The floor traders method is a Forex trading strategy designed to capture the continuation of a trend using a combination of two moving averages.
It was originally designed as a swing trading strategy but with a few tweaks, day trading the floor trader method can work very well depending on the currency you are trading.
The strategy is not time frame dependent but smaller time frames do have an amount of random noise that can give any trader a headache.
Let’s get this out of the way – I doubt real floor traders used this method to trade but it is a catchy name. I can’t see them in the trading pits with terminals and charts!
In order to fully understand the floor traders method, you need to know these 3 important concepts about this trading system:
- The floor traders method is a retracement-continuation trading method
- The floor traders method uses moving averages for trend identification and then trade in the direction of the trend
- The floor traders trading signal/trading trigger is a reversal pattern that forms after the retracement
What Are Price Retracements?
A retracement is a fundamental price action pattern that happens in any market which forms part of the ebb and flow of price in liquid markets.
In a downtrend, price is going down in a stair stepping pattern as price makes lower swing highs and lower swing lows. During this time, price will rally against this pattern and may form a short term up trend in price.
This is a rally but the general term is “retracement” and this is where resistance comes into play for support and resistance traders.
As long as price does not start putting in the opposing price pattern, we can trade this retracement with the floor trader trading method.
Price can also be in an uptrend making higher highs and higher lows. When price falls against the up trend, we say that price is retracing.
The floor trader trading method looks to take advantage of these moves that are counter to the trend in order to have a trade setup in a trending market.
To determine if the market is trending, which direction it is trending, and to give us trader action zones, we will use two moving averages.
Moving Averages For The Floor Trader Method
Let’s say that moving averages have no magical powers over the market. They are reference points and that is why price action also makes up this trading method.
We are going to use the following moving averages: 9 and 18 period exponential moving averages. You can also use 20 period, simple moving averages or even a 30 period weighted average to replace the 18.
The indicators are not what matters.
What matters is the price action that occurs during the retracement to an objective area that some may consider support and resistance. Moving averages do not provide physical roadblocks to price though so keep that in mind.
Trading Plans For Selling Or Buying Using This Trading Strategy
Decide on which time frame you are going to use. You can use a combination of holding times such as taking a day trade and using partial trading position as a swing trade.
- Day traders may choose a 15 minute chart
- Swing traders may use hourly, four hour or daily charts
- Position trader may decide on the weekly time frame for their trading setups
Test the following selling rules before you use any money:
- 9 EMA must have cross under the 18 EMA which gives us a downtrend. Ensure both moving averages are facing down or are in the process of turning.
- Ensure price trades for 3 candlesticks or bars below the moving averages
- Wait for price to retrace into the trader action zone (there are some rules I will cover below)
- Your trade is on the break of the candlestick that has reversed back in the direction of the trend
As with the selling rules, test these buying rules:
- 9 EMA must have cross over the 18 EMA which gives us an uptrend. Ensure both moving averages are facing up or are in the process of turning.
- Ensure price trades for 3 candlesticks or bars above the moving averages
- Wait for price to retrace into the trader action zone (there are some rules I will cover below)
- Your trade is on the break of the candlestick that has reversed back in the direction of the trend
Different Levels Of Trade Setups
The original floor traders method had some rules in regards to which trades you should take. They are labelled level 1, level 2 and level 3 trades.
Level 1 – Price enters the traders action zone and price touches the 18 EMA. This ensures you have a deep enough retracement in price.
Level 2 – Price retraces and while it pulls into the zone, it does not touch the deeper EMA.
Level 3 – These trades are only advised at the beginning of the trend. Price pulls back slightly and may or may not hit the 9 EMA
Ensure that your trading plan lays out which trades you will take and when.
Stop Loss And Profits
Some trades will suggest putting your stop loss just above or below the extreme candlestick.
They are horribly wrong.
Placing your stop in this location discounts that price may be forming a complex correction ( 2 stage retracement) and will be taking you out of your position at the moment you should be getting in!
I suggest you test using a multiple of ATR – average true range. This takes into account the current volatility of the market which the previous stop loss method does not. That type of suggestion is “textbook trading” and I can tell you with confidence that those traders make no money.
If the majority lose and the majority follow the same “advice”…..you get the picture.
Profit taking comes with the obvious that you won’t consistently get the full move. You will leave money on the table.
Consider scaling out at 1R ( 1 times your risk – risk 50 pips scale out at 50 pips). This gives you consistency and if you hit 1R, you can say that trade is working. Take some profits.
The remained could be trailed for larger gains or scaled out at multiples of R.
While some traders suggest look for reward/risk ratio of 3 to 1 – again – they are wrong. Price is going to move as it will and if you only aim for those targets, I assure you that you will lose money.
Why?
Markets don’t care about your ratio. Too many traders let profits run hoping for the 3R winner and end up watching paper profits erode during a retrace. The psychological mess this can produce is not worth it.
Should You Trade Floor Traders Strategy In Forex/Other Markets?
- This is a trend trading strategy that looks to capitalize on trend patterns. If you catch the turn of a major trend, you can make a ton of pips
- You are using an objective means to find trade locations (moving averages)
- You are using a price action trading method to get into your trading position
- You can trail your stop for larger gains after each retrace breaks higher or lower
Why You Should Ignore the Floor Traders Method
- In a sideways trending market, this Forex strategy tends to give a lot of false signals.
- In fast moving markets, the retracement happens not close to the EMA cross over and a big move has already happened prior to the sell or buy trade signal is given.
Experienced traders can use the moving averages as a sign to trade a breakout trading method once price begins to consolidate. I will cover that later.