How to Trade Forex “Blind” Using Average Daily Range

by Justin Bennett  · 

April 10, 2015

by Justin Bennett  · 

April 10, 2015

by Justin Bennett  · 

April 10, 2015

Here’s a trick question for you – every trade setup we take here at Daily Price Action must include some form of confirming price action such as a pin bar or engulfing bar, correct?

Mostly correct.

There are times where I will trade without the need for any confirming price action. I’m not referring to a wedge pattern or even a double top. These are situations where I’m entering at market in the opposite direction of a sudden spike in price.

Don’t worry, it isn’t reckless like I probably made it sound just now. In fact, it’s one of the safer ways to trade Forex when properly executed.

Before we dive into the details I want to make one thing very clear. This is an advanced trading strategy, so if you are still finding your way with the more traditional price action strategies on this site, I recommend sticking with those for now.

With that disclaimer out of the way, let’s get to it.

What the Heck Is 'Blind' Trading?

Don’t worry, no blindfold is necessary for this style of trading. Trading blind simply means taking a trade without needing a pin bar to indicate that a key level is likely to hold. Or at least that’s my definition of it.

That may sound dangerous or even reckless, but I assure you it’s far from it.

Like everything we do here at Daily Price Action, there are certain confluence factors that must be present before we even think about putting capital at risk. Trading a blind setup is no different.

There are four factors that must be present in order to make a blind setup favorable. There is also one very simple technique that will help us minimize risk.

But more about that later. First, let’s get into the first factor of confluence that we need when trading blind.

1) The Daily Time Frame

As you may have guessed, a strategy that is based in part on the average daily range should be traded on the daily time frame.

Not only is this time frame needed for this particular strategy, the daily time frame as a whole is more predictable and consistent when trading any price action strategy. This is why everything we do here is based on the 4 hour and daily time frames.

See What Time Frame is Best for Trading Forex to find out why I like these two time frames so much.

2) It's All About the Level

I feel safe in saying that the effectiveness of price action trading is 90% due to the key level in focus and 10% due to other supporting factors. This is why every lesson on this site begins with the importance of identifying the key levels on your charts.

So what differentiates a “key” level versus a “normal” level?

While there is no hard definition, a key level is one that is obvious. It sticks out like a sore thumb and practically begs you to trade it.

The golden rule when looking for key levels is to stick to the higher time frames. While the 4-hour chart can be great for this exercise, the daily time frame is far more effective. So much more effective in fact, that it’s a requirement for finding areas where we can take blind entries.

See How to Properly Draw Support and Resistance Levels for detailed instruction on identifying key levels.

3) Momentum is Critical

Another common theme on this site is that of trading with the momentum. Having market momentum in your favor means flowing with the market rather than trying to fight against it. In terms of factors that will compliment your trading edge, trading with the momentum comes in at a close second behind trading from key levels.

What is it about trading with the momentum that is so advantageous?

Simply put, when you trade with the momentum you are trading in the same direction as the big boys (banks, hedge funds, etc.). And I don’t know about you, but I would much rather trade with them than attempt to trade against them.

It’s all about flowing with supply and demand so as to trade in the direction of least resistance. That’s how successful Forex traders do it.

4) Average Daily Range Explained

The idea behind Average Daily Range (ADR) is that each market has a unique range that it typically covers in a single day. For example, GBPAUD may move an average of 200 pips in a given day while EURGBP may only cover 60 pips on average. This of course, can change over time depending on factors like seasonality and volatility.

There is an indicator that measures ADR but it simply isn’t needed for what we do. It’s only going to clutter your chart, making it harder for you to identify favorable setups.

The easiest way to determine the average daily range is to simply view the daily candles over the past month or two. Measure a few candles with larger ranges and then measure a few with smaller ranges and take an average.

The idea here is not to get an exact measurement or average, only to get a general understanding of how far a market is likely to move in a given day. By doing this we can get an idea of what is probable and thus put the odds in our favor.

See A Unique Way to Use Average Range to Your Advantage for more about using the concepts of ADR.

Bringing it All Together

At this point you are probably wondering what the heck I’m talking about – thinking that I have completely lost it. But just wait until you see how the factors above compliment each other.

So far in this lesson, we have discussed four factors that, at first glance, don’t appear to have much in common. And from a traditional sense of how we trade price action (pin bar at key level) they probably don’t have much in common, especially when referring to ADR.

But we are about to change all of that by putting these four factors to work so you can see how it all comes together. The chart below shows a great example of a blind entry that could have been taken on the NZDUSD daily time frame.

NZDUSD blind short entry final

Now that we have an example in front of us, let’s walk through what is happening here. The very first thing to point out is that we are on the daily time frame. We also have two key levels in play in the form of support and resistance.

The reason why I chose the upper resistance level in the chart above is fairly self-explanatory, but you may be wondering why I chose the lower level. The following chart explains why I liked this level so much.

NZDUSD daily chart showing key level

The chart above shows a snapshot from several years prior to the setup forming. Notice how many touches there are during this period. There is also a large gap that contributed to the significance of this level.

While it isn’t always necessary to go back this far to find levels of interest, it can be advantageous especially if you are unsure about the significance of a level.

Now that we have our two levels defined and we’re on the daily time frame, let’s take a look at the other two factors at work.

NZDUSD downtrend on the daily time frame

The chart above doesn’t need much explaining. It shows the previous nine months of price action leading up to the setup. Although the pair had started to consolidate in the lower half of this decline, the momentum was still clearly bearish.

Now for the last (key) ingredient – analyzing the average daily range. To start, let’s take a look at the day on which the trade setup occurred.

NZDUSD average daily range of a candlestickNotice that the daily range of the setup candle was 173 pips. This is quite a large move for a pair like NZDUSD.

In order to qualify that statement, I’m going to point out the number of times the pair moved more than 173 pips in the previous 30 days to the setup forming.

NZDUSD daily range exceeding 173 pipsThat’s it. There was one instance over the previous 30 days where the pair’s daily range was greater than 173 pips.

So what’s the significance of this?

The significance is that as soon as NZDUSD had rallied 173 pips in a single day and hit the upper resistance level, there was a 3% chance that it would continue to move higher during the same session and a 97% chance that it would reverse or at least stall. Those are the kind of odds every trader dreams about.

Some may argue that the sample size wasn’t large enough to rely on those percentages. To that I say, keep it simple. We aren’t out to prove or disprove quantitative research here. Our only goal with this is to get a general idea of what is likely given the pair’s recent average daily range.

The Finished Product

For the perceptive bunch out there, you may have noticed the massive bullish candle that formed just days after this blind setup. The range on that particular day was 270 pips.

So how do we protect ourselves from that kind of a move against our position?

It’s pretty straight forward, really. Because the upper level in our setup is so well-defined, we would want to see selling pressure build immediately after the market tested the level. Of course in order to do this you need to be at your trading desk while the setup is unfolding.

Which brings me to an important point. Not only do you need to be present while the setup forms, you should also only enter at market. Using a pending order for a blind entry while you aren’t around can get you in a lot of trouble really fast.

The illustration below shows the possible scenarios.

How to trade Forex blindIn the first image you can see how we enter short at market as soon as the pair tests the key level. At that point we want to see a strong rejection in the form of selling pressure. As soon as we get that pressure, we immediately begin to think about moving to breakeven. That’s how we protect our capital in case the market decides to break the key level.

The third image shows the market surging past the key level. If this happens your best bet is to take a small loss and get out. There’s a chance that the market will close the day back below the level, but it could also continue to run. When in doubt, always err on the side of caution and protect your capital. 

The following chart shows how all of the pieces work together to form the blind setup on NZDUSD.

Taking a blind trade in the Forex market

In the chart above, we have the daily time frame with a key level in focus, bearish momentum and a market that has far exceeded its average daily range.

Notice that we are also moving to breakeven as soon as selling pressure builds on a retest of key resistance. All in all this setup produced 132 pips of profit with a maximum potential loss of around 30 pips. That’s 4.4R or 8.8% profit if risking 2%.

Not bad for a setup that took less than 48 hours to play out.

In Summary

Trading Forex blind without the need for confirming price action can be a great addition to your trading toolbox. But just like any strategy that we use, it has its rules that must be followed.

As profitable as this strategy can be when used properly, I have to reiterate the fact that it’s a more advanced trading strategy. This leads me to two important points if you’re thinking about using it.

  1. The strategy should only be used once you have mastered the traditional price action strategies such as the pin bar and inside bar
  2. As with any new trading strategy, the blind entry should be practiced using a demo account until you become proficient. Only then should it be used to trade real money.

Lastly, it’s imperative that you use this trading strategy sparingly. If you find that you are trading more than one setup per month, there’s a good chance that you aren’t being selective enough. This could lead you to trade subpar levels which tends to end badly. After all, it’s the strength of the level that makes this strategy so powerful.

Let’s finish up with some of the more important points to keep in mind as you begin practicing this strategy.

  • Trading Forex blind means to enter the market at a key level without the need for confirming price action
  • The four ingredients to a favorable blind setup are the daily time frame, momentum, a key level and an “overextended” market relative to ADR
  • The best levels to trade from are the obvious ones
  • Use momentum to your advantage by trading in the direction of least resistance
  • It’s important to see buying or selling pressure immediately following the test of the key level
  • Move your stop loss to breakeven as soon as possible to eliminate risk
  • If the market begins to surge past the level in focus, err on the side of caution and exit for a small loss

Your Turn

What do you think about trading Forex blind? Is it something that you plan on practicing?

Leave your questions or comments below and I will get back to you right away.

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