A personal trading motto that I follow is the term “Fundamentally Driven, Technically Executed.”
Simply put, you need two things to succeed in the trading world. The first is the trade direction and the second is the entry price. In essence, a trader must know WHAT to do and WHEN to do it. Knowing the direction alone is not enough. You need to go to the charts and find a suitable location to execute the entry price. Thereafter, the task of calculating the stop loss and the profit target becomes simple enough.
In the Forex Market, a prime example to choose the direction of the trade is to follow what the central banks are saying. The Federal Reserve and the Bank of England are moving towards tighter monetary policies. The European Central Bank and the Bank of Japan are moving towards looser monetary policies.
These mandates create trading opportunities in itself. As an example, just by the direction of the monetary policies set out above, we can look at the following “fundamental” trades:
1) Short EUR/USD
2) Short EUR/GBP
3) Long USD/JPY
4) Long GBP/JPY
It wouldn’t make sense to go long or short on GBP/USD at this stage because both the US and the UK are moving towards tighter monetary policy. As a trader, we want to spot trades that give us the “biggest mileage” or the “chunkiest meat.” To that end, we need to spot trades whose currencies give us the biggest momentum. This is done by pairing up currencies which exhibit divergent monetary policies.
Knowing the direction of the trade solves half the problem. The next step is to find out the areas of entry. Here’s a good guideline for long and short:
1) Enter when a white candle appears after bouncing off an uptrend line (trend trade)
2) Enter when a white candle bounces off and closes above a support level (range trade)
3) Enter when a white candle closes above a resistance level (breakout trade)
1) Enter when a black candle appears after bouncing off a downtrend line (trend trade)
2) Enter when a black candle bounces off and closes below a resistance level (range trade)
3) Enter when a black candle candle closes below a support level (breakout trade)
In both cases, Trade #1 is called a trend trade because it tells us that the price is respecting the trend line. In this regard, a trend trade is taken in the direction of the trend.
In Trade #2, prices are moving within a range, respecting the boundaries of support and resistance. Hence, a range trade is executed by going long after prices turn up from support or going short when prices turn down from resistance.
In Trade #3, prices “breakout” from a previous range and we execute a breakout (or momentum) trade in the direction of the breakout by going long when prices break above resistance or going short when prices break below support.
I have used the above techniques for several years to trade the Forex Market. Having experienced considerable success with it, I am convinced that the motto “Fundamentally Driven, Technically Executed” can help you improve your trading results too.
USA: ISM Manufacturing PMI. Wednesday, 1st October, 10pm.
I expect figures to come in at 58.6 (previous figure was 59).
Australia: Building Approval m/m. Thursday, 2nd October, 9.30am.
I expect figures to come in below 1.3% (previous figure was 2.5%).
USA: Non-Farm Payrolls. Friday, 3rd October, 8.30pm.
I expect figures to come in above 210K (previous figure was 142K).
Long USD/JPY at 109.48
On the H1 chart, USD/JPY has just broken out of a range. With the divergent policies Federal Reserve and the Bank of Japan, our fundamental direction is to go long on USD/JPY.
Since a white candle has closed above the resistance level, we will go with Trade #3 and execute a breakout trade. We will go long once prices move up to 109.48, which is the level at which the breakout candle closed above the resistance level. A 35 pip stop loss is placed below the previous low as we do not expect the price to retrace back to the midpoint of the previous range. We will have two targets on this trade, exiting the first position at 109.83 and the second one at 110.18.
Entry Price = 109.48
Stop Loss = 109.13
1st Profit = 109.83
2nd Profit = 110.18