How Do You Generate Forex Signals with a Trading Strategy?
How Do You Generate Forex Signals with a Trading Strategy?
This forex trading guide will show an example of a Best Forex Strategy that swing traders can use to come up with a profitable Best Forex Trading Strategy. Based on the popular stocks strategy, where stock investors use volumes to predict forex price direction, based on the concept "Volumes always precede forex price", in forex market, there is no central clearing house where volumes are aggregated, so in we use an indicator that will estimate the volumes. This indicator is known as On Balance Volume.
This indicator is then combined with RSI & Moving Average Crossover Best Forex Strategy to form a Best Forex Trading Strategy. The Indicator settings are:
- 5 & 7 LWMA, Linear Weighted Moving Averages
- RSI 14
- OBV forex indicator
Time-frame: 4 H Chart
Entry Signal
Buy
- Both MA pointing up
- RSI above 50
- OBV forex indicator is in an upward forex trend line or it has broken downwards forex trend line
Sell
- Both MA pointing down
- RSI below 50
- OBV forex indicator is in a downward trend line or it has Broken upward Trend line
Exit Trading Signal
OBV forex indicator trend line is broken
RSI gives an opposite trading signal - 50 center-mark cross-over
You can study more about writing a Best Forex Trading Strategy rules Writing Best Forex Trading Strategy Rules and Generating Forex Signals
You can also Read about other Forex Strategies: Strategies List
Example of How Do You generate Signals with This Best Forex Trading Strategy?
Before looking at examples below, using the 138 pips and 177 pips profit example, you need to learn the concept of volumes precedes forex price and On Balance Volume technical indicator.
The On Balance Volume trading indicator uses volumes to measure the money flowing into a forex instrument or money flowing out of a forex instrument.
OBV forex indicator most popularly used for stocks analysis. The concept behind On Balance Volume is that Volume precedes forex price always and when it comes to analyzing the direction of a financial instrument whether or a forex instrument nothing is more crucial to this forex analysis as understanding the volumes that are flowing in and out of a forex instrument. These volumes can be in terms of money, in Forex because charts moves in ticks data, the more money in a forex instrument the more the ticks data, therefore volumes in Forex will measure number of tick data participating in a forex instrument.
On Balance Volume acts as a leading indicator giving a one an idea of how much buying pressure or selling pressure is moving into a forex instrument. And because volumes precedes FX price then this can be used as a good indicator to show the general investor sentiment.
For a Best Forex Strategy a one requires indicators are calculated differently. For examples our Best Forex Trading Strategy is based on
RSI - momentum indicator
MA - direction based indicator
OBV forex indicator - volume based technical indicator
A Best Forex Trading Strategy like this give a good overall picture of the market movement by taking into account 3 different calculation methods as opposed to using 3 oscillators that give signals based on the same calculation technique.
The OBV forex indicator will measure the tick volume of a forex instrument, for every candlestick. If you use the 1 hour chart time frame, then the volumes will measure the total volume for the 1 hour. If you use day charts then the volume will measure the total volumes for the forex instrument for the whole day.
However, the volumes indicator does not show the direction of the volumes, only differentiating by colors for the different candlesticks, Green for Bullish Forex Candles & Red for Bearish Forex Candles.
This is where the On Balance Volume comes in & adds a direction to the volumes & shows the overall direction that the volumes are flowing, whether into or out of a forex instrument.
Volume Precedes Forex Price
Volumes always precede forex price, this makes volumes a leading technical indicator. Knowing how to interpret this helps a trader make better decisions when it comes to predicting where the market direction is going to be moving to next.
When the volume rises it shows that money is starting to flow into a forex instrument. Because volumes will precede the forex price, the next thing is that the value of a forex instrument will then go up. When the OBV forex indicator is going up it shows there are more buyers buying a forex instrument than the sellers selling it.
When the volume falls it shows that money is starting to flow out of a forex instrument. Because volumes will precede the forex price, the next thing is that the value of a forex instrument will then go down. When the OBV forex indicator is going down it shows more trading volume is going short than long.
Subsequently when a downward forex trend line of the OBV forex indicator is broken it shows that sellers are starting to take profit and close their orders.
Likewise when the upward trend line of the OBV forex indicator is broken it shows that the buyers are starting to close their buy forex trades & take their profits.
Because the On Balance Volume will add direction to the volume and form a general direction, a trader can compare the two, the forex price direction and the OBV forex indicator direction. The direction of these two should correspond but when there is a disconnect between these two then one should pay attention to know when to exit the market or when to open an order.
On Balance Volume is a leading indicator & a trader using this indicator can avoid entering a forex market when it is too late. This Indicator is also a good indicator to show when to take a profit early enough before the market takes away all your profit.
Forex Indicator Formation
The OBV forex indicator is the cumulative addition and subtraction of volume based on forex price direction.
Upwards direction - adds volume/ technical indicator moves up
Downward direction - subtracts volume/ technical indicator moves upwards
Sideways market/Range market - technical indicator moves Sideways
Because forex price moves in a zigzag manner, the OBV forex indicator will also form in a zigzag manner
Forex Price Trend lines
Most Traders will use these to generate buy and sell signals.
For our Best Forex Trading Strategy we shall use the OBV forex indicator to confirm these buy sell signals from forex price trend lines.
We shall draw a Forex trend line on both the forex price and Indicator. If both give the same signal we buy or sell depending on direction.
This forex trading strategy will be used to figure out 2 things.
Continuation of the current market direction
Reversal of the current market direction
Example of this Strategy
1. Downwards Bearish Market
In the above chart the first half of this forex instrument is bearish. This can be shown by the forex price trend line that shows a downward direction. This forex price downward trend line is also confirmed by the downward trend line on the indicator - as long as these two move in the same direction then the direction of the forex instrument remains decisively downwards.
Because volumes precede forex price, a trader can hold on to his sell forex trades because the market direction will not reverse, before OBV forex indicator gives a warning.
2. Forex Trend Change
Halfway through this chart there was a forex market reversal marked by the vertical line. This reversal forex trading signal was generated when there was a trend-line break as illustrated on the forex chart.
From the forex chart you can see that the OBV forex indicator gave the reversal forex trading signal just before the forex price trend line was broken generating a reversal forex trading signal. If you had opened a sell this is where you would have closed all your trades.
3. Upwards Bullish Market
Trading a forex market reversal can be sometimes tricky, but the reversal forex trading signal generated above was generated at the optimum time and forex price continued to move up after this reversal forex trading signal was generated.
For this you would have just bought the forex instrument when the two trend lines were broken to the up side giving a buy signal. This buy was also a good signal in that the On Balance Volume had already formed an upward forex trend line by the time the downward forex trend line was broken.
The new OBV forex indicator upward forex trend line confirmed the direction of the market as a buy and more forex traders will open buy forex orders and as long as it holds, as it did in the above example then the forex price will continue moving upwards.
After this signal was given you can see that later the forex price formed a decisive upward forex trend line that matched the OBV forex indicator upward forex trend line. As long as the two kept moving upwards then the market was firmly upwards.
Forex Trading Whipsaws
4. At the end of this upwards direction, OBV forex indicator gave a forex whipsaw as if to break the upward trendline. However, even if you had opened a short trade because of this new signal that had formed as shown above you would have quickly closed your sell forex orders before they reversed because the OBV forex indicator soon broke this downward trend line as shown above and therefore the sell forex trade which was forming is now not valid.
One thing which a trader must learn to avoid as with any other forex trading strategy is that whipsaws might be generated. The best way to avoid this is to exit as soon as the OBV forex indicator trend line is broken especially when you are trading the reversal forex signals.
For the above example once you exit the short trade, after the new OBV forex indicator downward forex trend line was broken it shows there were still more buyers in this forex instrument and it is better to exit any reversal trades that you might have opened, this is because the forex price might as will move further upwards as shown by the forex indicator moving upwards.
Because the OBV forex indicator still went up even after touching & breaching it a little, the OBV forex indicator upward forex trend line still held therefore the upwards bullish direction is still intact according to our forex technical analysis & any further trades here are still buy.
How Do You Generate Forex Signals with a Trading Strategy?
