Step #1: Wait for the lines to develop a higher high followed by a lower high swing point.
The first rule of thumb to recognize a swing high on the indicator is to look at the price chart if the respective currency pair is doing a swing high the same as the indicator does. A higher high is the highest swing price point on a chart and must be higher than all previous swing high points. While a lower high happens when the swing point is lower than the previous swing high point.
Step #2: Connect the line swing points that you have identified in Step #1 with a .
At this point, we really ignored the histogram because much of the information contained by the histogram is already showing up by the moving averages. Look at the price action now and compare it to our we drew early. We can clearly notice that the contains the price action much better and reflects the trend much clear.
But, at this point, we’re still not done with the indicator, which brings us to the critical part of our Trend Following Strategy.
Step #3: Wait for the line to break above the . (Entry at the market price as soon as the line breaks above).
When the line (the blue line) crosses the signal line (the orange line) it’s an early signal that a might start. However, if trading would be that easy we would all be millionaires, right? And that’s the reason why our Trend Following Strategy is so unique. We’re not only waiting for the moving averages to cross over but we also have our other criteria for the price action to break aka the we drew early.
This is a clever way to filter out the false signals, but you have to be equipped with the right mindset and have patience until all the piece of the puzzle come together. If you were to trade just based on the crossover over time you’ll lose money because that’s not a reliable strategy. But if you use the indicator along with other criteria such what this strategy tells you to do, you will find great trade entries on a consistent basis.
Step #4: Use Protective Stop Loss Order. (Place the SL below the most recent swing low).
Now, that you already know how to enter a trade at this point you have to learn how to manage risk and where to place the SL. After all, a trader is basically a risk manager.
You want to place your stop loss below the most recent low, like in the figure below. But make sure you add a buffer of 5-10 pips away from the low, to protect yourself from possible false breakouts.
Basically, a good entry price means a smaller stop loss and ultimately it means you’ll lose a lot less comparing it with the profit potential, so a positive risk to reward ratio.
Step #5: Take Profit when the crossover happens in the opposite direction of our entry.
Knowing when to take profit is as important as knowing when to enter a trade. However, we want to make sure we don’t use the same trading technique as for our entry order. When the line (the blue line) produces signal line crossovers (the orange line) we want to close the position and take full profits.
Before taking profits, it’s important to wait for the candle close – either the 4h or the daily candle – depending on the time frame you trade so you make sure the crossover actually happens.
Note** The above was an example of a buy trade using the Trend Following Strategy. Use the exact same rules – but in reverse – for a sell trade.