CompassFX
Advanced Trading Strategies
Breakout - One of the most popular trading strategies, the Breakout is a strategy of monitoring a currency pair as it oscillates up and down in a narrow price range, then placing a trade depending upon the direction of the break of the range. A Long position can be placed if there is a break above the range; or, a Short position can be placed if a break below the range occurs. Buying or selling usually occurs after the price makes a move out of the range. Traders can either wait for a breakout to occur to place a trade or set an entry order to be executed in the event of a breakout of the range. When considering a Breakout, a trader should evaluate the following possible trading techniques:
- Has price remained in a narrow range for an extended period of time? The longer price remains flat or in a narrow range, the possibility of a breakout increases.
- What was the overall market direction or trend before the narrow range? Often, when a breakout occurs, price continues in the direction of which it originated.
Channel Trading - When the market is in a range, resistance and support price points within the range can often be identified. Sometimes during a range-bound market, these price points are reached in succession. In this case, at a repeated resistance level, a trader can short the market if the trader feels the market will retrace down to the previous support level. And, in similar fashion at a repeated support level, a trader can place a long position. It's important for a trader to do a thorough analysis before executing a channel trade. A continuation of the range may make channel trading a favorable strategy; however, if the market breaks out the range, there is the possibility of a channel trade being placed in the wrong direction.
In this example above, there is a price range that is about 60 pips wide between the 2 red lines representing Support and Resistance. In the middle of the range, there is a magenta line used to identify the halfway point between Support and Resistance. For this strategy to work effectively there should be ample distance between Support and Resistance - at least enough to trade within. Too tight of a price range may be dangerous with this strategy.
Let’s walk through this example of a Channel Trade strategy:
First, wait for the setup. There needs to be a repeated move in price to a Support or Resistance level to trade. In this case, there is a repeated Support at # 3.
Then calculate the repeated distance from Support to Resistance. Also, mark the halfway point, which can be used as either a Limit (take profit) point if reached or as a Stop-Loss if price moves through.
At # 3 point, a trader can enter a Long trade with the expectancy for the trade to move up to the price level of # 2. In this case, however, price did not reach the Resistance of the range but hesitated at point A which is a little beyond the halfway point. In Channel Trading, be aware of price hesitation. This can be a sign for potential reversal. As price moves above the halfway point, a trader can set a Stop-Loss at that price level.
As the trader feels that price will not go higher, the trader can exit his Long position around point A and enter a Short position with the expectancy of the short to descend down towards Support represented by points # 1 and # 3.
At point B, the trader can exit the Short position and enter into another Long position with the expectancy for the trade to move up to the price level of # 2. In which it did at point C.
Then, the process is repeated if there still exist the conditions for channel trading. In this case, a trader might have traded points A, B, C, D, E and then F.
It's important for a trader to do a thorough analysis before executing a channel trade. For most traders, it requires a keen eye to the charts and a feel for the market. It’s typically most suited for an active trader. If you attempt this strategy, remember that a continuation of the range may make channel trading favorable; but, if the market breaks out the range, there is the possibility of a channel trade being in the wrong direction.
Scalp Trading - This strategy is designed for active traders. Multiple trades are made for small gains. Each trade is held for a short period of time typically within a few minutes. The success of using this strategy depends in part to market volatility and a trader's ability to quickly enter and exit with minimal loss.
Straddle Trading - A trading strategy of setting entry stop orders above and below either a narrow range channel or resistance and support levels. Once one order has been filled, the trader can remove the other order. When considering a Straddle trade, a trader should evaluate the following possible trading techniques:
- Narrow range channel - an entry buy stop can be placed above and an entry sell stop can be placed below in the event price breaks out of either side of the channel.
- Resistance and Support - an entry buy stop can be placed above resistance and an entry sell stop can be placed below support in the event the market makes a push beyond either level.