Forex: The Memory Of Price Strategy

Is there anything more annoying than getting stopped out of a short trade on the absolute top tick of the move or being taken out of a long trade on the lowest possible bottom tick, only to have prices reverse and then ultimately move in your direction for profit? Anyone who has ever traded currencies has experienced that unpleasant reality more than once. The memory of price setup is specifically designed to take advantage of these spike moves in currencies by carefully scaling into the trade in anticipation of a reversal. Read on to find out how to use it in your next trade.

The Strategy
The memory of price setup should appeal to traders who despise taking frequent stops and like to bank consistent, small profits. However, anyone who trades this setup must understand that while it misses infrequently, when it does miss, the losses can be very large. Therefore, it is absolutely critical to honor the stops in this setup because when it fails it can morph into a relentless runaway move that could blow up your entire account if you continue to fade it. (For background reading, see Place Forex Orders Properly.)

This setup rests on the assumption that the support and resistance points of double tops and double bottoms exert an influence on price action even after they are broken. They act almost like magnetic fields, attracting price action back to those points after the majority of the stops have been cleared. The thesis behind this setup is that it takes an enormous amount of buying power to exceed the value of the prior range of the double top breakout, and vice versa for the double bottom breakdown. In the case of a double top, for example, breaking above a previous top requires that buyers not only expend capital and power to overcome the topside resistance, but also retain enough additional momentum to fuel the rally further. By that time, much of the momentum has been expended on the challenge to the double top, and it is unlikely that we will see a move of the same amplitude as the one that created the first top. (To learn more, read Trading Double Tops and Double Bottoms.)

Determining Risk
We use a symmetrical approach to determine risk. Using our double-top example, we measure the amplitude of the retrace in the double top and then add that value to the swing high to create our zone of resistance.

Figure 1: The memory of price, EUR/USD

Source: FXtrek Intellichart

In Figure 1 the price pushes higher above the initial swing high of 1.2060, but cannot extend the up move by the full amplitude of the initial retracement. We see this happen quite often on the hourly charts as well as daily charts. On the dailies, the setup will suffer fewer failures because the range extensions will be much larger, but it will also generate larger losses. Therefore, traders must weigh the advantages and disadvantages of each approach and adapt their risk parameters accordingly.

Rules for the Short Trade

Look for an established uptrend that is making consistently higher lows.
Note when this up-move makes a retrace on the daily or hourly charts.
Make sure that this retrace is at least 38.2% of the original move.
Enter short half the position (position No.1) when the price rallies to the swing high, making a double top.
Measure the amplitude of the retrace segment.
Add the value of the amplitude to the swing high and make that your ultimate stop.
Target 50% of the retrace segment as your profit. So, if the retrace segment is 100, target 50 points as your profit.
If the position moves against you, add the second half of the position (position No. 2) at the 50% point between the swing high and the ultimate stop.
Keep the stop on both units at the ultimate stop value.
If position No.2 moves back to the entry price of position No.1, take profit on position No.2, move the stop to breakeven and continue holding position No.1 for the initial target.