Floor Trader Strategy
There must be hundreds, if not thousands, of forex trading styles where a trader may hold a position for weeks or months or a few minutes or even seconds. One of the more popular styles is forex swing trading, where trades may be held from one to a few days. Since the holding time in these cases is short, traders need to check the charts only once or twice in a day or every few hours. This type of trading strategy is preferred by busy people, involved in other jobs or activities apart from trading. Swing trading strategies allow traders to sell on the upswing when the price is forecasted to move down and buy on the downswing when price is forecasted to turn up. In simpler terms, a swing trading strategy is about trying to buy at the bottom and sell at the top, the place where price reverses. One of the most popular forex swing trading strategies is Floor Trader Strategy.
The Concept Behind Floor Trader Strategy
This strategy is basically a retracement-continuation trading method, which uses moving averages to identify the trend and then trades in the direction of that trend. Traders using this strategy identify the trading trigger on the basis of the reversal pattern that forms after the retracement. So, what is a retracement? In case of a downtrend, the retracement, also called the pullback, is a minor rally upwards. This up move is only temporary and the price will eventually fall back down to follow the established downtrend. Similarly, in case of an uptrend, the retracement is the minor rally downwards. So, the price will fall back down a little but then later continue to move up.
Identifying Buy and Sell Signals
Traders generally use 9- and 18-month exponential moving averages to identify the trend. Some conditions that need to be met for selling are:
- If the 9 EMA crosses 18 EMA to the downside, it indicates that the market is now in a downtrend.
- There should be a price retracement where price goes back up and touches the 9 EMA or both the EMAs.
- Trading signal to sell exists if the candlestick touches one of the EMAs, and if the low of the prior candlestick is broken.
- Stop loss can be placed 1-5 pips above the peak of the retracement.
In case of buying, the conditions that need to be met include:
- The first condition is that the 9EMA must cross 18 EMA to the upside, signalling an uptrend.
- The next step is a retracement, wherein the price goes back down and touches the 9 EMA or the 18 EMA.
- The next indication comes from the breaking of the previous candlestick’s high, after touching the 9 EMA or the 18 EMA. This is the buy signal.
- A stop loss can be placed 1-5 pips below the trough of the retracement.
Pros and Cons of the Strategy
This trend-following trading strategy is simple to understand and implement. It also allows traders to get into a trend at the beginning and ride out the trend if the first retracement happens quickly after the EMA crossover. Another benefit of this strategy is that the trade entry is dictated by price action and stop loss is placed above the resistance levels for short orders and below support levels for long orders.
However, this method may give false trading signals in a sideways trending market. Also, in a fast-moving trending market, the retracement may not happen close to the EMA crossover, making th trader miss out a massive part of the trend. And if they do manage to enter a trade, the trend would have lost its steam by then. So, the farther the retracement is from the EMA crossover, the less reliable it is. When using this strategy, traders need to look out for the first retracement after the EMA crossover.
While all strategies have their advantages and disadvantages, they are not all created equal. The floor trader strategy is among the more popular styles of swing trading, for a reason. Used well and methodically, it can be very successful in the hands of a prudent trader.
If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.