Talking Points:
- Scalpers should identify the trend
- Short term momentum pinpoints direction
- Based off of strength or weakness, traders can the plan entries
For scalpers and day traders it is imperative to master identifying the market trend and momentum. The idea is that traders will sell in a downtrend, and buy in an uptrend when the market has the strongest likelihood of continuing in a singular direction. Today we will examine how you can identify these two components on your charts, while identifying one of the markets strongest trends. Let’s get started!
Currently the EURGBP continues to be one of the markets strongest trending currency pairs. Taking a look at the 4Hour graph below, we can see the pair declining as much as 346 pips from its March high. Knowing this, scalpers should have a specific bias to sell the EURGBP. However, before traders consider new positions they should also review short term momentum to identify if price is retracing or moving with the trend.
Learn Forex –EURGBP 4Hour Trend
(Created using FXCM’s Marketscope 2.0 charts)
Market Momentum
Rarely does the market head in one singular direction all of the time. That is why it is imperative to check and see if short term momentum is moving with the longer term trend. For this we can move into our 30 minute chart and identify the current direction of price. If price is heading in the same direction, traders may then consider taking new scalping positions. To help with this analysis we can turn to a series of pricing blocks. Let’s look at an example.
Below we can see the current EURGBP 30 minute chart divided into two pricing blocks. Block 1 starts with last Wednesday and runs through Sunday June 8th. It should be noted that during this time frame, price indeed moved to a lower low, while declining as much as 59 pips. Knowing this, Block 2 can now be used to confirm the strength of the current downtrend. Block 2 does indeed form a lower low signaling the continuation of downward momentum. With both blocks pinpointing lower lows in the direction of the trend, traders can continue looking for fresh selling opportunities using the strategy of their choice.
Learn Forex –EURGBP Trading Blocks
(Created using FXCM’s Marketscope 2.0 charts)
Further Analysis
To continue our analysis, traders should notice price is currently trading under the Block 2 low at .8063. This means that price has already moved to a lower low, and the next pricing block on the graph will also be painted red pending the absence of a higher high.
Now that you are familiarized with identifying the trend and momentum for scalping, try your strategy with a FREE Forex Demo with FXCM. You can practice your blocking technique along with tracking changes in the market in real time!
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter @WEnglandFX.
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