From the September 01, 2012 issue of Futures Magazine • Subscribe!

Trading forex with the trend

USD/JPY trend move

The USD/JPY trended to the upside from the beginning of February 2012 to the middle of March. “Beginning of the trend” (below) is the hourly chart that marks the start of this move. The pair was non-trending in a narrow range for nearly three trading days (from Jan. 31, 2012, to Feb. 3). Non-trending markets eventually will transition into trending markets, so often traders look for a breakout to signal the start of a trend. 

On Feb. 3, price breaks above trendline resistance and the 100-hour simple moving average (blue line at 76.20). Traders, looking for a break to trigger a trade, would buy here with a stop 12-15 pips lower. In the example, the technical break was indeed supported by strong buying, and the price moved sharply higher before pausing at the 76.793 level (59 pips from the breakout price). 

We can overlay the Fibonacci retracement levels and eye the Correction Zone for trend clues. In “Beginning of the trend,” that area comes in between 76.416 and 76.505. If the correction stays above the Correction Zone, the larger, more-capitalized traders are supporting the market and it will trend higher. We assume that sellers are not strong enough to push the market lower. As a result, they too can add fuel to the fire for another break to the upside as they cover their losing short positions. 

Because the Correction Zone defines risk at the Fibonacci levels, traders who missed the initial break higher, but who recognize the potential for a trend, can buy against the zone with a stop a few pips below the 50% retracement. Risk is defined and limited. 

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