The Forex Trade Signal

Our Forex Trade Signal

This week I'll explain my Forex trade signal and show you how I use it.

Last week we reviewed our trading system which contains our chosen indicators. These indicators give us a feel for what the market is doing.

Catching a Wave

The method I'm going to show you is one that you have probably not seen or used before, so be sure to test it on your trading to ensure it fits your style. It can be used on any currency pair and with any time frame you choose.

If you look at any price chart, the first thing you'll notice is the price moves up and down in waves. Some are large, others small, and still others are like ripples on a pond.

It is hard to know if the current wave is a correction from the last wave, or a new trend of the price. This method uses Fibonacci retracement levels to generate the Forex trade signal and tells us when to get into a trade and also when to head for the exit.

I'm using eSignal� charts for this example and the Fibo levels are set to show me the 0.250, 0.382, 0.618 and 0.750 levels of a wave.

trading system chart 1

Looking at the chart above, wave "A" is identified as a significant move. It is important to note that each wave must of a reasonable size. Let's pretend that when we first see the chart the price is at point "B".

I want to note here that for any trade, we want a separate confirming signal of a longer time period than our trading chart. We are going to use the RSI for this system and only sell if the long-term RSI is below 50, or buy if above 50. If you are trading from a 5 to 15 minute chart, use the RSI from the daily chart... if trading from a daily chart, use the RSI from the weekly chart.

On a short term chart (5, 10, 15 minute) any move of less than 50 pips is probably not one that will be reliable. On a longer term chart (60 minute, 4 hour) you should use a longer wave of 100 to 150 pips as a minimum.

We plot the Fibonacci levels on the wave and watch the price action. If the price falls back into the range between 0.382 and 0.618 we consider the move complete and continue to observe the price. If the price doesn't hit this zone, sit tight as the move isn't complete yet.

If the price continues to drop below the 0.750 level, our Forex trade signal tells us to sell the pair short, but only if our confirming signal from the RSI is below 50 on the longer term chart.

In this example the price rises from the .382/.618 zone to above the 0.250 level, so we want to go long, provided the long-term confirming RSI is above 50.

Now What?

Referring to the chart below, we see the price falls into the .382/.618 zone before climbing above the 0.250 level so our Forex trade signal tells us to buy the pair (be sure l/t RSI is above 50). For safety, you should set a stoploss order just below the 0.750 level to protect your account.

Notice the price action eventually creates wave "C" which is large enough to meet our size requirement.

We erase the previous Fibonacci levels from wave "A" and plot new ones using wave "C", as shown below...

Forex trading system 3

Continue watching the price action and drawing a new set of Fibonacci levels as new waves are discovered. Don't forget to move your stoploss level as prices increase.

When prices finally fall through your 0.750 level for the current wave, use this as a signal to exit the trade. By moving the levels as prices change, you are able to ride many trends safely to levels that you may have missed with other methods.

There is a lot of information packed into this page and I hope it is not too confusing. If you don't understand any part of this method, send me a note and I'll get you more information.

Wishing you trading success,
David Stevenson.

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