There are 2 common ways a trader can enter into strong trends.
- Retracement Strategy
- Breakout Strategy
This is the first part of a 2 part article that will explain how traders can enter and exit a strong trend using a retracement strategy. (The next article will explain how traders can enter and exit on a breakout type of strategy.)
The EURNZD is one of the strongest trends for the past 11 months. The pair has moved about 2500 pips since mid March 2011. This 20% move in foreign exchange is a huge move. As the sovereign debt problems in Europe continue, the EUR reaches towards all time lows against the NZD.
This week is a big week for the Euro which may create some additional volatility in the currency. Greece is in the midst of deciding whether to accept bailout funds in return for deeper austerity measures. The announcement of the decision was originally tossed around for today, but is now being pushed back by Greece.
The market has priced in some type of haircut on Greek debt. So acceptance of the bailout funds likely will have the Euro rally as that means there is a greater likelihood of debt obligations being met. However, this delay in the announcement continues to create uncertainty which markets generally don’t like. Since the USD is sensitive to the risk on versus risk off trades, look to trade a cross pair such as the EURNZD which strips out the USD exposure. As a result, we can match a relatively weak currency (EUR) against a relatively strong currency (NZD). We will look to sell the pair as it is in a strong down trend.
As we can see above, the EURNZD is near trend line resistance (black line). Additionally, we have a pink box defined by the two purple lines. These 2 lines (purple lines) were drawn based on former horizontal support levels. When the purple lines were originally broken, it created new resistance levels.
If you employ a retracement strategy, look for prices to bounce up and retrace into the pink box. The pink box is bound by 1.5873 on the top side and 1.5750 on the bottom side. You can confirm the trade with an oscillator (like MACD, RSI, Stochastic,CCI) so if it curls down from over bought levels, then enter the trade.
Place a stop just above the swing high. In this case, I would like to see prices turn down before reaching the high of the pink box. Therefore, my stop loss would be near 1.5890.
Since the pair is trading at all time lows, it has room to run if the trend continues. The bottom side of the daily channel is near 1.5000. So I would look for significant support to develop near 1.5000. Since this support level is several hundred pips away, I would move my stop loss to break even if prices trade below 1.5650.
Next: Entering a strong trend using a breakout strategy
---Written by Jeremy Wagner, Lead Trading Instructor, DailyFX Education
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