2.FOREX STRATEGY: PIRANHA STRATEGY

Forex trading strategies: Piranha Strategy

The forex market spends most of its time either in a trend or in a range. The rapid-fire scalping strategy works best in a trend. The piranha strategy was developed to work when markets move in a range.

Let us get right into the world of the piranhas. Piranhas take small frequent bites off their prey until it is totally devoured. Although a single bite may not cause much harm, the frequency of the bites causes the attack to be  deadly.  In much  the  same way,  the  piranha  strategy was  developed to give scalpers ample opportunities to bite the market and chew off small profits each time.

This strategy is designed specifically for the GBP/USD currency pair, using the 5-minute (M5) time frame. On average, there are about 15 to 20 trading opportunities  for  the piranha strategy every day.

Time Frame

The piranha strategy works with  the 5-minute  (M5)  time  frame. This meansthat each candlestick on the chart represents 5 minutes of price movement.

Indicators

We use this  indicator for the piranha strategy:

One set of Bollinger Bands

1. Period 12, Shift 0.
2. Deviation 2 (default).

Currency Pairs

The  strategy  is  designed  for  the  cable,  which  is  the  nickname  for  the currency  pair GBP/USD.

Strategy Concept

Bollinger Bands are used  to  identify  the  trading band of  the GBP/USD. The Bands help us to mimic the nature of the piranhas by giving objective entries for long and short positions. (See Figure 6.7.)

Forex trading strategies: Piranha Strategy

Long  trades  are  taken when market  prices  touch  the  bottom  band; short trades are taken when market prices touch the upper band.

Piranhas  are  active  in  relatively  calm  waters,  such  as  rivers,  but  not in  the  rough  open  seas with  strong  currents and waves.  In much  the  same way, avoid  trading  this strategy at  times of major news  releases during  the U.S. and U.K. trading hours, as such environments reflect the rough open seas with strong currents and waves. We use the GBP/USD currency pair on the M5 time frame to illustrate both long and short trades.

Long Trade Setup

Here are the steps to execute a  long trade using the piranha strategy:

1. Wait for the market to touch the lower band of the Bollinger Bands.
2. Enter for a long when the market price touches the lower band of the

Bollinger Bands. (See Figure 6.8)

3. Set the stop loss at 10 pips below the entry price.
4. Set the profit target at 5 pips above the entry price. (See Figure 6.9)

Forex trading strategies: Piranha Strategy

Forex trading strategies: Piranha Strategy

From the long example in Figure 6.10:

Entry  price  =  1.5931

Stop  loss =  1.5921

Profit target = 1.5936

The risk for this trade is 10 pips, and the reward is 5 pips. The risk to reward ratio is 2:1, which yields us a 1.5% return if we take a 3% risk.

Forex trading strategies: Piranha Strategy

Short Trade Setup

Here are the steps to execute a short trade using the piranha strategy:

1. Wait for the market to touch the upper band of the Bollinger Bands.
2. Enter  for  a  short when  the market  touches  the  upper  band  of  the Bollinger Bands.  (See Figure 6.11.)

3. Set the stop loss at 10 pips above the entry price.
4. Set the profit target at 5 pips below the entry price. (See Figure 6.12.)

Forex trading strategies: Piranha Strategy

Forex trading strategies: Piranha Strategy

From the short example in Figure 6.13:

Entry  price  =  1.5941

Stop  loss =  1.5951

Profit target = 1.5936

The risk for this trade is 10 pips, and the reward is 5 pips. The risk to reward ratio is 2:1, which yields us a 1.5% return if we take a 3% risk.

Forex trading strategies: Piranha Strategy

Strategy Roundup

At  the beginning  of  this section,  I mentioned  that piranhas attack  their prey until it is totally devoured. In much the same way, once your trade hits a stop loss, the loss is telling you that there is nothing left of your prey and it’s time to look for a new one.

Hence, hitting a stop  loss  is a  telltale sign  that  the market  is no  longer trading in a band and it is starting to move into a trend. So how do you look for  the next prey?

The answer  is  to  look  for a  trade  that  is  in  the opposite direction of your stop-loss  trade. For example,  if you  took a  long trade  that resulted in a stop loss, look to short the GBP/USD at the next opportunity with the same  rules.

This is an important consideration and a neat trick for you to navigate yourself in trending markets. As this strategy was designed primarily for range trading, it fails badly when the market goes into a strong trend.