Posted by forex at 5:15 AM
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1. Calculate the moving average of the closing exchange rate for your chosen currency pair. For example, if you intend to trade the European euro/U.S. dollar currency pair, EUR/USD, based on the U.S. trading session, use the closing exchange rate in your calculation recorded at 5 p.m. Eastern time. The most common averages used in the bounce strategy are based on averages calculated from 10 days, 50 days, 100 days and 200 days of closing exchange rate data. Remember that a moving average requires you to redo the calculation on the close of each day so that you end up with a time series of the average exchange rate based on the daily closing exchange rate.
2. Identify the trend of your chosen currency pair exchange rate. If the closing exchange rate is above the time series of your moving average, the trend is considered to be moving upward and the exchange rate is increasing on your currency pair. If the closing exchange rate is below the time series of your moving average, the trend is considered to be moving downward and the exchange rate is decreasing on your currency pair.
3. Determine the percentage loss or profit you are willing to accept on any given trade. For example, you might be willing to accept a loss of 1 percent on a trade and a 2 percent profit.
4. Identify your entry point into the market. If the trend is up, place a limit order to go long the currency pair at an exchange rate equal to your most recent moving average figure. Going long an exchange rate means taking a speculative position in the market anticipating that the exchange rate will go higher. If the trend is down, place a limit order to go short the currency pair at an exchange rate equal to your most recent moving average figure. Going short an exchange rate means taking a speculative position in the market anticipating that the exchange rate will go lower. Adjust your limit order every day so it always coincides with the most recent moving average you calculated.
5. Once a trade has been initiated, place your limit profit and stop loss orders in the market according to your predetermined percentages. For example, if you initiated a long trade, place a limit order at your predetermined percentage above the exchange rate at which you entered the market and place your stop loss order at your predetermined percentage below the exchange rate at which you entered the market.
6. Wait for the market to trade at either your profit or loss order, thus taking you out of your trade before you attempt to initiate a new trade.