Anatomy of a trade
The “momo” or momentum trade is my bread and butter set up. The entry begins with a sideways (three o’clock Wave) – this signals that the market is in consolidation or congestion. Finding chart patterns like triangles and rectangles are common in these situations.
The British Pound was set up with this exactly this set up in front of the ISM number this morning.
The breakout level is clear as the lowest of the downtrend lines is the breakout level and that price level is also situated near the 0.786 Fibonacci Level at 1.8747. Since the breakout price is so close (three pips) to the “50” pip psychological level, I would place a buy stop at .8755.
Now there are secondary confirmations that can help set up momentum trades because in the truest sense, momentum trades could break to either side – and a trader must be ready for both. I use indicators to filter these entries. The main filter is the MACD Histogram — my oscillator of choice for these situations. Another excellent secondary confirmation tool is the U.S. Dollar Cash Index.
The U.S. Dollar Cash Index was also trading in a sideways direction (look at the Wave) and the MACD Histogram confirmation tool is well below the zero line which is the filter for a potential short. Now even though this is not the trade-able chart, the indicators are certainly pointing in a very bearish direction.
And ofcouse a weak Dollar means a stronger Pound.
The Pound broke sharply to the upside as the Dollar tanked…
A few things to note here: The Pound set up is what I call a “pre-confirmed” set up whereby the MACD Histogram was well-established above the zero line. This means that only the break to the upside would be confirmed. Again, remember the MACD Histogram is a filter and trades are not set up with this or any other indicator. Indicators only “indicate”. Prices trigger entry and exits – so it still comes down to prices reaching a the breakout or breakdown level.
The U.S. Dollar Index is far from steady on the daily timeframe and it appears sharp moves up and only to be driven down by equally sharp sell offs…and vice versa. The intraday charts however do have excellent set ups. My focus is going to be on mainly 30 and 60 minute timeframes as long as the daily charts are congested and the Wave travels in what I call “lumpy and bumpy” direction.
Raghee Horner is an trader with more than 15 years’ experience in the markets. Ms. Horner has taught her brand of technical analysis and charting strategies to students all over the world. She is also the author of the bestselling “Forex Trading for Maximum Profit” and “Thirty Days of Forex Trading”. Emphasizing charting and price action and continues to teach the tools and strategies that encourage self-directed traders to pursue the study of chart analysis and market psychology. She is a much sought after public speaker who has conducted seminars in the US, Canada, the Caribbean, and Asia. For more information on Raghee’s analysis and trading email cs@raghee.com or visit www.raghee.com.