In this article, we present a complete collection of ideas to build daytrading strategies based exclusively on price action that can be useful to trade in Forex, although they can also be adapted to other markets. By the way, I have been told that these strategies were used on a trading desk of a well-known US investment bank. Although logically I have not been able to corroborate this, the truth is that these trading ideas are at the least original since they combine different patterns in an unusual way. Having said that, we will now study these strategies in detail.
Daytrading Strategy # 1 (Symmetrical Triangle with Outside Day)
-Price pattern detected: An Outside Day type bar is produced that has broken the top or bottom of a symmetrical triangle. The bar closes above/below the broken level.
-Entry order type: Buy Stop at the maximum of the Outside Day if the price breaks the triangle to the upside. A Sell Stop at the low of the Outside Day if the price breaks the triangle to the downside. If the pattern is verified and the order is not executed a few hours after the verification, then it is canceled.
-Profit Target: The profit target is placed in next support (bearish trade) or resistance (bullish trade).
-Stop Loss: A level that allows a ratio of 2: 1 or higher.
Example of the strategy in the NZD/USD
There is a clear upward breakout in a symmetrical triangle. We put a buy stop order at 0.6561 with a profit target on the green line (slightly below 0.6700) and the stop loss on the red line (slightly above the triangle’s previous bearish trendline at 0.6520). The profit to loss ratio is approximately 3.5 to 1.
Daytrading Strategy # 2 (Shoulder-Head-Shoulder Pattern with Inside Day)
Price pattern detected: after the neckline of a Head and Shoulders formation is broken, an Inside Bar type bar is formed.
-Entry order type: A Buy Stop is placed at the maximum of the price bar prior to the Inside Day if the pattern is an Inverted Head and Shoulders. A Sell Stop is placed at the low of the bar prior to Inside Day if it is a normal Shoulder-Head-Shoulder is formed. If after a few hours after the pattern is verified the order is not executed, we will cancel it.
-Profit Target: The take profit can be placed at the next support (bearish trade) or resistance (bullish trade).
-Stop Loss: The stop loss is placed at a price that allows a profit to loss ratio of 2:1 or higher.
Example of the strategy in the AUD/JPY
After breaking the neckline of an Inverted Shoulder-Head-Shoulder pattern with strength, an Inside Bar is formed. We place the buy stop order at the high of the previous bar (86.25) with a take profit target in the green line (slightly above 88.00) and a stop loss on the red line (slightly below the Inside Bar low at 85.15). Here the ratio between profit and loss is approximately 1.8 to 1, so it would not be the best pattern for trading and if we had an alternative with a better ratio, we would choose it over this option.
Strategy No. 3 (Short squeeze with Inside Day)
-Price pattern detected: after a prolonged decline in time we detected a very rapid succession of bullish price bars. In this bullish movement, we detected an Inside Bar type bar.
-Entry order type: This strategy only works on the short side. Once we detect the pattern, we will place a Sell Stop order at the minimum of the price bar prior to the Inside Bar. If the pattern is verified and the order is not executed a few hours after the verification, then it is canceled.
-Profit target: We will close our positions at the intermediate point located between our entry point and the next support.
-Stop Loss: Here we can allow a stop loss that generates a profit to loss ratio of 1:1 although the higher the ratio, the better.
Example of the strategy in the GBP/JPY
In this example, a short squeeze occurs from the price minimum marked at 164.00. During the bullish movement, there are several Inside Days. During the bullish movement, several Inside Days occur. Taking the last one Inside Day, we would place a sell stop order at the low of the bar prior to the Inside Day bar at 172.58. Considering the support at 164.00 we will place our profit target at 168.30 (green line) and the stop loss near the high of the pre-Inside Day bar, around 175.50. This gives us a profit to loss ratio of 1.4, something relatively normal when using this strategy.
Daytrading Strategy No. 4 (Double Top/Double Bottom with Reversal Bar)
-Price Pattern detected: A Double Top/Double Bottom is formed on a certain level. Although it has not been confirmed with the breakout of the intermediate vertex, a Reversal Bar is formed (a price bar that marks new highs before turning and closing downwards, or alternatively a bar that marks new lows before turning and closing upwards).
-Entry order type: A Buy Stop is placed at the highest maximum of the Reversal Bar or the previous bar. A Sell Stop is placed at the lowest minimum of the Reversal Bar or the previous bar. If the pattern is verified and the order is not executed a few hours after the verification, then it is canceled.
-Target level: The open positions are closed at a level that represents 2/3 of the distance between our entry point and the next level of resistance or support.
-Stop Loss: Here we can allow a stop loss that generates a profit to loss ratio of 1:1 although the higher the ratio, the better.
Example of the strategy in the EUR/GBP
In this example, the exchange rate is supported twice at the 0.7520 level and forms a bullish Reversal Bar in the last session. In that case, we will place a Buy Stop at 0.7615 (higher maximum of the last two candles). Our target, considering the resistance at 0.7750 will be at 0.7705. To have a good relationship between risk and benefits in this trade we will place our stop loss at 0.7555, thus obtaining a profit to loss ratio slightly above 2.
Daytrading Strategy No. 5 (Congestion Zone with Inside Day)
-Price Pattern detected: The price is immersed in a congestion zone where it has had several false attempts to break the range. Inside the congestion zone an Inside Day bar is formed.
-Entry order type: A Buy Stop is placed at the previous maximum of the Inside Day if the Inside Day is bullish. A Sell Stop order is placed at the previous low of the Inside Day if the Inside Day is bearish. If the pattern is verified and the order is not executed a few hours after the verification, then it is canceled.
-Target level: The open position is closed at a level that represents 2/3 of the distance between our entry point and the next level of resistance or support.
-Stop Loss: The stop loss is placed at a level that allows a profit to loss ratio of 2:1 or higher.
Example of the strategy in the EUR/CAD
This currency pair is immersed in a clear congestion zone and a bullish Inside Day is formed. We place a Buy Stop at 1.5430 (maximum of the previous candle). Our target considering the resistance at 1.6100 will be at 1.5875. For its part, we can place our stop loss order below the Inside Day low at 1.5200, which gives us a benefit to risk ratio of close to 2.
