I welcome my readers!
Today, I will explain a successful trading strategy for any timeframe, “4-5 and exit!”
The article covers the following subjects:
Why does the “4-5 and exit” trading strategy work?
I continue describing my own original trading strategies I use in Forex trading. I have already covered the system based on the candlestick pattern and the one based on probability. Today, I will show how you could make money using a simple Forex strategy based on the graphic chart pattern.
Generally, this strategy is based on the broadening formation price chart pattern. A broadening formation looks like a triangle. This triangle-shaped pattern, however, is not contracting but expanding. This pattern appears in any timeframe so that you can trade with this strategy both in five-minute and weekly timeframes.
The GBPUSD chart above displays a few broadening formations. This is just a random chart. For any other currency pair, the pattern will appear in the same way. As you see, it is better to spot the pattern in a line chart and frame it with two trend lines.
How does the “4-5 and exit” trading strategy work?
First, I would like to explain why the strategy is called “4-5 and exit!”. I have never tried to make up a name for the strategy. When I explain this trading approach to my students, I say take waves four and five and exit.
Well, the strategy suggests you trade the price movements inside the pattern. The price movement within the pattern, from one line to the opposite one, is called the pattern wave. So, according to this strategy, you trade only the fourth and the fifth waves of the pattern and exit the trade once these waves finish. Next, I will explain why.
Let us take one of the patterns from the previous chart:
1. In the above chart, the pattern has formed, and we know the result. Now, let us take a look at the section where the pattern has just started developing.
2. You can identify the pattern only when the first three waves (1,2,3) have completed. They are marked with four points or letters (A, B, C, D).
3. That is why you should trade starting from wave 4. Before, you will not be able to spot the pattern itself.
4. When there are four points, draw trend lines across the points. If the range between the lines is broadening (it is not flat or contracting), you can trade the pattern.
5. Statistics show that, out of 100 such patterns, 96 have had 5 complete waves. That is why I can say that such a pattern should have waves 4 and 5, following the first three ones.
6. After the (D) point is formed, we can suggest that wave 4 will be down, so we shall sell. When wave 4 ends, there will be wave 5, which should be up, and so, we shall buy. And, following wave 5, we exit! Next, the pattern is not interesting; we have made a profit.
7. Now, let us see how the trades are entered. It is very simple, in fact. Each wave within the pattern is a small local trend, which will reverse when the wave ends. You enter a trade at the trend pivot point. And how do you know when the trend will reverse? The trend should change when the price breaks out the trendline.
8. To sell at the assumed wave 4, wait until the trend of wave 3 reverses. Draw a simple support line across the lows of wave 3 and wait until the price breaks it out. In the above chart, it happens at the (A) point. That is the point where a sell trade is entered.
9. Hold a sell down until the price reaches the previous low if the pattern (the end of wave 2) and put a Take Profit at the low. It works out at the (B) point.
10. One wave has worked out! Almost 1100 pips of profit. Now, wait until wave 5 starts so that you can buy.
11. When the price breaks out the resistance level of wave 4, wave 5 will start. Enter a buy trade at the breakout point (С). Set a Take Profit at the previous high of the pattern (the end of wave 3). The Take profit works out at point (D).
12. The second wave has worked out! Almost 1600 pips of profit.
13. What is next? Nothing! Take waves 4-5 and exit. You have taken the profit and are not interested in the market anymore. Switch to another chart and look for a new pattern.
That is the entire strategy! As you see, it is very simple but profitable. You will almost always make a profit. I have been trading with the strategy for over three years and have not found any flaws. Try it and write about your experience. If you still have any questions, I will be glad to answer in the comments!
I wish you success in trading!
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Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.