Technical based trends provide buying and selling zones for forex traders. One question is what is the best time horizon to choose? Should the trader follow the weekly, daily, or intra-day trends? We know that the larger the time interval the greater the intra-interval swings.
But it is hard to determine at what stage a trend is in. While trend following works, particularly when you can identify the trend early on, being able to project a trend reversal though a tougher proposition, provides greater profit potential.
That challenge is to locate a trade at the beginning of a change in the trend direction. When a trend breaks the break represents a confluence of events that pushes the price through the trend line. If a trader catches that break, the energy at the break can result in large gains.
A promising technique is to use price break charts (also called a three-line break). The challenge is to identify as early as possible conditions when the trend has broken. Price break charts allow early detection because the trader can project in advance where a trend reversal will occur as they are defined as occurring when the price reverses three previous highs or three previous lows.
If one enters at the reversal it can lead to large gains. This means that tactically the appropriate order is a resting open buy stop or sell stop order. This can be placed in advance of a reversal. For example, the trader desiring to place a sell order seeing that the trend is up would count back three previous highs and place the sell stop order at that break point. The choice of what time interval to use is important to consider. An intra-day forex trader looking to capture 10-15 pip moves would use a five-minute time frame, whereas a longer-term trader would look to find reversals using a four-hour price break chart.
The four-hour price break chart below shows how this strategy would have been successful in the GBP/USD several times this July. A good idea is to always use multiple-time frames in three-price break charts. The trader would look at the four-hour, 15-minute, five-minute and even three-minute price break charts to sense whether the trend reversal is under way. Typically, a reversal will occur on the three-minute chart before it occurs on the 15-minute chart. But whenever a reversal is detected it can give a clue that the tide has turned. We may be at a critical turning point because as global forces are shifting, price break charting can become a map to shape forex traders looking for an edge in trying to detect the beginning or end of a trend.