This is the second part of a 2 part series on trading strong trends. The first part was devoted to using a retracement strategy on the EURNZD which has been in a strong down trend for the past 11 months. Yesterday, prices did push into the resistance retracement zone. Therefore, retracement traders may be inclined to enter a position based on selling at resistance.
However, in our DailyFX Plus webinars, we frequently hear from traders who are apprehensive to place entries into the market because they fear the unknown price movements into the future. What if the strong trend ends?
That is a common emotion felt by many traders. Utilizing a break out strategy can help alleviate some of those pressures as you let the market dictate to you if it is ready to resume the trend.
A breakout is simply selling at support and buying at resistance. There are many different ways of determining support and resistance. Today, we will look at a simple method of identifying entry and exit points by using the Donchian Channel Indicator.
(Created using FXCM’s Marketscope 2.0 charts)
Here is a summary of the rules to the strategy.
- Filter your trades in the direction of the daily trend. We determined in Monday’s report that this trend is a strong one to the downside. Therefore, we will look to sell.
- Add the Donchian Channel Indicator to a 2 hour chart. Input value is 55 periods.
- Place an entry order to sell 1 pip below the lower Donchian channel.
- Place a stop loss order at the upper Donchian channel. Manually trail your stop loss so that it follows the upper channel.
- Exit the trade when price reaches the upper Donchian channel.
The benefit of using this strategy is that if the trend re-emerges to the down side, the market trips the entry and places you in the trade. By trading to a new low, the market is essentially stating it is ready to trade to levels not seen in quite a while. In the case of the EURNZD, it would be trading at all-time lows and therefore, furthers the case that it is in a strong trend.
Also, another benefit of a breakout strategy is that it can keep you out of some losing trades (“Breakouts: How to Stay Away from Some Losing Trades”). So there are several advantages to implementing a breakout type of strategy. The downside to the strategy is that you are entering a sell trade at a lower price and therefore, entering the trade late.
In closing, when you find yourself facing the fear of the unknown in a strong trend, consider implementing a breakout strategy. Inside DailyFX Plus LIVE CLASSROOM, we frequently discuss breakouts and how to trade them.
---Written by Jeremy Wagner, Lead Trading Instructor, DailyFX Education
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