MA Channel Forex Trading Strategy

Introduction to the MA Channel Forex Trading Strategy

The forex strategy described is a trend following strategy designed to allow traders to follow an existing trend. This strategy is known as the moving average channel strategy.

Trades are taken on all currency pairs, and can be used on the 30-minute time frame as well higher time frames. Higher time frames usually give more rewards in terms of number of pips that can potentially be made, so it is advised that as much as possible, higher time frames are used for this strategy. Furthermore, trends are better defined on higher time frames.

Indicators Used:
The indicators for this strategy are as follows:

  1. 56-period simple moving average applied to close (change colour to improve visualization).
  2. 233-period simple moving average
  3. Stochastics histogram indicator set to 14, 3, 3.
  4. MA candles channel price action indicator.

The Stochastics histogram is simply a modification of the Stochastics oscillator where instead of Stochastics lines being used, histogram bars are added to produce the effect needed for the implementation of this strategy. This is a custom indicator which can be downloaded along with the MA candles channel indicator from this zipped file. Click here to download both indicators.

After download, make sure you unzip the files, then attach the indicators to the Indicators folder under the MQL4 folder of your MT4 client. This can be done by clicking File -> Open Data Folder on your MT4 client, then clicking MQL4 -> Indicators. Copy and paste the indicator files here, then restart your MT4 platform to view the Indicators in the Custom indicator folder.

The Strategy

The strategy is a trend-following strategy. The job of the two moving averages is to impart direction to the trade. These moving averages are captured in the MA channel indicator. We also use the type of candlesticks which are seen at the expected trade signal point to make a decision as to whether to buy or sell. The signal is then confirmed by the colour of the Stochastics histogram on the indicator window. The trades are setup as shown below.

1) Long Trade
The Long trade setup occurs when:

  1. The price action is located above the two moving averages in the MA channel indicator.
  2. At the same time, the candlestick seen at the signal point is green.
  3. The Stochastics histogram shows a green colour.

The long trade is then executed at the next candlestick’s opening price. We demonstrate this trade setup in the snapshot below:

MAchannel_long

The snapshot shows the template file used for this strategy. It is also part of the indicators package. Simply copy and paste it in the Template folder (File -> Open Data Folder -> Templates).

The MA channel indicator applies the two moving averages to the chart. The BUY entry area is seen where the candle marked green by the MA channel indicator bounces off the 56SMA. At this time, the 233SMA is well below the 56SMA, showing bullish bias for the trade. The Stochastics histogram is also green in colour at the same time. This is a perfect place to initiate a BUY trade.

Stop Loss
The stop loss is set at a few pips below the 56SMA.

Take Profit

The Take Profit is dynamic and cannot be set at trade entry. The Take Profit is the area where the Stochastics histogram bars are so high that they are virtually in the normal overbought territory that the regular Stochastics indicator would have been at that time. Once price gets to this area, the trader should then take profit. This trade was taken on the 4hr chart of the GBPUSD and would have yielded 100 pips.

Short Trade
The Short trade setup occurs when:

  1. The price action is located below the two moving averages in the MA channel indicator.
  2. At the same time, the candlestick seen at the signal point is red.
  3. The Stochastics histogram shows a red colour.

The short trade is then executed at the next candlestick’s opening price. We demonstrate this trade setup in the snapshot below:

MAchannel_short

The snapshot shows the template file, with the MA channel indicator applying the two moving averages to the chart. The signal is seen where the candle marked red by the MA channel indicator bounces downwards off the 56SMA. At this time, the 233SMA is well above the 56SMA, showing bearish bias for the trade. The Stochastics histogram is also red in colour at the same time. The SELL trade is executed at the open of the next candle.

Stop Loss
The stop loss is set to a few pips above the 56SMA band.

Take Profit

The Take Profit level is located where the Stochastics histogram bars are heavily oversold. This trade would have yielded 247 pips from entry to exit, showing how profitable this strategy can be.

Conclusion

This strategy performs very well in a trending market, and less so in a range-bound market. Therefore, trades should be made as much as possible on higher time frames when it is sure that the market is trending.

This strategy should be thoroughly practised on a demo account before being applied to a live account. Download the indicators and place them as well as the template file in the appropriate folders before restarting your MT4 platform. The template file ensures you get the indicators attached, with the colours set to those which can be visualized very easily.

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