The Memory of Price strategy in Forex trading refers to strategically predicting trends. This is centred around the belief that price levels have a “memory.” Forex traders use this strategy to focus on double tops and double bottoms to place their protective orders just above or below these levels.
A memory of price strategy is an ideal approach for Forex traders who do not want to take frequent stops in their trading journey. Photo: Joshua Mayo/Unsplash
How a Memory of Price Strategy Works
A Memory of Price strategy capitalises on the behaviour of retail traders who set their stop-loss orders near these patterns, which can be targeted by larger traders looking to trigger a stop hunt order. After these levels are broken and stops are cleared, the price is expected to reverse and retest these support and resistance levels. The Memory of Price strategy is trend-oriented, ensuring trades align with the prevailing trend for a favourable risk-to-reward ratio, leading to more successful trades overall. This strategy works best on an intraday basis, providing numerous trading opportunities compared to longer time frames where perfect double top/bottom patterns are less common.
What are the Key Principles of Memory of Price Strategy?
The following points are essential parts of any Memory of Price strategy that forms part of Forex trading:
Double Tops and Double Bottoms
This strategy relies on the identification of double tops and double bottoms in the market, which act as resistance and support levels, respectively. These patterns are formed when the price reaches a peak or a trough twice, indicating a potential reversal in the market.
Support and Resistance Levels
A Memory of Price strategy focuses on support and resistance levels to determine future price movements. When these levels are broken, this strategy suggests that it will take a significant amount of buying or selling pressure to exceed the previous range of the double top or double bottom, respectively.
Risk-Reward Ratio
A Memory of Price strategy has a negative risk-reward ratio. This means that the potential loss is greater than the potential gain. Traders using this strategy need to be aware of the risks involved and manage their positions accordingly.
Trend Trading
This trend-oriented approach ensures trades align with the leading trend for a favourable risk-to-reward ratio. This can potentially lead to more successful trades.
Scaling In
This approach involves scaling into the trade, which means entering the market gradually as the price approaches the support or resistance level. This allows traders to take advantage of the spike moves in currencies and manage risk more effectively.
Time Frames
A time frames strategy works best on intraday and shorter time frames. It provides more trading opportunities compared to longer periods where perfect double top/bottom patterns are less common.
Conclusion
A memory of price strategy is an ideal approach for Forex traders who do not want to take frequent stops in their trading journey. Forex traders who are comfortable with making frequent small profits could be inclined to use a memory of price strategy, which can assist with decision-making and a more focused trading approach.