Daily Lesson # 2

Posted on 25. Feb, 2010 by Jakob in How To, Random Noise

Click on the small picture below to see a one-hour chart of the EUR/USD. As you can see there was a perfect chance to enter on a short trade this night at the break of the drawn trend line. There are two places where the trend line is broken (just around 1.3515 – 1.3525) but the candle is closed just on or right above the trend line. About three hours later we finally have a full blown break of the trend line and a close below it on the one hour chart. This place would be a perfect place to enter for a short trade, right at 1.3513. If you look at the latest strong support area, it was just around 1.3466 where there was a lot of consolidation and then a strong move back up; hence this seems like a fair target for the short entry (just around 50 pips). The stop loss could reasonably be placed just above the broken trend line (just around 1.3535), which would be around 20 pips. This gives us a good risk:reward ratio. In addition to this, the trade would be in the direction of the trend, and we would enter on a strong technical signal. At the time of the break there was no upcoming fundamental news in the nearest hours, so it would have been a good time to base the trade solely on technical analysis. After around 20 – 30 pips or profit you could have moved your stop loss to break even and secure the trade. This is a perfect example of a good trade setup. Now if you look at your own platform, and see the same screen on a 30 minute chart, you will see that we would have been caught in a fakeout due to an earlier entry, and we would most likely have lost money (all depending on your stop loss obviously).

Every day brings a new lesson in forex trading. If you want to get a head start and read more about my trading strategies, you should grab a copy of my new book Forex Hacking.

Related posts:

1. Daily Lesson # 4
2. Daily Lesson # 3
3. Daily Lesson # 1
4. Daily Lesson # 5
5. The Day Before NFP – Daily Outlook