How often have you identified a trend but missed getting on board in time to profit from it? Do you have trouble pulling the trigger on trades? Do you suffer from paralysis by analysis? Are you always worried that if you enter now that the market will reverse and stop you out?
Here is an entry technique for forex markets to get you onboard those long term trends that just seem to keep going without a pullback.
First you need to confirm that you have identified a strong trend. Plot a 90-day simple moving average (SMA) and check the slope of the trend line to make sure it is strong and in the direction of your trend. A weak or flat line could indicate a choppy market where you should either stand aside or implement a swing technique. The longer time frame ensures a solid trend. Requiring a solid upward slope reinforces that the trend is active.
You can now apply a long entry technique based on a breakout. The trigger is a breach of the previous two-day high plus twice the bid/ask spread (normally 4-8 pips). If you are trading EUR/USD this may only be the high plus two pips. For most other liquid currency pairs this will be the two-day high plus four pips and for exotics this will be the two-day high plus eight pips.
If your entry hasn’t been triggered within the next 24 hours, you will need to adjust your entry one day forward to the new two day high (plus spread x2). In the event that the market continues to drop without triggering your buy order, then continue to adjust your entry until either you are triggered or the previous pullback low is exceeded.
A good example has been in the New Zealand dollar (NZD/USD), which has produced numerous profitable entries this fall. The vertical blue lines on the chart below indicate long entries using this method.
Conversely for a falling 90-day SMA, for example currently the USD/CHF, place a sell order below the low of the past two days minus twice the spread.
Using this method of entry, either on the long side or the short side, we can fade into the market with several entries on different days to build positions with risk mitigation being a primary driver. On days with consecutive entries you can quickly move your stop into breakeven range and continue to scale your stop up or down.
There have been many opportunities over the last few months to ride the strong rally in the New Zealand dollar. You can see on the chart that there have been several entries. On Oct. 14 NZD/USD took out the previous two-day high and you would have got long at 7420 using this strategy. You would have added to the position the following day and then again on Oct. 19 at 7500 and again on Oct. 21. Depending on your risk management, these may have been new positions or adding on to a longer-term profitable long position. The trade had an average entry of about 7489 and would have been closed on Oct. 26 after moving the stop to breakeven — assuming you exited previous longs before Oct. 14—which you probably would not have done because they would be extremely profitable.
Traders using this strategy should place stops based on their own comfort levels. If you are in a currency that is providing positive carry (you are long a currency earning higher interest rates than the opposite currency in the pair), the New Zealand dollar for example, you can allow yourself extra room.
By taking advantage of small pullbacks in the midst of strong long-term trends, this strategy allows you to enter markets with less risk and quickly move into positive territory where you can simply ride the wave of a long-term move.
