Friday, 12 June 2015

Different Trend Lines Part 3

Basic Trading Concepts Defined

Forex traders have various ways on how they could trade the corrective price action:

1. BOUNCE TRADER: Forex traders can take bounce trade setups off of the trend lines within the corrective price movements. This means that Forex traders are anticipating price to use or respect the support or resistance line and not break through it. As long as the correction lasts, this trade plan would work out until the moment the chart pattern fails and price breaks the pattern by going through the bottom or top trend line (the last trade is often a loss). The target is either the middle of the chart pattern (conservative target) or most often the opposite side of the chart pattern. Be cautious of the fact that corrective patterns with shallow trend lines often have small space between the top and bottom lines, which means profit potential could be (too much) limited.

2. BOUNCE TRADER FOR BREAOUT: Forex traders can take bounce trade setups off of the trend lines within the corrective price movements BUT with a different target in mind. They are targeting a price which is either below above the chart pattern because they are anticipating the break of the chart pattern. In most cases it is better to position oneself with the previous momentum or trend direction; because the chances are higher that price will break to the same direction. So in a downtrend, its best to pick the tops within the chart pattern for a downside break out. In an uptrend, its best to pick the bottoms within the chart pattern for an upside breakout.

3. BREAKOUT TRADER: Lastly, Forex traders can choose to wait for the corrective chart pattern to break and only trade when a new impulse is starting. When chart patterns break there is a higher chance that an impulse will occur, but never a guarantee. Occasionally corrective charts break and price does not become impulse but in fact expands the size of the corrective pattern or reverses (false break outs). In other cases quick momentum can occur when a pattern breaks and price can move up and/or down a lot, which is exactly what the breakout trader is looking for. There are various ways of trading the breakout. A trader does not have to trade a break of the chart pattern immediately, but could opt for more confirmation by letting price pullback to pattern, letting price pullback to pattern and bounce, and taking a 2nd breakout.

Reference: Chris Svorcik

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