Identifying Trade Setups
I think this first step in finding the strongest trends to trade is key for our long-term success. We only want to sell in a downtrend and buy in an uptrend to take advantage of the momentum of the market. We want to find the strongest trends on the daily chart and then move down to the 4-hour or hourly chart to find our entry and exit. On these two hourly charts below I am showing two of the more popular methods of finding your entry and stop loss level.
The first is just buying or selling the breakout. In a downtrend, we would sell on a move down through support and place our initial protective stop above resistance. We should then look for twice that risk in potential profit for our 1:2 risk:reward ratio. In an uptrend, we would buy on a move up through resistance and place our protective stop below support. We should than look for twice that risk in potential profit for our 1:2 risk:reward ratio. For those who are not comfortable with identifying support and resistance, which are really just highs and lows that are easily identified on the chart, the use of technical indicators can be of great help. It is important to remember that these tools were designed to help us better time our entry....nothing more....nothing less. I have a Slow Stochastics with values of 15,5,5 also plotted on each chart. The buy is after the Slow Stochastics (blue line) moves below 20 and then crosses up over the signal line (red line). We want to wait for the candle to close to make sure the crossover is confirmed and then place our protective sell stop below support. The sell is after the Slow Stochastics (blue line) moves above 80 line and then crosses down through the Signal Line (red line). Again wait for the candle to close to confirm the crossover and then place the protective buy stop above resistance. These events do mirror the breakouts but may be easier for some to see and may also offer a better entry price. But the key is starting with the strongest trends, because if we choose the right pair for our trade to begin with, everything else we do can fall right into place.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.