The trend(line) is your friend

If you ask any professional trader what is the most important rule when trading; nine times out of 10 the response will be money management. Any two traders can enter the market at the same time and same price but the success and longevity of a trader is based upon his exit strategy and money management. I have been conditioned to ensure that before a trade is placed I have a predefine stop loss level, which is usually 1% of my account. In addition, predetermined profit target zones are also identified.

I am a technical trader who pays close to attention to breaks of trendlines and support and resistance points, both calculated and visual (psychological). As a trader, I prefer to wish to be in a good trade than to beg to be out of a bad one. Patience is a quintessential component in forex trading; I never rush to take a trade.

One of the strategies I employ when trading the Mansa Wealth, Skyline managed account is a breakout strategy. My trades are based off of the daily and four-hour time frames. These longer time frames act as a filter and prevent whipsaws which you will find more frequently in the lower timeframes: 30-, 15-, five and one-minute timeframes. The daily time frame is used for direction and helps to identify bounces off trendlines and or support/resistance points. The four-hour time frame is where I will enter my trades and identify my stop loss and take profit zones. As previously mentioned, all trades placed must have a predefined stop-loss.

Let’s says you notice a good upward trend line on the USD/JPY. Remember that a trendline has to touch the market at least three times for it to be considered a valid trendline. You can see that the USD/JPY trended higher for the entire month of December and that trendline was touched twice in early January (see chart below).

Once we have identified a valid trendline, we wait and watch the daily chart for either a bounce or break of this upward trendline. As the market approaches the trendline, we switch to our four-hour chart to identify where and when to enter the market. While we are watching the four-hour chart we are also looking at how the market reacts to areas of support and resistance (both calculated and visual). If price breaks though and moves below the trendline, then we wait for a pull back to the top of the trendline before we execute our short position.

You can see from the above daily chart that on Jan. 12 the USD/JPY, the day after it broke the trendline, moved back up to test the trendline providing a good opportunity to get short. This allows us to place a tighter stop loss at the next area of visual or calculated resistance. Our risk is only 1% of the account. As for our take profit area it should be equal to or greater than our stop loss. The take profit can change from day to day and hour to hour depending on price action.

Drawing Fibonacci retracement levels from the start of the uptrend to the top can also produce profit target areas, namely the 38.2%, 50% and 61.8% levels (see chart below). Overlaying Fibonacci levels over our daily USD/JPY chart provides some guidance. This style of trading works across many currency pairs so there is no need to enter a trade late or force a trade.

Nicholas McGaw is head trader of the Mansa Wealth, Skyline Managed Account Program.

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