Cowabunga Strategy for FX Binary Options Trading
Now, before we get started, it’s important to note that the markets are dynamic and constantly evolving. There is no guarantee that strategies that worked well in the past will continue to work in the future. As a trader, you have to learn to be nimble, have an open mind and avoid being stubborn.
Today, we’ll be looking at the Cowabunga Strategy, which targets short term trend trading styles. This is primarily based on statistical and mathematical concepts, particularly patterns, and ignores rumors due to news and other events.
4 key elements
- Determine trend on 4 hour chart
- Trade accordingly on 15 minute time frame
- Trade accordingly on 1 hour time frame
- Make decision for entry/exit based on specific time frame and risk tolerances.
Important chart studies
- 5 period EMA
- 10 period EMA
- 10,3,3Stochastic’s
- 9 period RSI
How to initiate trade
Close and confirm 5 EMA > 10 EMA
Stochastic is rising and not overbought
RSI > 50 and not overbought
The goal of the trader is to capture SHORT TERM trending currency pairs instead of longer term patterns. This is a more advanced technical setup, trying to capture long and short trends inside of a long up or down trend, usually seen on the daily or monthly charts.
In Action
Here is an example of the USD/CHF currency pair that has a Cowabunga setup from about a week ago. This setup confirmed all 3 criteria, this allows the trader to enter this trade with a call position (at price 0.89326)
Figure 1: USD/CHF source: thinkorswim
Identifying a potential failure
The trader has to understand that due to the nature of the lagging indicators, it’s important to always wait for a confirmation of the pattern or trend. It is very common that you’ll see a breakout trend forming from the indicators, just to have the pattern fail and keep you range-bound. That is always important to check when trading this pattern. Look for signals where there could be a reversal present, or a trend failure occurring. Note, combining this with support and resistance levels can save many headaches in the future. Refer to Figure 2 for the combination of this strategy with a basic understanding of support and resistance levels.
FIGURE 2: USD/CHF source: thinkorswim
It is important to include analysis of the longer term support and resistance levels if trading “inside” this 4 hour chart. When the USD/CHF test previous resistance and does not break below that level, confirming that resistance, then it is safe to assume it is future support. Once this is confirmed, and support is strong, as a trader it is important to re-evaluate the other indicators you have included in your analysis.
First, determine if the trend is still valid;second, check if the Stochastic is rising and not overbought; last, check your RSI > 50 mark and is not overbought as well. If all of these criteria’s are met, it is ok to assume the trend is healthy, try to then build onto your position by adding additional calls to follow the long term trend.
Closing example and conclusion
If you are trading “inside” this trend, it is safe to place additional calls that are capturing the smaller 15 minute trends. In Figure 3, we’ve illustrated the power of larger time frames and how they can help make trading decisions. After profit target 1 is reached and proves to not be a “double top” pattern, the trader can add additional calls into his position, looking for profit target 2 to be reached .
Figure 3: USD/CHF source: thinkorswim
It is worth noting that the trader would have to increase their time frame again to find another profit target, or not add to the position due to an unfavorable change in the market conditions. This “double trend” analysis is key to maximizing gains and avoiding mistakes especially when you are focused on tiny 15 minute windows.
Additionally, a trader must note where and when it is time to remove himself from the trend, as everything must end eventually. With the addition of a larger time frame, this allows for a trader to set profit zones and determine where they should always be positioned in the market.
