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Friday, July 27, 2012

Micro trend

Micro trend trading belongs to the area of day trading. However, it is different as a day trader may not necessarily have to wait for some daily trend to develop, but can use other trading strategies to enter a market of his choice. A trader who wants to trend a micro trend has to wait for some momentum to develop (or a reversal to take place) before executing a trade. 

Since a trader needs momentum, the best thing he could do is to pick up volatile securities and trade only those in these minor market tendencies. If we take eur/chf pair (in Forex) it is not very volatile. Or a better example would be eur/gbp, especially during Asian session. A skunk would not squeeze a pip in these market conditions. However, you start picking gbp/jpy or gbp/usd pairs and you see a different picture. That’s what you are looking for when you want to catch and ride a micro trend. The same can be said about other securities: stocks, commodities, bonds and etf’s. 

There are certain times when volatility unavoidably increases and one can expect that. In other cases you can never be sure what is in store for you. Those certain times are economic news releases that affect all financial markets and volatility spikes in almost all financial instruments. 

What you need to do first is to select candidates for your trades. You will hardly be able to spread across all markets or trade multiple securities. You will have to select two or three and to monitor them more closely than others. I would look through other securities, but concentrate on two or three. 

Secondly, you have to determine appropriate time frames on your charts. Since these are short term moves you are chasing, be sure not to pick out large time frames. In my subjective opinion, 5 and 15 minute charts are best to watch for this type of trading style. 

Then, you will have to determine your profit and loss targets. Daily momentum (in Forex) usually lasts one session and then prices fall back in to ranges. It is quite often for prices to rally for about two hours and then lose direction. So, you have to be realistic about your expectation for the day. And always set your profits bigger than your stop losses. 

Fourthly, you wait for the trigger. Triggers depend on a strategy you choose. You might wait for a breakout of some level, or crossover of moving averages or a break of some chart pattern and etc. 

Fifthly, enter the market when you see the trigger and go with the flow. If the trade goes wrong you have your stop loss order to protect you. If it goes where you expected you will have bigger profit than your previously set loss. 

Good luck in trading micro trend. 

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Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.