Posted: July 12, 2009 | Categories: Steve Rising's Trading Success Series
One of the unique characteristics of the forex market is that the directional bias is constantly changing. In other words, in one session or in one day we can bullish and in the very next session or very next day we can be bearish, and that’s one of the unique characteristics of this marketplace that’s much different than other marketplaces is its constant shift in the directional bias.
Because of this constant shift in the directional bias, for us here at The Trading Institute who trade the forex on an intraday basis using the ThinSlice trading methodology, we look for one of two conditions. We look for either range-bound conditions or momentum-based conditions.
That’s why we don’t use any trend lines or look for any trend-based activity, a wave theory, once again trend lines, or any of these types of patterns because they simply do not perform consistently in this marketplace when trying to trade it specifically on an intraday basis.
Plan Your Trade And Trade Your Plan
So when we start our creating our trading plan, one of our cardinal rules is “plan your trade and trade your plan.” We first start out by evaluating the daily chart. Now I always like to distill things down to their simplest format, and really trading distills down to three simple steps. So step one in this video is evaluating the daily chart for one of two conditions.
We use the daily chart first, and then we move over to the 10 minute chart. We do not use multiple time frames or descending time frames, or what is often referred to as “the drill-down strategy.” We specifically focus on the daily chart to discern one of the two conditions, then take that information, move it over to the 10 minute chart, and then based on one of those two conditions, we then can consider which trading strategies we want to focus on.
So this is the US Dollar vs. the Swiss Franc, and we can go back here, we can highlight here, we can see here this previous activity here, we’re clearly trading in range-bound conditions, and then we can see here when the bottom of range is breached, then our momentum kicks in, and now we’ve got a new range starting to emerge here, at this point right here, where we’ve got our bottom of range starting to form.
Getting Into Trouble
And this is where many individuals, many of which are self-taught, or what I call the “trial and error” trader, get into trouble is because they’re always trying to interpret this type of information, when in fact what happens is we wind up going sideways here for four, five, six, seven days, and in fact price can reverse back around on us.
For instance at this point right here, we can see here if we were attempting to try to trade once again this trend line, we can see that we had a very dramatic pullback of almost, or very close to, 200 pips. So that’s why we don’t do that style of trading or use any type of trend lines. What we look for, is we look for specifically, do we have a trading range, and if so, then we focus on strategies one and two, our range bound trading strategies, and then ultimately what happens is the top and bottom of the range is breached, and then we can trade strategies three, four, or five. So once again we can go back here, I can see back here, earlier here, highlighting here, we’ve got a bottom of range, bottom of range breached at this time.
We had momentum based activity for one day, and then we went back into another range. And this is another area where people get into trouble because the reality is this momentum that we label it, or where markets has consistent directional bias, that typically only happens for 24 to 48 hours, and then we go back into a range.
I can keep going back here, we’ve got our range here at this point, actually the range just shifted with very little momentum-based activity, and this is why individuals get into trouble attempting to try to use wave theory, ABC pattern, or trend lines to discern the directional bias, overall is because it’s constantly shifting.
We can look at each one of the candlesticks which represents one day of activity, the red candlesticks being bearish candlesticks, or price closing lower than it opened, the green candlesticks being bullish candlesticks, or price closing higher than it opened.
And I can take this range right here, and I can see here that, for instance as the range started, one day we were bullish, the very next day we were bearish, next day bullish again, and bearish, and this constant shift in the directional bias is what causes individuals to not be consistent as traders.
Range And Momentum
So for us here at The Trading Institute using the ThinSlice trading methodology, once again we’re specifically looking for one of two conditions, either range-bound conditions, then the top or the bottom of the range is breached, and then momentum-based conditions.
Now in closing, please let me add, please don’t just try to attempt this just based on this one simple concept, because you need to have a solid entry strategy. An entry strategy is step two for us, which I’ll go into in the video labeled “The Three Steps of Trading (Step Two and Yhree”, but it’s difficult to understand this and what happens is sometimes people try to attempt to trade bits and pieces of free information, and once again they’re inconsistent as traders.
So in closing, step one, do we have range or momentum, and then based on that condition, we can then focus on which strategy we want to apply on our 10 minute chart.
