We constantly face the question, what ingredients make up a good trade? Entry; the closer that we buy off the bottoms, and sell off the tops, the greater amount of profit we can enjoy, while taking on a smaller amount of risk. Assuming the market establishes a 100-pip trading range between 1.2100 and 1.2200, it clearly makes sense that buying at 1.2110 is a better trade than buying at 1.2150, or 1.2170. However the dilemma we face is as follows: If we continue to buy market bottoms, we run the risk of buying a seemingly never ending downtrend, a practice also known as catching a falling knife. So the $10,000 (demo dollar) question remains how can we buy the bottoms and sell the tops, only when the trend is in the midst of a change in direction? The following chart may help add some light to this predicament.
The following (1-hour) chart shows the GBPUSD breakdown, below its established up trending channel. We may interpret this as a sign of a change in trend, as the market now shows a greater likelihood to now reverse back to the downside. With this in mind, it clearly makes sense that as we should only look to sell-short as a broken up-trending channel tells us we have a better chance to see lower prices in our near future.
As a general rule of thumb, while buyers try to go long at the lowest possible price, those who wish to sell-short should look to do so at the highest possible level. We can see that after the up-trending trading channel failed to contain the markets price action, a long-candlestick wick popped up above the upper Bollinger Band. In this application, I prefer to set the Bollinger Bands to a 3rd standard deviation as this will help isolate only the extreme market spikes.
To summarize, our goal is to enter the market as it takes its last exhausted attempt at a failing trend. Putting this together, this trade set-up allows us to identify short-term changes in trend, and then enter the market at its relatively extreme price levels. Although this scenario may not play-out as cleanly every single time, it provides us with the criteria to wait for the right trade, and wait for the right price. Best of luck in trading!!!
Al Bawaba
