I want to start the article by referring back to my
last post where I said that I expected Japanese Yen to strengthen against all
other pairs. As you may see the trend shift (from bearish to bullish) did not materialize
and my stop losses were hit. However, it was a ‘pre-planned’ loss and I am not
stressed about it at all. I often start building a line of my positions in the
direction of an ‘expected’ trend and if it does not happen I can suffer a loss
of about 10 to 15 percent. However, if it does happen I easily double my
account. That happened a lot of times.
The most important thing is to limit your losses and multiply your profits when
they come. Ok, now let’s move to today’s topic – calm range trading strategy.
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If you want to consistently make money trading you
must take only those trades that offer you better odds of winning and ignoring
those that are average or poor ones. This might be said easier than done, but
as practice makes everything perfect you can learn to find these high
profitability odds trades quite easily. The hardest thing, actually is not to
find them, but to patiently skip all those daily ‘half-good and half bad’
trades.
Be sure to read my other articles on the subject and watch a video:
Fortunes are made when market trends change
In order to be able to find these high profitability
trades you need to define what state a market you want to trade is in and how
this ‘state’ is traded best. Markets can be in four kinds of states:
- Volatile trend
- Calm trend
- Volatile range
- Calm range
Each one of these has its’ own specifics of trading.
Each one of them can be very difficult to trade if you just come at any place a
market is in and expect to make a trade. No, you need to define areas where the
market will reverse or break out and trade the areas accordingly. I want to
write a series of articles describing each specific market condition and how
you can trade that. Today will be the first article on calm range. I prefer
this type of market to volatile range as entry and exit points are much clearer
and you can place smaller stops than you have to do in a volatile range
markets.
Defining
calm range
So, what is calm range? It is a market that is
consolidating after some swing or trend move. It is a market that has quite
clear points of bottom and top. The market moves within these limits in a very
orderly fashion. When a bottom is hit the price forms a reversal pattern and
starts orderly moving upwards by forming higher highs and higher lows. The same
happens when the top of the range is hit. The price forms a reversal pattern
and then in a very orderly fashion starts moving down by forming lower highs
and lower lows.
Finding
high and low of the range
The first step to trade that you need to define the
highest point of the range and the lowest point of it. Now, the range can be
narrowing so you need to see how these support and resistance areas change! If
we talk about Forex we know that by nature some currency pairs are more
volatile and some are very orderly. The most orderly pairs are eur/chf and
eur/gbp. If you are a conservative trader and want to trade less volatile pairs
the above mentioned ones could be a good option for you.
Let us skip eur/gbp and look at eur/chf as it is in
pretty calm range at the moment. After a sharp move down the pair formed the
low of the current range (it is consolidating) at 1.2118 (on the 26th
of February) and the high of the range at 1.2390 (on the 8th of
March). It then started making lower highs and lower lows (clear sign of a
swing low). The further it went the more the move down slowed. It is a clear
indication that more buyers (of Euro) started coming in. Then at the end you
can see a cluster of daily candles with very small lows. A break above the
highs of those could have been a good long entry point if you trade these calm
ranges. You can see that it came very very close to the above mentioned lowest
point of the range.
Signs
of an impending reversal
When you see the pair coming to this support point
you would naturally expect a reversal. How to judge whether it will happen or
not? I want to see those clusters of candles when the price finally fails to
hit new lows and runs to some daily resistance point. At this point you can see
a lot of volatility and very narrow daily range. The pair goes to the low of
the day and then back to its’ previous day’s high. It can continue for three or
four days. This is a clear indication that a breakout is coming and the odds
are that it will be upwards. That is exactly what happened with eur/chf. Market
moved through the resistance of three days’ high when the news from Switzerland
failed to meet market’s expectations. A buy stop above 1.2171 could have been
an excellent level to enter the market. (Other
signs I look for: Alternatively 123 reversal pattern may also be formed,
which would indicate of upcoming reversal. Bullish candles also tell me about a
swing change).
Exit
points
Now, where could we exit our trade? Following
classical technical analysis definition we know that previous support becomes
resistance and previous resistance becomes support. So, we need to check to see
where the market reversed near resistance to find our exit point. We clearly
see that 1.2300 level served as support for some time till fundamentals came
and the market crashed. This is our exit level. I tend to exit the market ten
pips earlier, so possible exit level is 1.2290 now.
Catalysts
of a reversal
One more important thing to remember is that market
often needs a catalyst to break through some resistance or support point and
that catalyst is often fundamental news. So, when you market your technical points
and expect a reversal be sure to look at your Economic calendar to see what
fundamental news events are coming to be aware of possible fundamental
catalysts.
Ok. I hope you benefited from the post. I would
continue the topic of different market states in my next post. Hope to do it
very soon! If you liked the post I would also be happy if you gave a plus on
Google+, tweeted, liked it on Facebook and other social platforms. Have a nice
day.
Disclaimer
Trading
financial markets carries a high level of risk, and may not be suitable for all
investors. All information on the blog http://trend0.blogspot.com/ is of educational
nature and cannot be considered as advice, recommendation or signals to trade
in any financial markets.