Hi, Rimantas Petrauskas here. Forex trader and a programmer with 16 years of experience.
There is this saying among Forex traders “The trend is your friend until it bends”. I assume this means that when you are in a trade and the trend reverses you get into drawdown and that’s where things get messy.
But what if you enter the market only in the direction of the trend and only if it shows you signs that it will continue to go that way? In other words you would not enter the market if the price reversed and did not go in the same direction.
In this video I am going to show you how you can re-enter the market in the direction of the trend after a pullback and also how you can program your MT4 platform to do this for you.
So lets switch to my computer screen now and I will show you how this works.
First let me explain this re-entry method. You can use this with mostly any trend following strategy.
What we see on the screen now is the hourly EURJPY price chart and on the left side we see that the price dropped down significantly. Then later, after moving sideways in a 80 pip range, it started to go up. Market was kind of undecided where the price will go next, but when we see the price break that upper level of this price range, the resistance level at 136.6, we have a tendency to believe that the price will continue to go up again. This means we will be looking only for BUY trades.
What happens next is that the price goes up, then it pulls back and actually touches that same resistance level at 136.6. This is called price re-test and it is one of the things that confirms the last price breakout. If it continues to go up again then we might end up in a quite big uptrend. If it continues to go down then we will call this a false breakout. If it continues to go down we will not get into the trade, but if it continues to go up after this pull back we will BUY this currency.
So here’s how you can trade in such case. You place a BUY order at the most recent high price, which is 137.00 in our example and you place a stop loss at the most recent low price, which is 136.58, almost at the same price as the previous resistance level was. So if the price continues to go up and break that price level of 137.00 you will have a BUY trade opened.
Lets see where the price will go. We see that several hours later the price broke that upper level and we would have ended up with an active BUY trade. The price continues to go up even further and we see another pull back. Once we have at least one bearish candle starting the pull back and then at least one bullish candle after that, we may place another BUY order at the most recent highest price. So that would be our 2nd re-entry into the direction of the main trend.
Lets continue. The price moves up again and we would get another BUY order filled at this price 137.50. From there we see the price goes up again and then it starts to do a pull back once again. You see that this same scenario repeats over and over again and we can use it to our advantage to re-enter the market.
Now this time we see pull back was much bigger than those two previous pullbacks, so this indicates that the price now will reverse and continue to go down or it will go up even more. After a few bearish candles we got one bullish candle and this is the time we need to prepare our next re-entry for BUY trade.
We would place a BUY order at 138.17 and wait for the price to go up again. It is clearly seen that the price now is in a quite strong trend so this gives us more confidence that it will continue to go up. Next we see the price is moving sideways for some time, but then again it breaks the resistance level, pulls back to re-test that previous resistance and then goes up strong again.
Usually traders are afraid to get into the markets because they do not know where the price is going, but when they see such a big uptrend they get frustrated that they did not bought that currency at the beginning of that trend or at least re-entered somewhere in the middle. Obviously this uptrend will end at some point so it might get risky to enter, but in most cases you will get 3 or 5 re-entry positions on the same trend.
Now we have 3 re-entry positions so we will do one more and I see another opportunity at the 138.74. This time we see the price is teasing us for a little longer than usual, but as long as you are protected by a stop loss there is nothing to worry about. Later we see the price still continues to go up and all four trades turned out in our favor.
So lets take a look what re-entry positions we could have made. We have one, two, three, four positions in this bullish trend. This is an explanation how re-entry method works and there is no doubt that it is much better than trading by indicators that usually lag or even gives entry signals against the trend.
Programming MT4 to re-enter in the same direction
Now let me show how you can program your MT4 platform to re-enter the market in the same direction as the original trend. I am going to use a trading tool for that … it is called Candle Range Trader … and this re-entry technique is one of the many things that this tool can do.
I am going to use this tool in a simulation mode, also known as a Strategy Tester. This allows me to pause simulation anytime and explain what is going on on the screen exactly so you could understand it better.
Setting up the trading tool
First we need to set up the tool with the right parameters so it would work the way we want it to. But before this we need to take a look at the time the trading starts and also count the number of candles that it must use to determine a price range.
Lets start from the beginning and see how it would look like if you needed to do this in a real time without knowing where the price will go next.
We see the price went up, broke the resistance level and this is the important part right here, when the price starts to go down.
After this bullish move we see the first bearish price candle closed and formed a pull back, so now we need to wait for at least one bullish candle. This is how we know when it is the right time to set the tool for trading. So when that white bullish price candle closes we will be looking to start this trading tool and we will use the new currently forming candle’s time as the starting point. In our case the candle when we need to start trading was created at 23:00. Also if we count back the price candles we will see there are 5 that needs to be used to determine the price range. The upper level of that range will be used as an entry point and the lower level of that range will be used as a stop loss.
So now when we know the time to start and the number of candles to use we need to configure the tool and change some other settings to fit our requirements.
We will be trading in an uptrend so we do not need SELL trades and I am going to disable them. Also I won’t be using Trailing Stop and Break Even options so I disable them too.
Next I need to set how many candles this tool should use to determine the price range for trading and we already counted five candles. There is also an option to set for how many candles this setup should remain valid, but for this example I will set it to zero, which makes the setup to never expire.
Also it gives us opportunity to add a few pips above the entry price, which might help to avoid false breakouts in some cases, but I will turn this option off in this example.
Next we see the EA is set to work only if the price range size is bigger than 20 pips and smaller than 100 pips. I am okay with this and leave it as is.
Then we set a take profit and a stop loss and I choose take profit to be 200% of the price range while stop loss will be 100% of the price range. In other words stop loss will be of the same size as the price range and the take profit will be 2x times bigger. This also makes our risk to reward ratio 1:2.
Now we need to set the time when the EA needs to start trading. In our example that is 23:00 and we set this time as the start and end of the EA trading session.
And finally we set the EA to use money management option and risk 5% of available account equity on each trade. We start with the initial balance of 10,000 and this means the first trade will risk $500 dollars. And because our take profit is two times bigger it means we would earn $1,000 dollars if the trade goes in our favor.
Lets start the simulation now and see how this tool will work.
Okay, so now we see the price went up, then it pulled back, a bullish price candle has formed and at 23:00 EA started to work. It has created a price range and a blue line at the top of that range, which indicates the price where your BUY order will be opened. You could also set the EA to use regular pending orders, but in this example I use hidden pending orders which are not visible to the broker.
Soon we see the price breaks that level and your BUY order is opened. EA instantly places a stop loss and also calculates the right lot size to use so that if your order hits stop loss level it will lose no more than 5%. This window shows that the EA used a lot size of 1.32 for this order. It is not that easy to calculate the right lot size according to your account size, stop loss and risk percentage, but this EA does that in a fraction of a second.
Now if we continue this demonstration we will see how price is moving up and forming another pull back. Normally this is where you can re-start this EA with the new settings and set up another BUY order, but in the simulation mode I can only have one EA running. So after this first trade will be closed I will restart the simulation with the new parameters to show this one more time.
Okay, so now we got our take profit level hit for around 10% profit and next we have another trade setup opportunity. I am going to restart the simulation now and demonstrate this one more time.
But first we check the start time and the number of candles to use. There we have 1 first bullish price candle after the pullback and the next candle opened at 17:00. Also we have 7 candles to use for price range.
So I restart the EA and change its settings to 17:00 as start and end time, and also set 7 candles to be used for price range.
Simulation starts. Price goes up. Price starts to pull back. We got first bullish candle and the EA starts to work.
Later we see the price goes up, your BUY order gets filled in and some time later it hits the take profit again.
So that was the demonstration of how you can program your MT4 platform to re-enter the Forex market in the original direction of the trend. We were using a semi-automated tool to help us and do some of the work for us.
I hope you enjoyed this video and have found it to be useful. I will be delighted if you post your comments and questions below. Stay tuned for more videos.
If you think Candle Range Trader might help you with Forex trading you can find it on my website.
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And remember, “Stick to one strategy until you prove it wrong or keep profiting with it”. – Rimantas Petrauskas