Volatility-Based 4-Hour Forex Strategy

Introduction to the 4-Hour Forex Strategy

The forex strategy described is a trend following strategy designed to allow traders to follow an existing trend with confirmation of the volatility on the asset as well as the momentum of the asset move. This strategy is known as the Volatility-based 4hr strategy. This strategy is traded on all currency pairs, but purely on the 4hr time frame.

Indicators
The indicators for this strategy are as follows:

  1. 100-period exponential moving average applied to close (change colour to red to improve visualization).
  2. MACD coloured histogram.
  3. Volatility meter indicator. The parameters for the indicator should be reset as follows:
  • vis_atr 13
  • vis_std: 26
  • sed_atr: 37
  • sed_std: 100
  • threshold level: 1.3
  • lag_suppressor: true

The essence of using the volatility indicator is to ensure that trades are only taken when there is enough volatility to support a trend. Trend following strategies have a tendency to get caught in trends once in a while, so it is important to avoid trading at these times. This is what the volatility indicator is all about. It is a custom indicator which can be downloaded here

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 100-period exponential moving averages is to act as support or resistance to the price action. This is because the basis of the trade entry is when price breaks out of the 100EMA in a particular direction. But there comes a time when price will attempt to retrace to where it just came from, and will be rejected or will bounce at the 100EMA line. So the 100EMA gives the trade signal, while the coloured MACD indicator gives confirmation to the entry. The volatility meter will tell you if there is enough volatility to push a trend in the first place.

1) Long Trade
The Long trade setup occurs when:

  1. The price action breaks above the 100EMA line and pulls back a little to it. It is preferable if the price action is coming from below the 100EMA, has tested that level several times without success but eventually breaks it.
  2. At the same time, the coloured MACD indicator shows a blue colour.
  3. The volatility indicator shows TRADE. (if it shows “No Trade”, that means that there is no volatility and the market will be range-bound, defeating the trade).

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

volatility_short

Here we can clearly see that the 100EMA was a firm resistance which price could not break much earlier. Eventually the breakout occurred with a slight pullback to the 100EMA. Now acting as a support, the 100EMA will serve as the area where the Long trade is initiated.

Stop Loss

The stop loss is set at a few pips below the 100EMA line, since it will now act as a support.

Take Profit

The Take Profit is not set at trade entry. Rather, the trade is closed manually in profit when the MACD coloured indicator changes to the reverse colour, red.

Short Trade
The Short trade setup occurs when:

  1. The price action is coming from above and breaks the 100EMA line, then pulls back a little to this line which will now act as resistance.
  2. At the same time, the coloured MACD indicator is red in colour.
  3. The volatility indicator gives the “TRADE” signal as shown in the blue box at the left side of the chart.

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

volatility_short

The snapshot shows the price breaking below the 100EMA, taking a slight pullback up and taking off from the 100EMA line straight down to the exit area.

Stop Loss
The stop loss is set to a few pips above the 100EMA line.

Take Profit

The Take Profit level is left open. Rather the trade is closed manually in profit when the reverse colour of the MACD indicator appears on the chart, which is the blue colour.

Conclusion

This strategy performs very well in a trending market, and not at all in a range-bound market. Therefore, the volatility meter indicator serves to give a “TRADE” signal when there is enough volatility to form a trend on the 4-hour chart, and a “DO NOT TRADE” indicator when there is no volatility to push any trade into profit levels.

This strategy should be thoroughly practiced 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.

Leave a Reply