Markets trends often correct which is a trader’s delight for finding an entry like we are seeing on the GBP as it looks to be running out of gas.
Markets rarely if ever move in a straight line as a trend unfolds. However, when they are trending you’ll often find a reprieve of price as profits are taken or as opposing forces try and take on the current trend.
Thankfully for trend traders, trends often maintain their path so you can look at those short reprieves in price to re-establish a position or add to already successful trade.
When looking at a chart that is trending, you’ll often notice that a currency or other financial instrument moves in a stair step or jig saw manner. This non-linear nature of the markets should be seen from angle of how you can take advantage and trade.
When you notice markets moving against the greater trend, you have one main task as a trader. You need to work on identifying the finishing point and where the trend may likely resume so you can enter back in the direction of the overall trend. While this is no easy task, the payoff is often worth the effort.
There are many tools you can use to identify the ending point of a trend correction however none of them are right 100% of the time. A favorite of many traders would likely be a Fibonacci retracement number, trendline bounce, or price pattern playing out. As you can imagine, it’s great when these combine together and the trend resumes.
Once you have found a strong trend correcting and that correction is potentially ending, you have two more steps. The first step is to determine where you would like to enter into the trade. After you’ve decided where to enter a trade, you need to make sure you have a favorable risk to reward ratio.
Traders often decide to pull the trigger and enter back into the direction of the original trend when a breakout occurs with the new trend. Once in the trade in the direction of the trend you’re only edge is risk management through risk to reward ratios. We recommend that at the very least, you not risk more than you’re looking to make on your trade.
Source: Bloomberg Pro Terminal
Jr Trader Alexander Kumanov
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