The Floor Trader Strategy

In this article I will be discussing a very basic strategy that was used as one of my first strategies when I got into this business, and still among my preferred ones. Frankly speaking, it took quite a large amount of time just to get the idea of this strategy, mostly because of the lack of my experience back then. In this article the strategy will be discussed in layman’s terms to be much easier to understand than its original form in which I think the terms and phrasing used by the developer are pretty complicated. You can view the original form of this strategy for Forex here in this link: http://www.trading-naked.com/FloorTraderMethod.htm. This strategy is a trend-following one, and that’s why I like it. In order to recognize the trend, 2 Exponential Moving Averages with periods of 9 and 18 will be utilized. The trend determination will be done with the positioning and angle of the 2 Moving Averages, and the pattern created during the retracement will be utilized to perform market entry. Below is the description of this strategy in details with all its principles.

How to use the Floor Trader Strategy

Before going into further details, we should learn to understand the definition of retracement in this strategy. A retracement can be explained as a slight increase in prices during a downtrend and a slight decline during an uptrend. Retracements are counter-trend movements. When they are finished, the trend usually gets back to its track. The retracements play an important role in our strategy here because the entry patterns take place during the retracement. In an uptrend, the trigger of our entry is the first candle to reach above the high of its previous candle, determining the retracement end and the uptrend continuation; and in a downtrend, vice versa. Look at the following picture:

The Floor Trader Strategy 01

The best entries are those found after a retracement containing 2-5 candles. The rules of entries are as follows. They may seem difficult to understand at first, but in the end, they will turn out very simple and logical.

ENTRIES:

An Uptrend is recognized by:

1. The 18-EMA line is below the 9-EMA line

2. Prices trading above both EMAs

3. The slope of either or both of the EMAs is upwards. (At times the 9 EMA will be below the 18, but curving upward and about to cross it, which is acceptable)

Number 1 above is the primary identifier; prices must first trade above both 9 EMA and 18 EMAlines – subject to the two conditions as follows:

1. Price is “significantly” distant above the lines (before the retracement to cross the EMA lines), or

2.Price is above the lines for 3 candles minimum.

Entry signals have three types: Level 1 (L1), Level 2 (L2) and Level 3 (L3). L1 is the strongest signal. The next is L2. L3 is the weakest signal and should be traded with great care.

The LEVEL 1 Call signal(long):

After identifying a decline retracement and an uptrend is determined, look out for:

  • At least one candle touches the 18-EMA line (or goes slightly below it), and
  • Price to decline and enter the area between the 9 and 18 EMA lines
  • When the 18-EMA has been touched, find a candle that reaches above the high of its previous candle by at least one pip. (Trigger candle)

The LEVEL 2 Call signal (long): (akin to the L1 signal and may appear prior to it)

After identifying a decline retracement and an uptrend is determined, look out for:

  • Price to decline and enter the area between the 9 and 18 EMA lines
  • A Call signal Trigger candle appears before the 18-EMA is touched. The market starts to move up without touching the 18-EMA (which is the normal trigger for the L1signal).

The LEVEL 3 signal (long):

After identifying a decline retracement and an uptrend is determined, look out for:

  • Price to decline but it DOES NOT enter the area between the 9 and 18 EMA lines, or price merely touches the 9-EMA line.
  • A Call signal Trigger candle appears above the 9-EMA. The market starts to  move up above both EMA lines (or merely slightly touches the 9-EMA line) following a minor retracement.

An L3 Call signal is only taken if it is the first signal in a new uptrend.

The Floor Trader Strategy 02

Qualified L3 Call signals arepretty rare. The most common ones are created when the market performance is at new highs in a “runaway” rally, or following a strong consolidation.

Continuation Long Signals:

The first Call signal in the mentioned new uptrend should be closely watched irrespective of its condition as taken or not. If the trade comes to a halt or gets back to the breakeven point, refrain from acting on any additional long signal in the present uptrend. In this strategy, it is also highly advised that additional long signals not be taken unless they take place at significant distance above the first one. Generally, the first signals in a new trend provide the best trades. This means the top rate of success comes alongside a signal provided in the first retracement following an EMA crossover. And all of the rules must be reversed in the case of a Put signal.

The conditions and rules are quite complicated to grab, so let’s simplify them with illustrations as follows:

The Floor Trader Strategy 03

Disadvantages

The first and most obvious bad thing about this strategy is the complicated set of confusing rules. It is a seriously big challenge for beginners and not many can keep their spirit with it. I was in that situation, and I did think of quitting every now and then. However, my decision was that I had to keep following the strategy and it was not very long before I could detect signals better and the need to regularly check the rule sheet went away. Another big disadvantage of this strategy lies in its inability to work well with ranging periods, which has been considered a weakness of trending strategies. However, there are other tools (such as ADX) designed for better trend identification that can help you avoid such problem. One more note: refrain from any trading if the two Moving Averages stay flat.

Advantages

The basis of this strategy is amongst the strongest and most popular trading principles: the trend. Also, the best place to enter the trend is just after a retracement. As drawn from real practice, the retracement provides precise signals that take place very frequently, thus satisfying even busy investors who trade a lot. During a trend, traders can take multiple trades to maximize their profits, and if they take all the signals, the trading gains will be so huge.

Conclusion

This strategy, in my subjective opinion, works very effectively and remains my preferred strategy. Perhaps the EMA’s need some adjustments and the ranging markets could be avoided by using some other filters. If you want to check whether or not this Floor Trader Strategy is cut out for you, the best way to check is to use a demo account and test it and get used to it. You should make up your mind whether or not to use this strategy on a live account only after having done carefully forward testing and back testing. The rules may seem complicated and difficult to follow, but be confident and keep up your work, I am sure it will pay off.

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Author: David Wilson