Forex Strategies and Tips
The Rabbit: An Entry Strategy
Begin With This Scene In Your Mind
Imagine there is a beautiful open field or meadow. On either side of it are hedges and trees.
Now imagine there is a little rabbit in the hedges who wants to go across the field to the other side where the other hedge is. The rabbit is safe where it is, and it knows it will be safe in the hedge on the far side,,, but going across that open field makes the poor little thing nervous and scared.
What does it do? It goes out into the field a little ways to check that going out just a little bit will be safe – then it runs back where it came from, and gathers up its courage for the big dash across.
If our rabbit feels courageous enough, he will then make a dash for it, trying to get across the open field as fast as he can. Like this little movie shows:
Now Translate This To Trading Forex
That's just what we're looking for in the market action to identify a decent entry setup. We want to wait for the price action to make a move, then come back to safety – and then break out.
We add a moving average to make this easier to spot. Any moving average will do. We happen to like the exponential on the close, period 14, but use whatever you like.
We wait for a move across the EMA, then a backwards movement to return to the EMA, then follow thru of the move.
How do we double check that the rabbit is ready to jump across the open field and follow thru with the run?
We ask the rabbit to go just one step more than he did before when he went out to see if it was going to be safe. In price action, this translates to asking for a lower low or higher high.
Depending on which time frame we are using this might be 1 pip more for a 5 or 15 minute chart, 2 pips for a 30-60 minute chart or 3 pips for a 4 hour or daily chart. It also might vary with how volatile the currency pair is.
Where's the stop? Behind the hedge that the rabbit went back to when he was gathering courage. If the rabbit starts his move then loses courage and goes back further into the trees or hedge than he was before, he's probably not going to make it across the field after all; If price goes back that far again then the trade is probably no longer valid.
See how simple trading can be? The simpler - the better! (Read more about the importance of simplicity).
A Typical Example of This Trade
A Few Refinements
- FIRST PUSH CLEARS EMA: We like to see that first move the rabbit makes be clear of the EMA. The EMA should not cut the candle more than about 10%. In other words 90% -100% of the candle should be free of the EMA. The best are those that float free of the EMA without touching it at all.
- FRESH MOVES: Look for rabbits when the EMA first turns over and price just begins to move on the new side of it. we're not looking for rabbits and pullbacks all along the EMA; this is specific to the early development of a new move. A fresh move is like a young rabbit with vigor and strength to run all the way across the field.
- IDEAL PULLBACK: The ideal pullback does not go past the EMA, but stays on the same side of the EMA that the rabbit's first move is on. It does not matter how few or how many candles make up the pullback.
- NON-IDEAL PULLBACK > CHECK CLOSE: If the pullback does go a little past the EMA, check to see that the candle or candles that go past the EMA do not close on the far side of the EMA. Some of the candle can go past the EMA a bit but should have their close on the new side of the EMA.
- CONSOLIDATION: If you think you see a potential good setup, zoom out your perspective a little to see more candles and time, and make sure you're not in a tight consolidation band. If you are too zoomed in to the action, sometimes it's hard to see these. If you are inside consolidation, wait for price to move out of the consolidation to look for the rabbit move. By the way, this approach to trading combines nicely with out BOB technique in these cases. One exception is shown below: if you can reach profit within a consolidation band you can take the trade.
- USE PENDING ORDER: We prefer using pending orders for these, rather than market orders. It is less stressful and gives you time to plan all the components of the trade properly. Once you see the rabbit make a first move - then the pullback - you are all set. You can place your buy stop or sell stop, position sizing with the Advanced Calculator and planning the whole trade out in advance. As you're waiting for your pending order to be picked up, if you see the pullback go too far on the other side of the EMA, you simply remove your pending order.
- EXITS: See our discussion of exits, all of which work nicely with this. Additionally, once you are familiar with seeing rabbits, you can often identify a rabbit move in the opposite direction to clearly mark the end of the move and your exit point.
More Examples of The Rabbit Trade
No Trading Strategy Will Work Every Time
We have found this to be a very solid strategy for Forex trading; but remember, there is no such thing as a strategy that works every time. Please read our Risk Disclosure.
There are times when you may want to place a take profit, leave your stop set and simply walk away from your computer. You can do that with this strategy.
You may also choose to manage it more actively – the choice is yours. If you like active involvement with your trades, the one thing to watch for is what price does on the opposite side of the EMA. As long as it is on the side of your trade, you're good. Leave the trade alone.
If price crosses to the other side of the EMA, that in itself is not a reason to call the trade off and pull it prematurely. Just watch what it does. If it actually creates a reverse rabbit looking to run back the other way, that's a good sign to tighten your stop.