STRATEGY 11: THE PENDULUM In the previous strategy, we explored a technique that helps us to anticipate a range with the help of the stochastic indicator and also trade it in the early stages of formation. The pendulum strategy comes to the rescue in the later stages of a range formation. In other words, we can still trade the range after it has been formed. You don t need any indicators for this strategy, and you can use it to trade a range for as long as the market is swinging back and forth within the range like a pendulum. Time Frame The pendulum method works with the hourly (H1) or 4-hourly (H4) chart. This means that each candle on the chart represents 1 hour or 4 hours of price movement respectively. Indicators No indicators are used for this strategy. Currency Pairs This strategy is suitable for all currency pairs listed on the broker s platform, especially the seven major currency pairs of: EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD Strategy Concept The pendulum in motion swings back and forth because the force of gravity is pulling it back to the vertical position every time it swings away from it. The pendulum reaches an optimal height before it starts to fall back. However, if the swinging force is too great, the string holding the pendulum will snap, and the pendulum will fly off.
The ranging market acts in a similar fashion to the pendulum. Every time prices pull away from the midpoint of the range toward the support or resistance, market forces will pull it back towards the mid-point of the range. However, when the market gathers enough momentum, prices will break the support or resistance of the range and move into a trend. In this strategy, we wait for the pendulum to reach its optimal height and fall before we enter the trade. We do this by executing a trade only at the 10% mark after prices turn back from either support or resistance. The first target is set at the 50% mark of the range, and the second target is set at the 90% mark of the range. Long Trade Setup We use the AUD/USD on the H4 time frame to illustrate a long trade. Here are the steps to execute the pendulum strategy for long: 1. Identify the resistance and support. Take note when the price goes back to the support again. (See Figure 8.35.) 2. In this example, the range is 269 pips; 10% of the range is 27 pips. Enter when the price bounces 27 pips above the support (1.0101). (See Figure 8.36.) 3. The first and second profit targets are 50% and 90% of the range respectively, which are 135 pips and 243 pips above the support (1.0101). 4. Use risk to reward ratio of 1:1 to set the stop loss. (See Figure 8.37.) FIGURE 8.35 Identify Resistance and Support
FIGURE 8.36 Enter When Price Bounces 27 Pips Above Support FIGURE 8.37 Set Stop Loss and Profit Targets From the long example in Figure 8.38: Entry price = 1.0128 Stop loss = 1.0020 Profit target 1 = 1.0236 Profit target 2 = 1.0344
FIGURE 8.38 Trade Hits Profit Target The risk for this trade is 108 pips, and the reward is 216 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk. Short Trade Setup We use the GBP/USD on the H4 time frame to illustrate a short trade. Here are the steps to execute the pendulum strategy for short: 1. Identify the resistance and support. Take note when price goes back to the resistance again. (See Figure 8.39.) 2. In this example, the range is 205 pips; 10% of the range is 21 pips. Enter when the price bounces 21 pips below the resistance (1.6117). (See Figure 8.40.) 3. The first and second profit targets are 50% and 90% of the range respectively, which are 103 pips and 185 pips below the resistance (1.6117). 4. Use risk to reward ratio of 1:1 to set the stop loss. (See Figure 8.41.) From the long example in Figure 8.42: Entry price = 1.6096 Stop loss = 1.6178 Profit target 1 = 1.6014 Profit target 2 = 1.5932
FIGURE 8.39 Identify Resistance and Support FIGURE 8.40 Enter When Price Bounces 21 Pips Below Resistance The risk for this trade is 82 pips, and the reward is 164 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
FIGURE 8.41 Set Stop Loss and Profit Targets FIGURE 8.42 Trade Hits Profit Targets Strategy Roundup This strategy is applicable as long as the market is swinging back and forth in a range. The power ranger strategy and the pendulum strategy work perfectly together. You can use the power ranger strategy to identify and trade the range in its early stage of formation, then apply the pendulum strategy to trade the later portion of the range.