Peculiarities of trading according to a popular strategy
Having learnt about the Forex market and the wide opportunities it provides, a beginner trader starts searching for the Holy Grail - a strategy which will help him or her earn a stable income. Some read and reread loads of books, some become frequent visitors of training internet resources and forums, some pay for individual training with an experienced trader, some buy trading robots... Everyone chooses their own way, but the more you search, the more you think that those who have already found the answer won’t share their findings with others. Linda Raschke, the author of the best-seller “Street Smarts: High Probability Short-Term Trading Strategies”, has disproved this idea. Not only has she found an efficient strategy which she called “Holy Grail” indeed, she also made it public.
In fact, trading isn’t as hard as one may think at first sight. From the variety of Forex tools, you just need to choose one which is associated with a stable trend and to catch retracements using the “Trend is your friend” principle. The direction of price movements must be stable and corrections must be short-term ones. To choose an appropriate currency pair and form an efficient strategy, the moving average and Average Directional Index (ADX) are applied. The former will indicate the depth of retracements while the latter - a suitable financial instrument.
The modern theory of technical analysis says that ADX value which exceeds 25 points to a strong trend. According to Linda Raschke, a level of 30 and a 14-period indicator are meant here. A precondition for the “Holy Grail” strategy is ADX continuing to grow at 30 and higher. An important nuance: ADX value shouldn’t be too high or else there will be an association with a trader trying to backdoor his way into opening positions, which, as a rule, ends in a sad fashion.
Let’s suppose we’ve found an appropriate tool. Then, we need to make sure that correction isn’t too deep. A fast retracement from the 20-period moving average may be the signal. If this is the case, Linda Raschke suggests placing a pending order at the maximum level of the previous bar when it comes to a long position or at the minimum level of the previous bar if bears are predominant in the market. A protective stop order is placed near the opposite fluctuation extremum once the pending order triggered.
Holy Grail on USD/JPY H1 time frame
An uptrend is gradually gaining strength on the H1 chart of USD/JPY. Once ADX has risen to above 30 and higher, a trader should find an opportunity to open a long position at the exhaustion of a correctional movement. On 21 May, the quotes touched the moving average but weren’t able to consolidate below it. It signals bears’ weakness and allows applying the Holy Grail strategy. The return of the pair to the maximum of the test bar is a signal for forming a long position. A stop order is placed at the minimum fluctuation level and trailed upwards as the USD grows against the Japanese yen.
The same principles work in a downtrend. The stronger a downtrend, the more chances for building up earlier opened shorts. So, May’s fall of GBP/USD allowed selling the pound for the dollar three times. In all those cases, the trend was stable and correctional movements weakened quickly: bulls weren’t able to consolidate above the moving average for a long time.
Holy Grail on H1 chart of GBP/USD
Please pay your attention to the fact that an extremal value of ADX (much higher than 60 in our example with GBP/USD) intensifies the risk of trend exhaustion. It isn’t advisable to use the Holy Grail strategy under such conditions.
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Price chart of USDJPY in real time mode
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