Forex Diversification Strategy For Metatrader 5

The Forex Diversification strategy for Metatrader 5 is designed primarily to protect the trading account from large drawdowns.

Our goal is to trade uncorrelated currency pairs, by the means of a diversification method.

This is done to help us avoid the emotional rollercoaster present in forex trading.

Although, drawdowns are bound to exist, the more diversified an account becomes, the less equity variation it will have.

We’ll stay off currency pairs that enjoy a certain degree of correlation, as this might lead to overtrading, and overtrading certainly leads to overexposure.

Trade Setup 

MetaTrader 5 Indicators: MACD.ex5 (Default Setting), dots.ex5 (Parameters Modified; Period=40)

Trade Style: Day trading, swing trading

Trading Sessions: London | New York | Tokyo

Currency Pairs: Majors, cross pairs, exotics

Platform: Metatrader 5 (MT5)

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Buy Trade Example: EURUSD, H1 Chart

Fig. 1.0

Buy Trade Example: AUDJPY, H1 Chart (Uncorrelated Currency Pair)

Fig. 1.1

Trading Strategy Rules For Buy and Sell Trades Explained

Buy Entry

Enter a buy trade if the following trading conditions are met:

  1. If the blue dots of the dots custom indicator stay aligned somewhat below the candlesticks as shown on Fig. 1.1, price is said to be pushed to the upside i.e. a trigger to go long on the designated currency pair.
  2. If the silver histograms of the MACD Metatrader 5 custom indicator break above the 0.00 horizontal level, the overall market sentiment is said to be bullish i.e. a trigger to go long on the selected forex pair.
  3. A buy trade should be initiated on the uncorrelated currency pair (AUDJPY), as a diversification strategy to increase our survival chances in the market. Just in case the position(s) moves against us, we’ll stay negative on Fig. 1.0, while ramping up profits on Fig. 1.1.

Watch the uncorrelated price direction within our entry/exit time stamp (red vertical lines) for our original pair (EURUSD) and the diversification currency pair (AUDJPY).

The EURUSD went bullish within the said period, while AUDJPY did the opposite.

The EURUSD and AUDJPY pairs are perfect for applying our principles of risk-balanced portfolio construction.

Suggested Stop Loss for Buy Entry: Place stop loss below medium-term support.

Suggested Exit Strategy/Take Profit for Buy Trade

Exit the buy trade if the following trading conditions are met:

  1. If the dots custom indicator displays a red dot on the activity chart while a bullish trend is running (see Fig. 1.0), price is said to be making a likely reversal, thus an exit or take profit is recommended.
  2. If the silver histograms of the MACD indicator readjust to form below the 0.00 horizontal level while a bullish trend is running, therefore an exit or take profit is duly advised.
  3. Concurrently exit or take profit on the AUDJPY pair as well.

Sell Entry

Open a sell trade if the following trading conditions are met:

  1. If the red dots of the dots forex indicator stay aligned fairly above the candlesticks as seen on Fig. 1.2, price is said to be dragged lower i.e. a trigger to go short on the currency pair of interest.
  2. If the silver histograms of the MACD forex indicator aligns below the 0.00 horizontal level, the general market sentiment is said to be bearish i.e. a trigger to go short on the selected currency pair.
  3. A sell trade should be initiated simultaneously on the uncorrelated currency pair (AUDJPY), as a diversification strategy to increase our survival odds in the market. Just in case the trade moves against us, we’ll stay red on Fig. 1.2, while going green on Fig. 1.3.

Suggested Stop Loss for Sell Entry: Place stop loss above medium-term resistance.

Suggested Exit Strategy/Take Profit for Sell Entry

Exit the sell trade if the following trading conditions are met:

  1. If the dots custom indicator displays a blue dot on the price chart during a bearish trend (refer to Fig. 1.2), price is said to be making a probable bullish reversal, thus an exit or take profit is highly advised.
  2. If the silver histograms of the MACD indicator readjust to form above the 0.00 horizontal level while a bearish trend is ongoing, it is a signal to exit or take profit forthwith.
  3. Concurrently exit or take profit on the AUDJPY pair as well.

Sell Trade Example: EURUSD, H1 Chart

Fig. 1.2

Sell Trade Example: AUDJPY, H1 Chart (Uncorrelated Currency Pair)

Fig. 1.3

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MT5 Trading Indicators Used For This Strategy

Designed by Gerald Appel in 1979, the MACD or Mac D, as it is fondly called is a common and multipurpose tool deployed in identifying and following strong trends, while also catching trend reversals.

The dots custom indicator is a Metatrader 5 custom indicator that resembles the parabolic SAR.

It is used to forecast market trends.

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