The last two weeks 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. We then used a daily chart of the NZD/JPY to identify a downtrend, a change to an uptrend and an uptrend. Here we have a daily chart of the GBP/CHF, which shows a range bound market.
A range bound market is noted by the market oscillating between two similar price levels for a long period of time before experiencing a breakout of the range. This is best identified on a daily chart to give the trader time to react and enough of a range to be able to justify taking the trade based on an acceptable risk:reward ratio. The idea here is to identify a buying zone just above the lows and a selling zone just below the highs. We also want to identify the zones where we would consider the market to have broken out of the range and offer good placement for our protective stop orders. This range bound situations will most likely show up in the currency pairs that do not include the USD and are close in geographical and economic terms. Examples would be the EUR/GBP, the GBP/CHF, the EUR/CHF and the AUD/NZD. We should confirm the range bound condition before using a range bound strategy and of course, always trade with a protective stop to limit our losses on the eventual breakout. As usual, we want to pick the most obvious range bound markets to trade, as that increases our chance of success.
[B]Written by Thomas Long, FX Power Course Instructor[/B]