This strategy employs phenomenon occurring on any market that is ruled by smart money, forex included. Tests are present in any trend. Purpose of test in forex is following:
To test interest of trend opposing group of traders in trend reversal.
To catch stop losses of traders already in trend following trade.
What we will be looking for, is immediate strength response to the test from the market. If market responded by strength (of a trend) trend reversal is very unlikely, because it would simply be too expensive for market makers to reverse it.
Our forex strategy, is bases in VSA theory, using forex indicators: Alligator (26,16,10) and SMA 200 (smoothed moving average) to establish the trend. Correctly identifying test formation is the only challenge with this strategy. Following forex strategy rules will allow you focus on the basics and make it simple. We will not use volumes forex indicator with this strategy, as the test can happen on both on hig and low volume.
For the best results, trade with professional ECN/STP broker with MT4. If you can't trade with profit. Automatically copy the traders that are already profitable.
Forex strategy rules (works on any currency pair and timeframe)
First of all we identify trend in forex instrument:
Uptrend: Alligator is above SMA. Alligator lines are clearly separated and untangled. Alligator lines from the bottom: Blue, red green
Downtrend: Alligator is below SMA. Alligator lines are clearly separated and untangled. Alligator lines from the bottom: green, red, blue
Uptrend signal:
Tall downward wick of candle. Wick is at least twice the size of candle body + upward wick. Candle body is preferably narrow. This will be our test candle. At this point we know that market is testing interest of traders in downward move. We look for response in form of immediate strength reaction – up candle surpassing high of the test candle. We enter long on reaction candle close. Strength response may be delayed by couple of candles. Signal remains valid if there is no candle showing weakness, by surpassing the low reached by the test candle.
Take profit:
Signal size: distance from low of the test candle to high of reaction candle. Default distance for take profit. Once it is reached we either liquidate position immediately or we move stop loss to break even, and double the take profit.
Stop loss:
Couple of pips below low of the test candle.
Orange - valid test
Red - failed test
Downtrend signal:
Tall upward wick of candle. Wick is at least twice the size of the candle body + downward wick. Candle body is preferably narrow. This will be our test candle. At this point we know that market is testing interest of traders in upward move. We look for response in form of immediate trend strength reaction – down candle surpassing low of the test candle. We enter short on reaction candle close. Strength response may be delayed by couple of candles. Signal remains valid if there is no candle showing trend weakness, by surpassing the high reached by the test candle.
Take profit:
Signal size: distance from high of the test candle to low of reaction candle. Default distance for take profit. Once it is reached we either liquidate position immediately or we move stop loss to break even, and double the take profit.
Stop loss:
Couple of pips above high of the test candle.
