The “Memory of Price” strategy is a Forex strategy often used by professional Forex traders who have a good understanding of more detailed elements of the forex market. These traders will use the double tops or double bottoms to place their protective stop loss just above or below these psychological levels – plenty of stops will reside above or below these levels.
Professional traders recognize that double tops and double bottoms will attract this kind of behavior from the retail crowd who usually use these predictable levels to place their stops. The large traders who need liquidity to fill their big orders will try to run those stops which is why price often breaks above or below the double tops or bottoms.
The Memory of Price Strategy
The memory of price strategy implies that after the double tops – (which act as resistance) and the double bottoms – (which act as support) are broken and the stops are cleared, the price will reverse and retest these support and resistance levels. The theory behind this strategy says that it will require an excessive amount of buying or selling pressure for the market to consume all the stops, and to travel beyond the range of the double top breakout and double bottom breakdown.
The price does have a memory, because of the interaction between the buyers and sellers combined with the double tops and double bottoms, sets up a “fight” between these buyers and sellers. In the case of a double bottom, after we have the breakdown in price and the stops are cleared, there will be some traders who will hold their long position taken from the double bottom pattern, hoping they will get a chance to cover their position at breakeven. This leads to a reaction after the retest of the broken double bottom. So, traders who went long taken from the double bottom pattern, will need to cover their position with a sell order which will add pressure to the downside momentum.
Double Top Pattern
Double tops form in an uptrend and usually signals a reversal in the market. The price drops from the peak of two tops due to the resistance being present. Because it’s a very clear pattern that can be easily recognized by retail traders, it has a high level of failure. This is why the Memory of Price strategy emerged.
The double bottom is similar to the double top except in the other direction and is also considered to be a reversal pattern which means it’s going to go in the opposite direction from which it came. The double bottom forms in a downtrend and usually signals a reversal in the market. The price then rallies from the lows of two bottoms due to the resistance being present.
Rules of the Memory of Price Strategy
Speaking from my own experience this strategy works best on an intraday basis as it will provide you with more trading opportunities because, on longer time frames, you’ll rarely see a perfect double top/bottom. In this regard, the preferred time frame for this strategy is the 15-minute TF. Here are the rules of the strategy:
- Currency Pairs: Any;
- Time Frame: 15-Minute;
- Stop Loss: 30 Pips;
- Take Profit: 60 pips;
- Buy Signal: Look for a double top formation pattern; wait for the breakout to the upside and be prepared to enter long either at the previous double top level or at the open of the breakout candle;
- Sell Signal: Look for a double bottom formation pattern; wait for the breakdown and be prepared to enter short either at the previous double bottom level or at the open of the breakout candle;
We use a static stop loss and take profit levels because we want to make sure we have a symmetrical risk to reward ratio.
Short Trade Example
In Figure 3 we have a short trade example on USD/CAD which ended to be a profitable trade. Using the insights provided by the Memory of Price strategy one would have managed to capture a nice 60 pips profit. Even though our SL was very close to be hit, you can see the power of trading in the direction of the primary trend.
Long Trade Example
In Figure 4 we have a representation of a long trade example and how to correctly apply the Memory of Price strategy. This time, we have a long opportunity on AUD/USD which after establishing a double top at 0.7628 and stops have been cleared, we notice the subsequent rally after the retest of the broken double top as a great long trading opportunity.
The reason why the Memory of Price strategy works is because it’s a trend trading strategy, unlike the conventional strategies around the double tops/bottoms that requires you to take a position against the trend. This variation of the strategy makes sure we are trading in the direction of the trend and we have a positive risk to reward ratio which means that we’re always going to win more on our winning trades and lose less on our losing trades.