While there is no shortage of quantitative Forex strategies, many of them are actually quite similar. There are an almost endless number of variations that all boil down to a few general concepts. All of these strategies have the same basic goal: taking profits out of markets. The key is to find one that works well with your trading personality.
Last week, I looked at a strategy that used the 50 unit CCI oscillator to time its entries and an exponential moving average (EMA) as a trend filter. This week, I found a strategy that uses the CCI indicator and exponential moving averages in a different way. While the application is different, the idea is very similar: taking profits out of trending markets.
Forex Factory user ForexFocus published his Real Money Swing Trading Strategy earlier this month and has updated us a few times since then. The strategy uses the 25, 55, and 100 unit EMAs to determine the trend direction and then used the 6 period CCI to signal entries.
One of the unique aspects of ForexFocus’ strategy is that he doesn’t use standard charts. In his post, he explains how he became very interested in Heikin-Ashi and Constant Range charts and began experimenting with using them together.
Heikin-Ashi describes a technique where different criteria are used to determine the open, high, low, and close values of a candlestick. The goal is to make trends easier to identify and trade.
Constant Range charts focus on pure price movement without regard for time, so they also are designed to better identify trends.
While ForexFocus designed his strategy to be used on Heikin-Ashi and Constant Range charts, he suggests that the same strategy could also be traded on normal charts at any time frame.
The strategy uses the three EMAs as a trend filter. In order for a long trade to be considered, the 25 unit EMA must be above the 55 unit EMA, which must be above the 100 unit EMA. For a short trade to be considered, the opposite situation must exist.
Once the three EMAs confirm either an uptrend or a downtrend, the 6 unit CCI will signal an entry with a break above 50 for a long position or a break below -50 for a short position. This signal must also be accompanied by a bullish candle with no wick for a long position or a bearish candle with no wick for a short position.
ForexFocus suggests placing a stop right at the most recent swing point. He is a little more vague on the profit taking exit, but suggests targeting a one to one risk/reward based on the stop and “managing the trade from there.” Obviously, we would want to better define the exit, but a simple ATR trailing stop might work well in this case.
Testing the Strategy
In order to get a feel for how the Real Money Swing Trading Strategy would actually work, I put the three EMAs and the CCI indicator on a normal daily chart of GBP/USD. Even without using the type of charts that ForexFocus recommends, it appears that the strategy would still have captured big chunks of the recent trends on this chart.