Forex trading strategy: Pendulum strategy
In the previous strategy, we explored a technique that helps us to anticipate a range with the help of the stochastic indicator and also trade it in the early stages of formation. The pendulum strategy comes to the rescue in the later stages of a range formation. In other words, we can still trade the range after it has been formed.
You don’t need any indicators for this strategy, and you can use it to trade a range for as long as the market is swinging back and forth within the range like a pendulum.
Time Frame for this forex strategy
The pendulum method works with the hourly (H1) or 4-hourly (H4) chart.
This means that each candle on the chart represents 1 hour or 4 hours of price movement respectively.
No indicators are used for this strategy.
This strategy is suitable for all currency pairs listed on the broker’s
platform, especially the seven major currency pairs of:
The pendulum in motion swings back and forth because the force of gravity is pulling it back to the vertical position every time it swings away from it. The pendulum reaches an optimal height before it starts to fall back. However, if the swinging force is too great, the string holding the
pendulum will snap, and the pendulum will ﬂy off.
The ranging market acts in a similar fashion to the pendulum. Every time prices pull away from the midpoint of the range toward the support or resistance, market forces will pull it back towards the mid-point of the range. However, when the market gathers enough momentum, prices will
break the support or resistance of the range and move into a trend.
In this strategy, we wait for the pendulum to reach its optimal height and fall before we enter the trade. We do this by executing a trade only at the 10% mark after prices turn back from either support or resistance. The ﬁrst target is set at the 50% mark of the range, and the second target is set at the 90% mark of the range.
Long Trade Setup for this forex strategy
We use the AUD/USD on the H4 time frame to illustrate a long trade. Here
are the steps to execute the pendulum strategy for long:
1. Identify the resistance and support. Take note when the price goesback to the support again. (See Figure 8.35.)
2. In this example, the range is 269 pips; 10% of the range is 27 pips.
Enter when the price bounces 27 pips above the support (1.0101). (See Figure 8.36.)
3. The ﬁrst and second proﬁt targets are 50% and 90% of the range respectively, which are 135 pips and 243 pips above the support (1.0101).
4. Use risk to reward ratio of 1:1 to set the stop loss. (See Figure 8.37.)
FIGURE 8.37 Set Stop Loss and Profit Targets
From the long example in Figure 8.38:
Entry price = 1.0128
Stop loss = 1.0020
Proﬁt target 1 = 1.0236
Proﬁt target 2 = 1.0344
FIGURE 8.38 Trade Hits Profit Target
The risk for this trade is 108 pips, and the reward is 216 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% returnif we take a 3% risk.
Short Trade Setup for this forex strategy
We use the GBP/USD on the H4 time frame to illustrate a short trade.
Here are the steps to execute the pendulum strategy for short:
1. Identify the resistance and support. Take note when price goes back to the resistance again. (See Figure 8.39.)
2. In this example, the range is 205 pips; 10% of the range is 21 pips. Enter when the price bounces 21 pips below the resistance (1.6117). (See Figure 8.40.)
3. The ﬁrst and second proﬁt targets are 50% and 90% of the range respectively, which are 103 pips and 185 pips below the resistance (1.6117).
4. Use risk to reward ratio of 1:1 to set the stop loss. (See Figure 8.41.)
From the long example in Figure 8.42:
Entry price = 1.6096
Stop loss = 1.6178
Proﬁt target 1 = 1.6014
Proﬁt target 2 = 1.5932
FIGURE 8.39 Identify Resistance and Support
FIGURE 8.40 Enter When Price Bounces 21 Pips Below Resistance
The risk for this trade is 82 pips, and the reward is 164 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
FIGURE 8.41 Set Stop Loss and Profit Targets
FIGURE 8.42 Trade Hits Profit Targets
Forex Strategy Roundup
strategy is applicable as long as the market is swinging back and forth in a range. The power ranger strategy and the pendulum strategy work perfectly together. You can use the power ranger strategy to identify and trade the range in its early stage of formation, then apply the pendulum strategy to trade the later portion of the range.