Last week we talked about identifying a trade as a two step process. The first step is to determine the direction of the trend on the daily chart and then to move down to an intraday chart, like the hourly or 4-hour, to pinpoint our entry and exit.
If the daily chart shows an uptrend, then we only want to look for buying opportunities. If the daily chart shows a downtrend, then we only want to look for selling opportunities. If the daily chart shows a range bound market, then we want to buy above support and sell below resistance. If we are not sure about the trend, we simply move onto another currency pair where the trend seems obvious. We identify an uptrend as a series of higher highs and higher lows and a downtrend as a series of lower highs and lower lows. We used a daily chart of the USD/CAD to identify an uptrend, a change to a downtrend and a downtrend. Here is a daily chart of the NZD/JPY.
This chart starts with the market in a downtrend and then changes to an uptrend and continues in the uptrend through the end of the chart. The key is identifying the change from the downtrend to the uptrend and that is simply when the market moves up through the previous high. That change is noted on the chart. Remember that the idea is to pick the strongest trends to trade as that increases our chance of success. Next week we will go over a range bound market.
Written by Thomas Long, FX Power Course Instructor of DailyFX.com