– With gold being a safe haven recent moves have been heavily driven by risk sentiment caused by Brexit
– Further concerns surrounding a delayed rate hike, China slowdown and a falling oil price has seen a further rise
– Also keep in mind that there are no negative interest rates with gold making it a far more lucrative safe haven. Further stimulus from central banks in upcoming meetings could drive further gold buying.
– Gold is also the anti-dollar – weak dollar means stronger gold price. Keep an eye on the fed watch tool for the chance of hikes and comments out of the FOMC: http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
How to use this trade plan
1. Support and Resistance
Monthly, weekly and daily pivot points provide market support and resistance. Note that when a pair has broken through a resistance pivot point this could form support in the future. The same applies when price has broken through a support pivot point later being tested as resistance.
Areas highlighted in green are support zones derived from price action. This is either where price has failed to break below previously or where price has broken through resistance and previous resistance will be tested as support. These zones are areas where we would look to trade in the future and should be seen as a trap for price. Should price arrive in our zone we need to pay careful attention to lower time frame charts to see how price is behaving in these zones. If price is in a support zone then the evidence we should look for on a lower time frame chart, say a 5 or 15-minute chart, would be:
– An oversold stochastic
– Candlestick reversal patterns
– A reversal pattern like a double bottom, head and shoulders, etc
– A cross of our 5 and 8 EMA
– A higher high followed by a higher low
– A cross on the MACD
– A cross of our 21 and 55 EMA
An effective way of identifying where price could find support in our zone would be looking for pivot points and pivot point clusters in our zone. Pivot point clusters are where multiple pivot points lie close to each other. For instance, if you find a monthly central pivot point on top of a weekly support pivot within our support zone you should pay very careful attention to these pivot points within the support zone should price arrive here.
Areas highlighted in pink are resistance zones. Identifying a trade in these zones is done in the same way as the support zones as mentioned above though you would be selling.
2. The Market
Once we have identified support and resistance we need to identify what the market is doing technically.
We use our 21 and 55 EMA and our MACD to determine market direction and speed.
If the 21 is above the 55 then pay attention to the angle of the moving averages and the width between them. The greater the angle and width the stronger the direction and momentum of the market.
Also take note of where price is in relation to the 21. If price is above the 21 then the market is technically bullish. If price is below the 21 then the market is technically bearish.
Note: The market will trade using moving averages as dynamic support and resistance. If the market is bullish and price falls and touches the 21 EMA then the market will look to buy here. The same applies if the market is bearish and price rises to the 21 or 55, the market will look to sell here. If you see price touching the 21 or 55 EMA then apply the same technique mentioned under support and resistance to identify a trading opportunity.
Something to keep in mind – some traders like to wait for one or two candlesticks on the hourly chart before they feel confident in taking a trade. If you are using proper risk management then this is not necessary. You need to accept that you are going to lose some trades and you are going to win some trades. The goal is to give yourself the best odds and extract the most value while taking the smallest loss and it is therefore important to buy as close to support and sell as close to resistance as possible. If you are using proper risk management a loss will not be the end of your world and if the trade goes your way you won’t be losing out on pips because your fear and uncertainty got the better of you.
Now that we have analysed what the market is doing we now need to identify what price is doing. Keep in mind that price can fall in a bullish market so we want to make sure that when we open our trade we are trading in the direction of the market. Therefore, we want both market and price to be moving in the same direction.
We use our 5 and 8 moving averages and stochastic to identify the direction of price.
Ideally being patient and waiting for an oversold or overbought stochastic will allow us to find support or resistance and get into the trade from the start of the move though sometimes we find ourselves in a trending market or we missed the start of the move and would still like to take advantage of the rest of the move. In this instance we need to align price on lower time frames with higher time frames. So if the stochastic on the daily chart is moving from oversold to overbought then we can say price is technically bullish and we would therefore wait for an oversold stochastic on an H4 and H1 time frame before opening a long trade. This is a safer and more conservative approach. If you struggle with patience and discipline keep this in mind – a trader is either patient enough to wait for the right opportunity to trade or rushing to blow their account. There are no shortcuts and the market loves punishing traders who don’t follow the rules in a disciplined manner.
4. Risk Management
If you have identified a trading opportunity, you are looking to buy at support or sell at resistance and you have confirmed that price and market are moving in the same direction then there is one last step before pulling the trigger – identifying the maximum risk that you can take with your account size.
You first need to be clear on where your stop loss is going to be placed. If you are trading according to support and resistance on the daily chart, then your stop loss needs to be placed on the daily chart. If you are trading according to support and resistance on the H4 chart, then your stop loss needs to be placed on the H4 chart. If you are buying, then you are going to place your stop loss beneath a lower level of support. If you are selling you are going to place your stop loss above a higher level of resistance. When looking to place your stop loss think about where other traders would place theirs and place yours slightly above or slightly below.
Once you have identified where your stop loss will be placed use the cross hair (+) to measure the number of pips from the current price to where the stop loss will be placed. The first number shown next to the crosshair is the number of candles, the second number is the number of pipettes so you will need to divide by 10 to get the number of pips. The only exception is exotic pairs like USDZAR where you would divide by 100. Once you know the number of pips of your stop loss you need to calculate your volume (lot size) of your trade. You can do this manually though why not just use a calculator like the one available here: http://www.babypips.com/tools/forex-calculators/positionsize.php
Something to note. Risk management is not just identifying the volume you trade with – it is identifying any behaviour that poses a threat to your success. I consider the following as risky behaviour
– Trading without a plan
– Risking anything more than 1% of your account on a single trade and more than 5% on all open trades
– Trading when angry, sad, drunk, tired or hungry
– Trying to recover from a big loss by trying to make a quick win
– Trading immediately after a big win – this may sound strange though when a new trader makes a big win they suddenly think they are a market guru and that the rules do not apply to them. Taking a break after a big win and identifying why the trade was a success will help you learn from your success so that you can apply the same strategy and tactics on future trades. If you are unsure of why the trade went in your direction, then it was luck and luck is not a trading strategy.
– Moving your stop loss hoping the market will turn around and move in your direction
– Closing a trade that has been in the minus as soon as it reaches break even or moves slightly above your entry point for fear that the market may turn against you again
– Trading because you need to make money – this is a big one. If you need to make money, then you are going to be trading with a lot of emotion. Firstly, you will most likely be trading with a volume and leverage that far exceeds your account’s lethal dose and the moment any trade goes into a negative you will instantly react because you will fear losing money and this will probably cause you to close the trade instead of letting it run its course.
– Trading with a small account size – the smaller the account the more difficult it is to make money. Think about this, if your account size is $500 and you follow a 1% risk management strategy the maximum stop loss you can hold is 50 pips which may not be enough for your trades forcing you to have an ill placed stop loss which will most likely be hit. Rather practice on demo account until you have gained enough experience to trade and in the process saved money and built up a larger account size that allows you to trade according to the market you are in and not your financial situation. Instead of blowing 10 $500 accounts wouldn’t you rather refine your trading strategy and tactics over the period of a year and then if you feel you are ready have a $5000 to trade with?
– Being ill informed – fundamental data moves the market, technicals only tell the market where to get in and out. You need to be reading up on everything and anything you can get your hands on that involves the currency you are trading, financial markets, macroeconomics and anything else that has to do with money. Setting up a calendar with central bank meeting dates, following up on the fed watch tool, reviewing the COT report every Monday, reviewing fundamental data daily, planning your week according to risk events outlined on a calendar in order of importance, updating your Twitter feed with relevant people worth following, watching Wayne’s webinar every day, interacting with posts on Forex.Today and doing anything and everything you can to educate yourself to the level of smart money with the goal of one day being an accredited CTA.