trades, for short entries forex traders should set the sell-stop orders to expire at the beginning of each new candle;
• Place the stop-loss orders 2 pips over the signal candlestick, which was the one that touched the 20-day EMA;
• The stop-loss orders can also be placed just behind a nearby swing point or support-resistance level;
• As with long entries, profit targets are set at an amount equal to the total risk of the trade expressed in pips. So, if the forex trader’s total risk in the trade is 20 pips, the profit target for the first order is set at the same 20 pips; and, the profit target for the second order is set at double the total risk in pips;
Trailing stops to achieve profit targets
Once the currency price has moved favorably by a total amount equal to the initial risk, the first position has reached its profit target and is closed out. At the same time, the mechanical trading system changes the stop-loss order on the remaining position to the break-even level.
Continuing the same example above, once the price has moved 20 pips in the favorable direction, the first position is closed and the stop-loss on the remaining position is set at the next increment.
The remaining position’s trailing stop is left at the break-even point until the marketplace closes out the trade, either by achieving the next profit target or by triggering the stop at break-even level. Regardless of the performance of the second position, the first position’s gains are a significant prize.
The blockade reversal is a variant of the forex blockade trading strategy. It likewise uses a polarity indicator such as the EMA or a combined 20 EMA and Bollinger middle band. The variant trades currencies based on crossovers of the two indicators combined in the polarity oscillator. On the charts here, the oscillator is shown as a contracting or expanding yellow band.
In a blockade reversal, the price will stall, reverse its direction, and pass through the polarity oscillator before finally returning to retest the oscillator from the other side.
On the chart below, the Asian session (shown in blue) experienced a gradual price drop below a fairly narrow band, after failing at the day’s central pivot (the yellow line) earlier in the trading session.
The price then continued downward, slicing through the weekly pivot (the blue line) before stalling and reversing at a nearby round-number price level (the gray line).
Next, the price moved indecisively until the end of the Asian session, when a final surge from below the polarity oscillator pushed the price toward the round-number level. This represents the level at which the 20-day EMA and Bollinger middle band would cross over.
On the chart above, the left-side circle shows a bullish entry signal. The right-side circle shows another bullish entry signal with a close above the current price range, indicated by the white line.
Differences between forex blockade and blockade reversal
The forex blockade strategy involves waiting for the trend confirmation, then trading price bounces off the polarity oscillator in the same direction as the trend.
The blockade reversal strategy comes into play once this trend finishes, and the price reverses and closes on the opposite site of the polarity oscillator.
Both of these two related strategies are traded in the same direction as the current trend, which is determined when the currency price closes on the particular side of the polarity oscillator.
The previous example showed a forex blockade reversal traded with a bullish expectation. The above chart shows the opposite scenario – A bearish trade entered from below the polarity oscillator.
In the current example, the upward move has ended and the price has broken down and closed repeatedly under the polarity oscillator. A bearish technical signal (circled) occurred below the polarity oscillator.
Scalping the polarity oscillator
Deploying both the forex blockade and blockade reversal strategies together during the same trading session can help bring trading success during long periods of time when prices are range-bound. Savvy traders use both strategies together as an EMA-scalping strategy.
Forex blockade crossover strategies
As with the basic forex blockade strategy and the reversal variant, a variety of related blockade crossover strategy can also be developed with the power of expert advisors (EA) and mechanical trading systems programmed to watch for currency prices to break out of channels and trend strongly. Because of versatility, forex blockade trading provides a profitable opportunity to “scalp” the EMA and other polarity oscillators.
Do you use similar strategies in your own trading?