The 4 Keys to ProfitableForex Trend TradingUnlocking the Profit Potential of Trending Currency PairsBy Christopher WeaverHh

HARRIMAN HOUSE LTD3A Penns RoadPetersfieldHampshireGU32 2EWGREAT BRITAINTel: 44 (0)1730 233870Fax: 44 (0)1730 233880Email: [email protected]: www.harriman-house.comFirst published in Great Britain in 2012Copyright Harriman HouseThe right of Christopher Weaver to be identified as the Author has been asserted in accordance with theCopyright, Designs and Patents Act 1988.ISBN: 978-0-857190895British Library Cataloguing in Publication DataA CIP catalogue record for this book can be obtained from the British Library.All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwisewithout the prior written permission of the Publisher. This book may not be lent, resold, hired out orotherwise disposed of by way of trade in any form of binding or cover other than that in which it ispublished, without the prior written consent of the Publisher.No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a resultof reading material in this book can be accepted by the Publisher, by the Author, or by the employer(s) ofthe Author.Figure data and information copyright respective owners and sources.Set in Minion, Bebas Neue and FrutigerMW Cond.Printed and bound in the UK by CPI Antony Rowe.HhHarriman House

ContentsPrefaceIntroductionvviiKey 1 – Trend Lines1The TheoryPrimary strength: tells you whether to buy or to sellSome practicalitiesBasic trend line characteristicsTrend line typesTrend line projectionEntry and Exit Strategies1. Trend line bounce strategy2. Trend line break strategyKey 1 SummaryKey 2 – ChannelsThe TheoryPrimary strength: creates a trending rangeChannel characteristicsChannel typesChannel zone projectionEntry and Exit Strategies1. Channel bounce strategy2. Channel break strategyKey 2 SummaryKey 3 – Fibonacci Retracement LevelsThe TheoryPrimary strength: reveals hidden support/resistance levelsFibonacci retracement level characteristicsFibonacci typesOverlapping Fibonacci levelsEntry and Exit Strategies1. Fibonacci bounce strategy2. Fibonacci break strategyKey 3 8589102102110122iii

The 4 Keys to Profitable Forex Trend TradingKey 4 – Symmetrical TrianglesThe TheoryPrimary strength: clear message – indecisionSymmetrical triangle characteristicsSymmetrical triangle typesSymmetrical triangle zone projectionEntry and Exit Strategies1. Symmetrical triangle bounce strategy2. Symmetrical triangle break strategyKey 4 SummaryUsing the Keys EffectivelyWhich currency pairs should we trade?The trend strength of the cross ratesThe locked chartMultiple key confirmationsExamples of multiple key 8139148154155155163165166167175177

PrefaceWhat this book coversThis book covers four different approaches to trend trade the foreign exchange market.These four keys are: linesChannelsFibonacci retracementsSymmetrical trianglesWe will explore the primary strength of each key, why it is useful, and the differentvariations of each key. We will then go through two practical strategies for each key andhow to use them to execute successful trades.It is worth noting that all of the strategies in this book can be described as continuationstrategies. A continuation strategy is one that is traded in the direction of the trend onthe assumption that the trend will continue.As these keys are general concepts in technical analysis they are not limited to specificcurrency pairs. For example, one can trade using a trend line for a minor cross currencypair such as the GBP/AUD, with the same confidence as when trading a major currencypair such as the EUR/USD.These keys and their corresponding strategies are designed to be traded in the foreignexchange spot market. But they are equally applicable to trading CFDs or spread betting.Who this book is forAs this book does not cover such basics as general trading terminology, the process ofplacing a trade or navigating through a trading software package, it is assumed the readeris comfortable with trading in general and is therefore looking to enhance their overalltrading experience by generating more profit. The application of the techniques in thisbook should be possible with any standard charting package.Notes on chartsAll the charts in this book were produced using eSignal.v

IntroductionThe currency pairs which make up the foreign exchange market provide us with some ofthe most reliable trading trends. This is due to the high daily liquidity, or volume, of themarket. The foreign exchange (forex) market as a whole trades around US 4 trillion everyday - far more than all of the major stock markets in the world combined. All of thistrading creates strong trends!For instance, look at the EUR/USD currency pair.Figure 0.1: major trends in EUR/USDOf all of the currency pairs that make up the forex market, none is traded as heavily asthis one. This means that whatever direction this currency pair is moving in, there is ahuge amount of money backing it. It is believed that there is nearly US 1 trillion of tradingvolume per day on this currency alone. If it is trending up, it will require somethingdramatic to sufficiently turn the sentiment of the buyers into sellers and shift the trend.Compare that to an obscure stock listed on a minor stock exchange. The smallest bit ofnews regarding the company, or the change of opinion by just a handful of stock holders,can turn an uptrend into a downtrend very quickly.Liquidity is the key in providing reliability for trend trading - this is good news for theforex trend trader.vii

Key 1Trend LinesA trend line is one of the most commonly used tools in technical analysis. However, whilemost traders know what this tool is, not so many know how to use it to implement aneffective trading strategy. More often than not, traders draw a single trend line, which isused to highlight historic price action rather than to project a probable future.Because of this, the trend line has come to play a minor role for many traders in settingmarket entries and exits. People have overlooked the simplicity of the trend line in favourof more complex indicators and systems. This is a shame as they are missing out on apowerful tool.In this chapter, I am going to explain trend lines by defining their characteristics, bydiscussing different types of trend lines, and showing how they can be used to projectfuture trading zones. We will also look at the power of using trend lines to pinpoint exactentry and exit prices.1

The 4 Keys to Profitable Forex Trend TradingThe TheoryPrimary strength: tells you whether to buy or to sellA trend line shows which way the currency pair is trending and reveals the current marketsentiment of the pair. The market sentiment is revealed by the direction of the trend line.If the trend line is moving up, then the market feels that the base currency (the firstcurrency in the pair) is stronger than the terms currency (the second currency in the pair).If the pair is trending up then we are likely to buy, if it is trending down then we are likelyto sell. Knowing this up front, before considering the entry and exit points of the potentialtrade, puts you in a good position to effectively analyze a particular currency pair. Onceyour trend line is drawn and you are sure about your intention to either buy or to sell,you can move on with confidence and begin looking for possible places of entry into aposition.Another important benefit of trend lines is that they allow us to spot key turning pointsin the price action. A key turning point is a moment where the price action changesdirection, forming either a peak or a trough. As we will see in this chapter, identifyingthese turning points creates effective entries in the market.Some practicalitiesIn this book the price action, which is the plotted history of the exchange rate fluctuations,is shown by using candlesticks. The most basic of charting software will have a trend lineoption that can be used to highlight trend lines when they occur.While it is true that each chart can present many different trend lines and can thereforebe highly subjective, the goal for the trader is to identify the most obvious one. This isbecause our trading decisions must be based on information that the larger market movingtraders, such as banks and large funds, are considering. The more eyes that see these trendlines, the more trading that takes place based on them and the more this happens themore likely they are to cause the desired reaction to the price action.Trend lines can be drawn on any time frame. In this book, however, the shortest timeframe chart we consider is the 15 minute chart and the longest is the daily chart. This isbecause trend lines drawn on anything less than the 15 minute chart tend to breakdowntoo often and are therefore unreliable to trade with. While charts longer-term than dailydo not produce enough trading opportunities and can become outdated. The effect ofbeing able to draw trend lines on a number of different time frames is that the amount ofpotential trading opportunities is very large.2

Key 1 – Trend LinesBasic trend line characteristicsA trend line has two major characteristics,1. it has a minimum of three touches with the price action, and2. it is angled and not horizontal.The requirement for three touches is a generally accepted rule in technical analysis. Twotouches are more likely to be just a coincidence. With that in mind, the more touches thereare the stronger the trend line.The trend lines in the following charts demonstrate both of the required characteristics.Figure 1.1: example of a simple, single-sided trend line3

The 4 Keys to Profitable Forex Trend TradingFigure 1.2: example of a simple, single-sided trend lineAfter examining the previous charts, you should be able to recognize how the presence ofa clear and established trend line can enhance your trading profitability. When a trendline is pointing up, as it is in Figure 1.1, you will be considering long entries; when a trendline is pointing down, as it is in Figure 1.2, you will be considering short entries. To doanything else would be trading against the trend, and is likely to decrease your probabilityof success.Later in this chapter we will identify which significant points on the chart provide youwith the most efficient entry in relation to the trend line. Before we do that, there are afew more concepts regarding trend lines which you need to understand.Trend line typesThe basic trend line shown in Figure 1.2 is a simple concept which people generally findeasy to identify. This basic approach, however, is insufficient, leaving you wondering howfar back on the chart to go in search of trend lines and which trend line to use if youidentify more than one.Answering these questions is a matter of understanding the difference between major andminor trend lines, the impact that key moving averages have on trend lines anddifferentiating between the single-sided trend line and the double-sided trend line. Thefollowing sections of this chapter will do just that.4

Key 1 – Trend LinesSingle-sided trend linesA single-sided trend line (like those in the previous figures) are called single-sided becausethe price action is only on one side of the trend line. If the price action is going up, the trend line is beneath it. One can think of the trendline as holding up the price action. If the price action is going down, the trend line is above it. One can think of the trendline as pushing down the price action.Take a look at Figures 1.1 and 1.2 again, viewing them with this understanding of singlesided trend lines.Double-sided trend linesA double-sided trend line always runs through the price action, as opposed to runningon just one side of it. The result is that there will be price action on either side of the trendline. A single-sided trend line connects only troughs or peaks depending on its direction,but a double-sided trend line connects both peaks and troughs. As with single-sided trendlines, the double-sided trend line must have three touches with the price action.One problem that can occur with introducing the double-sided trend line to our analysisis that suddenly we can identify many trend lines. To address this we must understandtwo points:1. The more touches the price action has with the trend line the more relevant the trendline is.2. The most obvious trend line is the one to use. This is for the same reason as previouslymentioned concerning single-sided trend lines – we want to use the trend lines thatthe majority of the market is also using.5

The 4 Keys to Profitable Forex Trend TradingLook at the following chart of the EUR/USD daily chart for the nine month periodbetween March 2009 and November 2009.Figure 1.3: example of a double-sided trend lineYou can see that the overall trend for this time period is definitely up, but the price actionjumps from one side of the trend line to the other. This is typical of longer-period trendlines, especially when viewed on the daily chart.Let’s look at another double-sided trend line. The following chart is the USD/JPY for the18 month period between July 2008 and January 2010. The trend in this case is down.Figure 1.4: example of a double-sided trend line6

Key 1 – Trend LinesAlthough the overall trend is down, you will notice that between March 2009 andDecember 2009 the price action is bouncing off the top of the downward trend line. Thisis not a problem. Remember we are now considering more complex trend lines and theinteraction which the price action has with them. In this example, the downward trend isfurther confirmed by