Successful Short Term Forex Trading
Successful short term Forex trading is the goal of many new traders who enter the Forex markets each year. For them, life begins and ends on the one or five minute chart. It is important to understand that the trend on a small time frame chart may only be a retracement of the primary trend from a higher time frame chart. As a result, understanding the higher time frame trend is an important step in becoming a successful, short term Forex trader.
Range Bound Vs. Trend Bound
Certain asset classes tend to be range bound and others tend to move in trends. One asset that does trend well is the spot Forex market. Currencies are based on economies, and it takes a long time for economies to complete the four stage business cycle of expansion, peak, contraction, and trough. While the primary trend marches on for months and years, there can be several intermediate term trends lasting days and weeks.
These intermediate term trends offer short term Forex traders many opportunities to trade long and short with the primary trend, or counter to the primary trend. Each type of trading has specific rules. Counter trend traders must exit a position quickly in the event that the primary trend resumes. Currency traders all over the world like to observe the trend from the previous trading session, and pile on in that direction during their session.
The previous session can be Asia’s session transitioning into the Europe and UK session, followed by the UK session transitioning into the US session. Currency traders will observe the direction from the previous session and attempt to trade with that intraday trend. Most short term movements in the Forex markets are driven by news stories and economic reports which are released at various times of the trading day. Prior to news being released, price consolidates as traders wait to see what the impact of the announcement will be.
If the announcement is completely unexpected, a possible reversal of the primary trend may occur. If the news is within the boundaries of what was expected, a period of wild reaction to the announcement will eventually be followed by a resumption of the primary trend.
No Economic Data
What about the times when no economic data is scheduled to be released?
Price has to move. If no news is scheduled, price will consolidate during quiet trading periods and then breakout either in the direction of the intraday trend, or in the direction of the primary trend. Sometimes price will pull back to a support area before resuming the primary trend which can be an opportunity for a short term trader to enter a longer term swing trade. Being aware of the primary trend is the only way for the short term trader to recognize this opportunity. Other times, price will rally into resistance before the intraday trend resumes.
This entry is typically a low risk opportunity to enter a counter trend trade with a definite idea of where to place a stop loss in the event the primary trend resumes. In preparation for the Extended Learning Track (XLT) Forex midnight session on June 25, 2009, a possible shorting opportunity in the GBPUSD was identified on the 5 minute chart at the start of the Europe and UK trading day. A plan was made to enter a short trade on a throwback to a small area of supply above current price, or on a breakdown below the first target support level.
This trade was counter to the direction of the primary trend in the GBPUSD which has been trending up for several months. The GBPUSD did rally into a previous resistance level near 1.66 the day before when the Federal Reserve interest rate decision was announced. This meant that the direction of the intraday trend was down. One XLT student, Carlos, did manage to take the breakdown below the support level during the session.
The retracement to the higher resistance short entry occurred before the start of the XLT session, so the breakdown short entry was the next best trade. Since Carlos was counter trend trading, he exited the trade for a 44 pip gain. The GBPUSD gave Carlos the opportunity to take a long trade bounce for 30 pips during the same session using our XLT Bollinger Band CCI rules.
Carlos followed his rules on those trades, but I managed to get stopped out for losses on both entries. The lesson here is it is better to focus on trading rather than to try to teach and trade at the same time. Opportunities to trade with the trend and counter to the trend come along everyday in all markets if the trader understands the difference between the primary trend and the secondary trends of the market they are trading. We will explore more of these types of trades in future newsletters.