Very often, some of the best ideas are those we run into by accident or sheer luck. There is even a list of the greatest inventions of all time that happened by accident. I ran across the gambit exchanging model in Forex just the same way, and it has been very rewarding. Anyone who has ever played chess will recognize the term ‘gambit’ as a very popular chess model, which is where some of the exchanging model’s principles have been generated. The idea was first published in the magazine Technical Analysis of Stocks & Commodities by Walter T. Downs. He is both a chess player and a mathematician, and these are where the gambit exchanging model emerges. Therefore, let us just get into it. (Learn about: The Elliot wave theory and how to use it)
More about the gambit exchanging style in Forex
In chess, a gambit is a model of sacrificing a piece in order to gain an advantage over your opponent. While at first it may seem counterintuitive, it actually ends up helping a player. The idea is to minimize risk, use the least effort and in the end increase the reward potential. To do so, the exchanging model is intended to catch market corrections and make use of the existing trend. As you know, there are many false breakouts that occur around S/R levels, but once a trend has been set it more often than not keeps going in the same direction. In so doing, the risk is minimized while using less effort without limiting the potential gains from a exchange. (All you need when: Looking for market correction)
The main principles of the exchanging model can be summarized into three:
- market action discounts everything
- prices move in trends
- history will repeat itself
With these three basic principles, the gambit model is supposed to cover all markets. As already mentioned, the exchanging model was initially meant for the stock markets, but the same principles should hold for all financial markets. (What is Gartley and how to exchange with it?)
Requirements for the gambit forex exchanging model
I hope that got your appetite for the gambit model. What’s even better is the simplicity that the exchanging model requires. The first thing to keep in mind is to use the daily timeframe while exchanging. The reason for using a daily timeframe is once again to reduce risk. Lower timeframes will often not have well defined exchange patterns due to erratic behaviour in the markets throughout the day. Therefore, the daily timeframe reduces risk by providing only the most reliable exchange patterns and avoiding fake trends and reversals. It is still possible to use a slightly lower timeframe like the 4-hour or 1-hour charts, although you would have to employ stricter risk management strategies. (Tips about: Risk-management on Forex)
The next requirement is to use the 30-day simple moving average (SMA). In financial markets, the 30-day SMA is among the most powerful indicators because a lot of traders use it. As a result, it becomes a self-fulfilling prophecy because a lot of traders rely on the signals generated by this SMA. According to the principles of the gambit model, this increases efficiency as you won’t have to use too many indicators when one can do the job. (These are the: 10 steps of successful traders)
That’s it! That is all you will need for this exchanging model.
Exchanging with the gambit model
With these basic principles, you’re now ready to get into the markets, so let’s define the entry and exit points in an actual market situation. The image below represents actual Forex charts set to the EUR/USD pair on the daily timeframe. The green rectangles represent the possible opportunities to go long using the gambit exchanging model.
In order to go long in the markets, you need to spot a bullish correction once the markets are trending upwards. To spot such a correction, wait for two lower lows to form with the candles followed by a bar that closes above the midpoint of the previous candlestick. Meanwhile, all of these should happen while the candles are exchanging above the 30-day SMA. Within all the coloured rectangles above, you will notice that all these conditions had been met and that the markets kept trending upwards. (This is the: Forex model on based on MAs)
Once you are in the exchange, searching for an exit point will also require some rules. The first sign of an exit position occurs when a bar is formed that has a range greater than the previous three candles. Moreover, this bar is supposed to close within the top 10% of its length. In the image above, such a point occurred at the region marked with a red rectangle where there was a long bullish bar that was longer than the three previous candles and had a close very near the top. However, to exit the exchange, we shall need another signal as this previous signal is just a warning of a possible trend reversal. The long bar indicates a lot of bullish momentum that could indicate the bulls are exhausted, or the bears are trying to stop out the bulls. (How to earn on corrective waves)
The actual exit signal occurs when a bar forms that has a close lower than the previous bar. This indicates that the bears are now in control and are forming lower lows in the markets. This signal occurred in the area marked by a red arrow pointing downwards. (The: Best technical indicators and how to use them)
All the above represents exchanging markets in an uptrend, but the rules can be reversed in a downtrend. That means:
- you should enter the markets when there are two higher highs and the third bar closes below the midpoint of the previous bar
- prices should be below the 30-day SMA
- look for exit signs when a bar forms with greater range than the three previous candles and has a close around the 10% level at the bottom
- exit when a bar forms with a higher closing price than the previous bar
Such a scenario can be observed in the image above within the region marked with red vertical lines. All the above conditions have been met starting from the point the markets break below the 30-day SMA. Two candles form that have higher highs, and these are followed by a third bar that closes way below the midpoint of the second bar. That should have been the signal to sell because it shows the slight uptrend was just a market correction instead of a trend reversal. (Using trendlines in your Forex exchanging model)
All through the downtrend, there were signs of the trend reversing, but none showed the complete list of requirements. In the first incident marked with a red rectangle, there was a tall bar that had a greater range than the previous ones. It even had a close around the lower 10% of its body. However, there was no bar formed thereafter that closed above it, showing that the fourth rule from the aforementioned list was not met. This exchanging model requires that all rules be met, both when entering and exiting trades. It was only in the final section of the trend that the fourth rule was met, and when you should have exited the markets. (Learn more about the: Forex Intraday Market Flow Model)
Additional rules for the gambit model
There are some other rules that you need to heed when using this exchange model, but these are just meant to enhance the efficiency of your exchanging.
- make only one exchange at a time. There is often the temptation to take multiple trades just because you see many opportunities, but that is not the gambit way. Remember, you’re supposed to minimize risk, and taking many trades increases your chances of being stopped out if the exchange goes against you (This is: How to protect yourself from margin call)
- reduce the chances of risk by moving the stop loss on any exchange that has been open for two days. Since you’re using the daily timeframe, a fake breakout should occur within two days. By moving your stop loss to the breakeven point, you avoid any losses on your account (Hedging in the Forex markets)
- exit any exchange that has been active for 16 consecutive exchanging days in the Forex exchanging platforms
Risk management should always be observed and a stop loss is always recommended. In a bullish gambit, your stop loss should be right below the entry bar in case the uptrend turns out to be fake. Meanwhile, place a stop loss order just above the entry bar in a bearish gambit for the same reason.