Those of you who have taken one of our DailyFX Courses know that the instructors always recommend trading in the direction of the trend on the daily chart. If the trend is up, then only look for buys and if the trend is down, then only look for sells.
This includes those situations where you have identified a trading opportunity using a chart pattern. On the daily chart of the GBP/CHF below, I have identified two Double Tops and a Range Bound situation.
Many traders look for these patterns on a chart as solid trading opportunities. They will try to sell Double Tops (and buy Double Bottoms) and wait for a breakout of the range with the intention of entering into a trade in the direction of that breakout. But we still recommend using the direction of the trend as a directional bias on your trades even in these situations. When a market pulls back off of an all-time high and then starts to move back up to new all-time highs, there will be a period of time when the market looks like a potential double top. However, selling all-time highs or buying all-time lows is really not an approach that will lead to consistent profits. We should be looking to buy a market that is at or near all-time highs, not try to predict the end of the trending move. Our preferred play is to sell Double Tops in a downtrend and buy Double Bottoms in an uptrend. On the chart below are two examples of what that looks like. Many traders will sell as the market moves down through the support low between the two highs as that serves as some confirmation that it is indeed a Double Top. Selling as the market moves down through that low and placing your protective stop above the Double Top represents a solid trading opportunity.
Since we are looking at a market in a downtrend, we can also see how that trend may determine the direction of a break out of a trading range. When a market moves into a range bound situation, many times it is because traders are waiting for a news event before putting on new positions. More often than not, that news event just confirms the direction of the trend and breaks out of the range in that same direction. So markets that are moving down and then move into a range will more often than not, break down through support. Markets that are moving up and then move into a range will more often than not, break out up through resistance. Otherwise, markets have a tendency to break out of a range in the same direction it was trading in before going into the range. “More often than not” does not mean every time, but does offer a professional enough of an edge to use as the basis of a solid approach to trading.
Written by Dailyfx.com