Trading High and Low Situations
First of all I would like to say that although this method of trading works for me, it is not necessarily for everyone. Trading is a personal thing, and each and everyone of us approaches it differently, depending on their beliefs and convictions about the market.
I believe that getting one green pip is just about the hardest thing possible, and so the setup to this means must be damn near perfect. Also, any first trade I make, be it on a daily basis, or the first trade of the week, must be a winner, or all goes to hell.
So, I stick to my market analysis, and follow the trade through until the end.
In practice, this means that either I take profit at a predefined level, or otherwise my stop-loss is hit, or I bail after a market twist or surprise – in which case I go back to the drawing board and start all over again.
The following method for trading is the one that I use in real life, and that I incorporate in my trades in competitions at Dukascopy. In short, this is my story.
Part 1: The Setup
Before I enter the market to make my trade I need three pieces of information:
Defining a pair's High or Low Situation
Market News and Analysis on this pair
Combining this with Technical Indicators
Let me go into this deeper and explain to you how this works for me.
First of all I 'take a walk through the Market' and seek out a Forex pair that I can use.
This means that I look at Forex pairs that I have traded before, see how their values are at this point in time, and compare them to other pairs. In my case this means that I look at Major pairs (i.e. USD/JPY, EUR/USD etc), and a couple of Crosses that are combined of these Majors (i.e. EUR/JPY, GBP/AUD etc), what I look for is a pair that has climbed a lot or declined a lot in a relative short period of of time and looks 'off mark'
Bear with me, and I will provide you with an example right after this.
Once I have identified the pair that I want to take a closer look at I will start looking for information about this pair on the Internet. Personally, I like to stick to one website, to not to over-complicate things, and reduce searching time to a minimum.
The Dukascopy website proves to be that means to an end; here I can find the Technical and Fundamental analysis on the pairs that I trade, under the header 'Market Info' – then scrolling down to 'Market News & Research', first of all.
After reading through the articles that are relevant to the pair that I intend to trade, I also like to hit the 'FX Spider' button under 'Market Info', and take a look at all the most recent market news and posts, to see if I missed anything, and take a look at the situation as it is at this exact point in time.
Off course, this is my personal approach to collecting information, but you can find tons more of useful articles and videos under the 'Market Info' tab, so just browse around to find whatever information you need.
What I look for here is evidence that the pair that I have chosen has a chance of changing direction, i.e. will it retrace and provide me with an entry point, or hasn't it reached its high or low yet – then I look for a different pair to trade.
Now my market analysis is up to date, I turn to my favorite Technical Indicators and start drawing a picture of the future of my pair of choice, as I perceive it.
Again, the Technical Indicators that you will use are hugely personal and need to fit your trading style. If you do not trust your own capability, just check out the technical analysis provided by Dukascopy on the desired pair.
Now I think it is time for an example to show you how it is done:
Ok, I am browsing through the pairs that I am comfortable in trading, and have some prior experience with. One pair that stands out to me is AUD/USD, because I remember it being at 1.04 not to long ago, and now it is around 0.97 – that is a 700 pip drop!
So, let's pull up some charts, starting with the monthly chart:
On the monthly chart there are three things I see:
1. A potential bottom arround 0.9550 that I have drawn as a line - it seems to be a support area,
because it has been tested three times now and still holds
2. The RSI is bearish - around 44, this could signal a deeper move down
3. The MACD indicator holds bullish around this area
So, lets take a look at the weekly chart:
I have used two new indicators here:
off course, you can choose which ever you like.
Here I see that the Stoichastic indicator is at a low - which indicates a reversal
and the ADX is moving up, which tells me that I have conformation of that move
So, finally, lets look at the daily chart
Here we see a large bullish candle, that will - combined with our other information - probably follow through. So, despite the one indicator that predicts a further move down (RSI), I feel pretty safe in assuming a bull move here, so this pair complies with my wishes, and I can move on to the next step:
The fundamental analysis on this pair:
If I go to Dukascopy now, and click 'Market Info' - then 'Market News and Research' - then 'Fundamental Analysis' I can see an article that has been posted on May 30th:
This article suggests that the economy may grow, which is a bullish sign, so that is a conformation of my previous research.
So, let us see what the technical analysis is:
I go back to Dukascopy: 'Market Info' - 'Market News and Research' - 'Technical Analysis' and see this article:
This suggests that AUD/USD has indeed reversed, but has a resistence to overcome around 0,9830 before there can be talk of a complete reversal, this tells me that the pair is indeed reversing, or is on the verge of doing so.
Let's see if we can incorporate some of this information in a technical analysis of our charts:
As I can see on the weekly chart the pair has retraced back at least 70% after testing the 0.9550 line,
and the previous move down has triggered a retracement to the 76.4% Fibonacci retracement line.
If this trend holds, we will see a retracement to at least 61.8% Fibonacci, if we look at the amount of retracement from the two previous attempt down - or, if the 61.8% retracement is broken - we will see a complete reversal and the pair will move up above the 61.8% retracement that is at 1.018 as we see here:
I have drawn a line which indicates a wedge pattern in the same chart:
This would indicate a natural move up towards the upper border of the wedge which stands around 1.045, and is another sign to us that we have found the direction this pair is going to move in.
You can see that the 61.8% retracement is below the upper border of the wedge, and provides a natural and indeed logical retracement of this pair based on all the research that we have done till now.
Given all this information, I can say that this pair will go to, at least 1.01 in the near-future,
and that provides us with a chance to trade AUD/USD
And here comes Part 2: The Trade
in the next Article: Trading High and Low Situations part 2