The Memory of Price strategy is a Forex trading strategy often used by advanced traders with a good understanding of the forex market. These traders will use the double tops or double bottoms to place their protective stop loss just above or below psychological levels as retail traders are predictable in the placing of stops above or below them.
Professional traders recognise that double tops and double bottoms will attract this kind of behaviour from retail traders 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 in a Stop Hunt strategy, 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 Tops Pattern
Double top patterns form in an uptrend and usually signal an upcoming reversal in the market. The price drops from the peak of two tops due to the resistance being met. Because a double top is an easily-recognised and clear pattern, it has a high level of failure, and thus why the Memory of Price strategy emerged.
Double Bottoms Pattern
The double bottom pattern is similar to the double top except in the opposite direction. The double bottom pattern forms in a downtrend and predicts a reversal pattern which means the price will go against the existing trend and move in the opposite direction. At this point, the price then rallies from the lows of two bottoms due to the resistance being met.
Rules of the Memory of Price Strategy
This strategy works best on an intraday basis, as it provides more trading opportunities than on longer time frames where a perfect double top/bottom is rarely seen. 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;
Memory of Price Examples
Below are two examples of how to trade on Memory of Price principles. The first is a short position on USD/CAD, and the second is a long position on AUD/USD. Both examples show how the market retests the support and resistance levels and then reverses.
Short Trade Example
The Figure 3 short trade example on USD/CAD closed as a profitable trade. Using the insights provided by the Memory of Price strategy there would have been a 60 pips profit. Even though the SL was very close to being hit, it demonstrates the power of trading in the direction of the primary trend.
Long Trade Example
Figure 4 is a representation of a long trade example and how to apply the Memory of Price strategy correctly. This time, we have a long opportunity on AUD/USD which, after establishing a double top at 0.7628 and stops have been cleared, there is a subsequent rally after the retest of the broken double top providing a great long trading opportunity.
The Memory of Price strategy works because it’s a trend trading strategy, unlike more conventional double tops/bottoms strategies that require traders to take a position against the trend. This variation of the strategy ensures trading in the direction of the trend with a favourable risk to reward ratio, which means more winning trades and less losing trades overall.