The first step in identifying a trading opportunity is to start with the daily chart to get a feel for the mood of the market. Is the market range bound and bouncing between two general areas or is it trending? This first step leads to what approach should be used when opening a trade.
If the market is range bound, buying above the support and/or selling below resistance is the preferred method. If the market is trending up, then we should only look for buying opportunities and if the market is trending down, then we should only look for selling opportunities. These trend traders look for what is called an A,B,C or 1,2,3 formation. A look at the GBP/USD chart below gives a good example. Point A is the bottom and the start of the trending move up. Point B is the high of the trending move while Point C is the bottom of the corrective move against the trend. Where trend traders enter is a matter of personal preference. Aggressive traders will try to buy near point C and use technical indicators like Fibonacci retracement levels and Slow Stochastics to help better time their entry. Notice how the market pulled backed to the 50% retracement level while the Slow Stochastics dipped below the 20 level as the market pulled back to point C. This is how these tools should be used. They are much more valuable when used as confirmation of your analysis rather than as a stand alone tool. Traders could enter on either signal and place their initial protective stops below the 61.8% Fibonacci level. More conservative traders will wait for the market to rally up past point B before entering the market as they prefer to wait for a signal that the uptrend is intact and the buyers are back in charge before entering. This is called a breakout as the market moves up to new highs. While this may mean less in terms of profit as some of the move is over by the time entry takes place, these traders will be rewarded with a higher win percentage because they waited for confirmation of the trending move being intact. So the next time you are looking for a trading opportunity in a trending market think A,B,C?.or if you prefer 1,2,3. The choice is yours. Good luck with your trading!