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+
As 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.
