SCIENTIFIC FOREX

ScientificForex by Cristina Ciurea outlines a systematic approach to trading Forex using technical indicators and candlestick patterns. Here is a summary of the methodology and trading rules:

Methodology

  1. Back-testing: The author conducted back-tests on various indicators and settings using historical data from January 2008 to December 2011 across different currency pairs and timeframes. Each trade was entered with a $10,000 account at 0.1 lot, ensuring enough trades for reliable results.

  2. Entry and Exit Rules

    • Entry: Enter at the close of the candle immediately after the signal appears.
    • Stop Loss: Set the stop loss 3 pips above the highest high of the past three candles.
    • Take Profit: Set the take profit at twice the value of the stop loss.

Indicators and Patterns

  • Moving Averages:
    • Simple Moving Average (SMA) and Exponential Moving Average (EMA) were compared. Different settings were tested to determine their effectiveness across various timeframes.
  • Stochastic Oscillator:
    • Signal/Entry Trigger: Buy when the %K line crosses above the %D line from below the oversold level (20%). Sell when the %K line crosses below the %D line from above the overbought level (80%).
    • Settings tested included 14,3,5 and 15,5,7, among others, with specific recommendations for EURUSD and GBPUSD on 4-hour charts and 1-hour charts.
  • Relative Strength Index (RSI):
    • Signal/Entry Trigger: Buy when RSI is below 30 and then crosses above it. Sell when RSI is above 70 and then crosses below it.
    • The document highlights the effectiveness of these settings across different currency pairs and timeframes.
  • Candlestick Patterns:
    • Hammer & Hanging Man: Buy after a hammer (bullish reversal) appears at the open of the next candle. Sell after a hanging man (bearish reversal) appears at the open of the next candle.
    • Inverted Hammer & Shooting Star: Buy after an inverted hammer (bullish reversal) appears at the open of the next candle. Sell after a shooting star (bearish reversal) appears at the open of the next candle.

Application and Money Management

  1. Money Management:
    • Adjust the lot size based on the risk and stop loss distance.
    • Avoid trading during flat markets and high-impact news events.
    • Use a risk-reward ratio that enhances profitability.
  2. Confirmatory Entry Signals:
    • Trade in the direction of the trend.
    • Use additional indicators or trendlines to confirm the entry signals and filter out bad signals.
  3. Exit Strategies:
    • Use support and resistance levels, trailing stops, and momentum indicators like ADX or ATR to determine stop loss and take profit levels.

Conclusion

The author emphasizes the importance of using a scientific approach to identify the best indicators and settings for different timeframes and currency pairs. Back-testing is crucial for verifying the effectiveness of any trading system before applying it in real-time trading.

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