Weekly and Daily

Another simple technique is to use two proven moving averages to add to what the pink lines are telling us to engage in overall market conditions.

- The weekly and daily 200sms is used to give the overall bias. If price is above, the bias is bullish and if price is below the bias is bearish.

- The weekly and daily 50sma is a proven area of support and resistance.

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Weekly chart

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Daily chart

In short, we want to see price above ALL the moving averages in a bullish market and below ALL in a bearish market. Looking at the GBPUSD, we can see that price is very much in a bearish market and has been for many months. Taking short positions have the edge and carry a far higher probability of success. Going long will require more luck and more guess work and, well luck, is not something a good trader relies on.

Goal 2

Depending on the strategy I am using based on what price is telling me, I sometimes enter on the weekly or the daily chart. With the GBPUSD, let’s look at how we could enter based on a breakout on the daily chart.

We can see that we have had weakness since September when price fell from 1.3400 to 1.2200, where it is now in a mini breather. As we have rightly identified that the overall market is bearish, I favour a breakout to the downside and a continuation of the bear trend. Trend traders will look for price to break and close of the drawn in pivot support just below 1.2000 at the END OF THE DAY before looking to place entries.

Until then, trend traders will be exercising patience (a key trait of a top trader) and standing aside. Many will already have short positions running from below 1.4000, after the release of BREXIT, and will look to compound further on the next breakout.

Be also aware that good traders have not only the entry point but also the initial stop loss, the risk, the exit management and compound levels all pre thought out. This is crucial and must not be an afterthought.

Goal 3

Many will have a fixed risk to reward, let’s say 1:1 or 1:2 or variations. This is another crucial mistake as you have capped your profit. And the reason why many blow accounts is because they have uncapped losses. This must be reversed and the only way to do that is to let winning trades run to proven psychological levels. You have often heard expressions like “the trend is your friend” and “cut your losers short and let your winners run” but this is regularly not well-practised.

A simple technique to use to let winning trades run is to understand that a natural feature to price is to move towards round numbers. If price on the GBPUSD clears the 1.2000 support level, then I would like to see price move towards 1.1000 and then 1.0000. The distance between round numbers is 1000 pips and so, we could potentially see price on the GBPUSD weaken 2000 pips, maybe even further.

In summary, based on what the charts are telling us, the GBPUSD has the edge for further weakness and so short positions are what we must be looking for. However, until price dictates that with a breakout, we must apply patience for now. And patience is handsomely rewarded in trading.

Zaheer Anwari
Trend trader and Mentor