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Trending Days in Currency Trading

Over the past two days I’ve been explaining “trading days” in the foreign currency exchange. Today I’m going to explain the procedure for attempting currency trading on “trending days.”

Trending days, in contrast, are characterized by the following external events and conditions:

1. A fundamental announcement is released during the session.
2. Price movement is aggressive (fast).
3. Market movement (volatility) during the session creates large trading ranges of 120 to 300 pips.
4. Prices don’t close near the session’s opening price.
5. Price movement during the session creates an uptrend or a downtrend.

Currency Trading on a Trending Day

If you plan to day trade currencies on the trending day, cancel and replace on a 30-minute forex chart. There are two currency trading strategies on a trending day: the first is to trade the straddle (when the session’s fundamental announcement is preceded by consolidation).

The second is to trade a convergence (when the session’s fundamental announcement is not preceded by consolidation). Refer to our earlier discussion of trading the straddle for the why’s and how’s of that type of trade.

Trading a convergence on a trending day is similar to trading a convergence on a trading day (except that you will not see the formation of a bell curve on a trending day).

Begin at the anticipated release of the fundamental announcement – that’s where you will expect that market to break into a downtrend or an uptrend. Look for consolidation to make sure that you should not be trading a straddle – if there is no consolidation, you’ll trade the convergence. Draw your inner, outer, and long-term outer trendlines.

Next set your Fibonacci lines based on the latest price swing. Based on your trendlines and your Fibonacci numbers, do you see a possible convergence? If equity management allows, trade the convergence in the direction of the trend.

If the fundamental announcement reverses the current trend, your losses will be confined to the distance between your entry and  stop loss order. In addition to using the trendline and Fibonacci numbers to set up your trade, you can also use your technical indicators (MA crossover, MACD, etc.) to help you anticipate the market’s movement.

Rules for Currency Trading on a Trending Day

The general rules for currency trading a convergence on a trending day are:

1. Locate the point at which the fundamental announcement will be released. Plan to create your market order 15 minutes prior to the fundamental announcement.
2. If there is a fundamental announcement planned for the trading session, but the market is not in consolidation prior to that announcement, you’ll trade a convergence (if the market is in consolidation prior to the announcement, you’ll trade a straddle, described earlier).
3. Find and draw all your trendlines (inner, outer, and long-term outer). This will help you determine if the market is trending up or down, or if a trendline has been broken.
4. Locate the price at which you anticipate the market will bounce (at the trendline and/or one of the Fibonacci numbers). If the anticipated trendline bounce and Fibonacci bounce are located at the same price, you will trade a convergence. 15 minutes before the fundamental announcement is released, place an order to buy or sell the convergence in the direction of the trend.
5. Find the last level of support or resistance to determine where to place your stop loss order.
6. Practice sound equity management. If you can’t afford the potential loss (the loss you would incur should the market reach your stop loss order), don’t make the trade.
7. Create a trading plan. Trade the plan.

By understanding the market’s likely movement on a currency trading day and on a trending day, you can prepare yourself to make more solid, predictable trades.

The principles you use to make your trades are largely the same no matter what kind of session you’re in (e.g. trading a trendline bounce, Fibonacci bounce, a convergence, a candle formation, or technical indicator) but having an idea of whether the market is going to move slowly, closing near the open or move aggressively downward or upward can help you immensely in making consistently profitable trades.

Posted in Fundamental Announcements

Currency Trading Price Consolidation Breakouts

Every consolidation in forex charts will eventually end in a breakout in currency trading (usually wild and fun!)

When currency traders identify a price consolidation, they usually anticipate a breakout to follow. A breakout occurs when prices break out of consolidation, penetrating the support (downward breakout) or resistance (upward breakout) lines.

To profit from a consolidation and breakout, you will need to make a straddle trade. Because you cannot know when currency trading whether the market will break out of consolidation downward or break out upward, you need to prepare for either (thus you are straddling the consolidation). Place one order to buy 15 pips above the level of resistance and another order to sell 10 pips below the level of support.

Why place your buy and sell orders beyond the levels of resistance and support in the forex? Otherwise, you could be entered into the market when it is still in consolidation, by a relatively minor 5 or 10 pip spike within the consolidation.

You don’t want to enter until just before the fundamental announcement (the anticipated breakout point). Why place your buy order 15 pips above the level of resistance and your sell order only 10 pips below support? Remember that the chart you look at is a bid chart, but the price you buy at is the ask (which, remember, is about 5 pips above the bid price).

Trading inside consolidation

While currency trading breakouts from consolidation can lead to solid profits, if the consolidation range is large enough, it is also possible to profit from trading inside the consolidation.

This would be a consolidation you would not want to place a straddle on, however (if the trading range is wide enough to profit from trading the consolidation it would be too risky to straddle).

In this case you would sell at the resistance level with a profit limit at the level of support and a stop loss at the last level of resistance. You would also want to buy at the support level with a profit limit at the level of resistance and a stop loss at the last level of support.

Posted in Fundamental Announcements

Trading Currencies when the Downtrend Breaks

How do you notice when the downtrend breaks when you’re trading currencies online?  You take what you know about currency trading buy and sell zones and apply them to a breaking downtrend.

Before you can start trading currencies, you need to know when the downtrend breaks.

A downtrend is considered broken if the following conditions are met:
1.The market makes a new low.
2.The market first penetrates the trendline.
3.The market then retraces to the last level of resistance.

When the downtrend is broken, the market enters the buy zone, which is the area above the trendline.

When trading currencies that the trendline is only considered broken if all three of the conditions are met.  That is, the market must have made a new low prior to piercing the trendline or it is not considered a trendline break.

Trading Currencies in the Buy Zone

Trading currencies in the buy zone is one way to take advantage of a downtrend break.  To trade currencies in the forex online when prices enter the buy zone, wait until a complete bullish candle forms above the trendline (it must completely clear the trendline, wick and body).

Take care to wait until the candle has closed to call a trendline break; otherwise you may fall victim to a false spike.  When the bullish candle appears in the buy zone according to the conditions stated above, place a market order to buy at the opening of the next candle (if equity management allows).

Set your stop loss order at the last level of support.

Rules for trading currencies in the Buy and Sell Zones

As with every indicator, there are several important rules to follow when trading currencies in the buy and sell zones:
1. Draw all trendlines (inner, outer, and long-term outer).  This will help you determine if the market is trending up or down, or if a trendline has been broken.
2. Locate the downtrend (uptrend) break and the bullish (bearish) candle in the buy (sell) zone that confirms the break.
3. Find the last level of support or resistance to determine where to place your stop loss order.
4. Practice sound equity management.  If you can’t afford the potential loss (the loss you would incur should the market reach your stop loss order), don’t make the trade.
5. Create a plan for trading currencies.  Trade the plan.

In addition to those important rules, it is also important to decide before every trade whether you will be a day trader or an overnight trader.

A day trader will stay in the market (on that trade) for a short amount of time (a couple of pips, perhaps) whereas an overnight currency trader will remain in the market for three or four days, canceling and replacing to lock in profits.

Remember that when the inner trendline is broken the market predominately (most often) moves to the outer trendline and bounces there.  One way to estimate the potential profit to be made if you are trading an inner trendline break is to calculate the difference between the inner and the outer trendlines.  If there is not much price difference between the two lines, you will likely not make much profit trading the inner trendline break.

When both the inner and the outer trendlines are broken, that is a sign of a major reversal.  That the inner and the outer trendlines broke indicates that the market is not in a price swing within a larger continuing trend, but that the larger trend itself is breaking.

Posted in Technical Analysis