After many trials and errors with paper trading the forex market for a month, the first of my trading setups is finally taking shape. So I would like to document this approach here after a well executed trade this week (illustrated below). This trading setup is based solely on technical analysis. Here's an overview of the steps:
- Define a long term time frame for identifying setup.
- Draw the major supports and resistances.
- Add a momentum technical indicator.
- Add a trend indicator.
- An entry is signaled by an agreement of the trend and the indicator at the support or resistance price level. Do not enter yet.
- Define a short term time frame for timing, use this for the following steps.
- Draw the supports and resistances on this short time frame.
- Place an order when the price breaks the short-term trend to be aligned with the trend on the longer one.
- Exit when the entry conditions are gone (not necessarily reversed).
This is very vague. So here's a real example in practice. Figure 1 shows steps 1 to 5 on the daily chart of CAD/JPY for a short entry. The entry point is the bar before the marked vertical line on Oct 21. See that CAD/JPY tested the descending resistance line (step #2) with a negative RSI divergence (#3). The trend as suggested by the moving averages is a choppy downtrend (#4). Thus, the conditions were met and a short entry is signaled. [caption id="" align="aligncenter" width="580" caption="CAD/JPY"]CAD/JPY[/caption] For timing the entry, Figure 2 is a 3-hour chart of CAD/JPY with the entries and exits marked. Yellow triangles are entries and red dots are exits. I entered a full position after CAD/JPY made the initial dive and then retraced to the previous support (now resistance) line. It bounced right off that line strongly (left side of figure). I entered at market price once we made a hammer candlestick (negative signal) the bar before. Stop was placed at 88.0, near the recent high and at a round number resistance. [caption id="" align="aligncenter" width="580" caption="CAD/JPY, 3-hour"]CAD/JPY, 3-hour[/caption] For the exit, I had a manually adjusted hard stop to be a couple of resistances away. I kept it loose on purpose because this position was my biggest winner. (Let your profits run). But once the RSI on the daily passed below 50, I took a more conservative approach on the exit stop. Then once CAD/JPY tested 84.50 and hung around 85.0, I tightened my stop and was taken out at 85.30. Note that my original target was 84.0, so I thought testing 84.50 was close enough. Also note that this setup is expected to be executed recursively. It is meant to be run so that you're stacking up your winning position if the conditions and the trend is in your favour. This is actually where the power with this setup kicks in. I'll continue with the CAD/JPY example to illustrate this point. Notice in Figure 2 that I added to this CAD/JPY short at the (second from the right) yellow triangle point on the chart at 86.3 for 50% more units. The down move was still intact as shown in Figure 1 at the time. Using the same setup, I added more units to this position. And by adding 50% more to my position, I was able to ride that last wave down for +200 pips on these extra units. Otherwise, I would have exited at 85.30 on the consolidation around 85.0 and left with nothing on the market for the last big wave. The timing as shown in Figure 2 for this addition isn't the same as for the original entry. But it's obvious enough on the figure with the same markings which I used. Simply refer to Figure 2 for a visual explanation on the timing for this entry. In case you haven't noticed on Figure 2, but I just re-entered this position with half the size using the same setup. Since this third entry is still in progress, I can't comment on it just yet. We'll see how it goes. Finally, for ease of referencing this trading setup later on, I will call this particular setup, FTC (forex trend-continuation). Right now it's version 0.1, a first publication release but still in beta testing with my paper trading. Once the setup has proven itself, I will use it in live trading with real money. Then I will christen it with a version 1.0, and perhaps a better name. In the mean time, I expect more refinement to this setup as I continue to try it out on paper trading. Check my FTC tag for more sample applications of this trading signal. Update Nov 18, 2009: I've changed the name from FTCS to FTC as I now have a FTR setup.