Simple forex strategy looking for a test formation confirmed by ADX (average directional movement index). Test formation reflects the effort of market makers to gauge the interest of wide public in trend continuation. Any strength response to this blatant money making maneuver can be considered to be a strong trend continuation signal.
This forex strategy trades this forex formation with the assistance of ADX to identify trend and be able to establish a profit target, as test alone doesn't provide any information on target profit.
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Used forex indicators
ADX (average directional movement index) 50. Add line with value 10. It will help us to confirm existence of trend with sufficient momentum.
Forex strategy rules.
We trade in 1H chart of EURUSD.
SELL
Main ADX line trending above 10 line confirming the trend presence (sufficient momentum filter). Red adx line (DI-) trending above green line (DI+). Confirming the downtrend. Only short trades should be entered.
Test formation: Bullish candle with extremely tall upper wick (at least twice the size of candle body). Test candle body is very narrow -result of price closing near the low of the hourly session.
Test response candle: signal candle following the test candle. Strong bearish candle closing below the low of test candle.
We enter the trade short immediately on test response candle close.
Stop loss is placed one pip above the high of signal formation (test candle high).
Take profit: ADX DI- line crossing DI+ line downwards.
BUY
Main ADX line trending above 10 line confirming the trend presence (sufficient momentum filter). Red ADX line (DI-) trending below green line (DI+). Confirming the uptrend. Only long trades should be entered.
Test formation: Bearish candle with extremely tall bottom wick (at least twice the size of candle body). Test candle body is very narrow -result of price closing near the high of the hourly session.
Test response candle: signal candle following the test candle. Strong bullish candle closing above the high of test candle.
We enter the trade long immediately on test response candle close.
Stop loss is placed one pip below the low of signal formation (test candle low).
Take profit: ADX DI- line crossing DI+ line upwards.
