FX TECHNICAL ANALYSIS
thinking in terms of a fixed risk to reward but in terms of levels. I like to use round numbers as these are proven
psychological levels that Chart 3. Daily chart
calendar year (displayed on monthly) • Below the 200sma (displayed on the weekly and daily) • Below the 50sma (displayed on the weekly and daily).
We also then need to decide whether price structure is more suited for a breakout entry or a pullback entry into this high-probability environment. Simply having price trading above or below the above mentioned levels is not enough. We need highs and lows of recent price structure cleared to enter trades and a further edge to our edge. (Highlighted on the daily time frame.)
The complete picture
What I describe above is a clear and unsubjective approach to technical analysis applied to the larger time frames to establish an edge.
But an edge simply means we are playing on the odds that price is more likely to move in our favour than not. Tere is, however, a very real
70 FX TRADER MAGAZINE April - June 2016
chance that the trade may go against us. So the following points must all be clearly defined before we place a trade:
• How much risk do we allocate per trade? Tis must always be small so you have the opportunity to see another day if it goes against you. • How will we calculate and where will we place our initial stop loss? I have simple mathematical formulas that I use based on the unique volatility of each instrument. Stops are well placed as I expect price to move against me first before moving in my favour. But if the trend goes against you, cut your losers short. Do not move stops once placed. Losses are part and parcel of trading but blowing accounts does not need to be a common feature to your trading.
If the trend moves in our favour, then the following points must also be clearly defined before placing a trade:
• What levels can we expect to see price move towards? Move away from
price moves towards and that can also cause reversals and the end of trends. Never forget the expression, the trend is your friend, and we want to keep our trades open for as long as possible once the trend is in play. In simple terms, cap your losses but have uncapped returns. • How and when will we compound into the trade to accelerate the profit- taking phase? I prefer breakouts as they are far more versatile and they
also confirm the trend but I am always aware if a good pullback opportunity presents itself. • How are we going to manage our exit from the trend? Tis is crucial and where the real art of trading comes in. Discretion is a big part of exit management as this is very much dependent on variables such as where is price in relation to support and resistance. A good trader has a several methods in his arsenal to exit from a trade.
Applying patience is key to the success of a trader as it can take time for the edge to appear when trading on the larger time frames. But do not let this fool you as patience is heavily rewarded in trading both in terms of money and, more importantly, time.
Te goal, aſter all, is to trade well, not oſten.
Zaheer Anwari
Founder & Trend Trader at Te Traders’ Cosmos
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