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Something to add to your trading arsenal
The
internet is awash with Forex trading theories, strategies and magic
incantations to achieve consistent results on the markets. Although it is
likely that some of these have validity and can help traders, many of them
cannot prove their efficacy or viability in the long term.
This article will
look into a relatively well know and often mentioned strategy called the Four
Week Rule.
What is the Four Week Rule?
The
Four Week Rule is a variation or off-shoot of the very popular and widely used
Trend Following. The idea of trend following actually is the baseline for
multiple popular trading indicators including Bollinger Bands, Moving Averages,
MACD and RSI.
Indicators are
generally used as part of a trading system unlike the Four Week Rule which is a
trading system in its self. The roots of this system date back to the Weekly
Rule – which was tested and proven to achieve positive results when trading
commodities. The four-week rule can be applied to FX because it essentially
stipulates that an entry point can be observed at the four-week high and an
exit point at the four week low.
Variables
Its
simplicity is enticing to many new traders – but at the same time its main
issue is its simplicity. Each market is different and although there are many
systems based on “rules” markets are not just affected by sentiment.
Geopolitical events, policy changes, natural disasters even social media posts
by influential people or companies’ executives can cause market volatility (as
we saw recently with Tesla stock and Elon Musk’s outspoken series of tweets).
Technical Analysis and Market Cycles
Technical analysis is one
of the sharpest tools in any traders tool box to identify sentiment and the
beginning of trends. Although fundamental analysis can help protect against
unforeseen reversals (usually a result of unforeseen policy or geopolitical
events) fundamental analysis’ reach is relatively short. This is why many
traders point towards the four week rule as a solid form of technical analysis.
If the most recent
four week signal was a high, that likely indicates towards a possible beginning
of a downtrend or a current downtrend in action. Inversely if there most
proximate signal was a four week low, then there is a possibility that the
instrument being analyzed is in the midst of an uptrend or a uptrend is
beginning.
Four Week Rule+
with any trading strategy,
it is wise to augment it with another indicator or strategy. Don’t put all your
eggs in one basket, is a pretty solid piece of advice especially for traders –
diversification in fact is considered a pretty concrete risk management
strategy.
Deriving
all your signals from one methodology can have given you tunnel vision – i.e. hyper
focusing on one thing and ignoring the big picture. For example, If the four-week
signal is showing an uptrend and the instrument’s prices have dipped below the
moving average indicator, then it can be used as a confirmation – to a certain
extent.
On
the other hand if there is an incongruity between these two indicators, then
you might need to look a big deeper – or widen your scope to truly identify
what the market is going to do.
The
wide range of tools available to traders today is immense and not all tools are
created equal. The one fundamental and unchanging value when on the markets is every
trader needs a risk management strategy. Knowing your risk/reward ratio and
working with a limit on loss using stop loss are crucial.
Choosing a broker
that not only strives to offer you a great trading experience, but also
protects you with negative balance protection and guaranteeing your stop loss
level is also important.
