U.S. Dollar / South African RandEducation
Technical analysis defined
Technical analysis has been defined as the art of identifying a trend reversal at a relatively early stage and riding on that trend until the weight of evidence shows or proves that the trend has reversed.
This definition has influenced my choice of strategies and why I chose price patterns to trade the forex market.
Here is how I do it according to the definition above:
a. The art of identifying a trend reversal: I use trendline breaks to do this. I used to rely on swing points. For uptrends, I would be waiting for when the last swing low is broken, and for downtrends, when the last swing high is breached. But now, I use the break of trendlines. On the GBPUSD daily chart, you could see how the trendline break and using the 123 pattern could help one to identify and enter the trend early.
b. Riding on the trend: I use trailing stops to ride a trend when I have hopped into the trend so as to lock in my profits before the trend reverses. I place the trailing stop at logical levels in the price movement. For downtrends, at swing highs and for uptrends, at swing lows, because if price comes back to this levels, the trend has reversed.
c. Until weight of evidence proves price has reversed: I would ride a trend until the trendline gets broken or I get stopped when price hits the trailing stop loss. The two charts below contrasts and compares the use of trailing stops and trendlines to ride the trend and exit when trend has reversed. The first, using trailing stops, would give you a net pip profit of 5393.8 pips.
The second, using a trendline, would have given you better profits. The choice is yours. Both methods are good.
As I said in another article, I don’t trade price action in isolation. I look for other signs like momentum, volatility, and the story the price action tells before deciding on a course to take. Some traders trading forex would use volumes which I have considered in the past, but I think that volumes are unreliable because the forex market is decentralized and different forex brokers would give different output for volumes. Just my POV though.
This definition has influenced my choice of strategies and why I chose price patterns to trade the forex market.
Here is how I do it according to the definition above:
a. The art of identifying a trend reversal: I use trendline breaks to do this. I used to rely on swing points. For uptrends, I would be waiting for when the last swing low is broken, and for downtrends, when the last swing high is breached. But now, I use the break of trendlines. On the GBPUSD daily chart, you could see how the trendline break and using the 123 pattern could help one to identify and enter the trend early.
b. Riding on the trend: I use trailing stops to ride a trend when I have hopped into the trend so as to lock in my profits before the trend reverses. I place the trailing stop at logical levels in the price movement. For downtrends, at swing highs and for uptrends, at swing lows, because if price comes back to this levels, the trend has reversed.
c. Until weight of evidence proves price has reversed: I would ride a trend until the trendline gets broken or I get stopped when price hits the trailing stop loss. The two charts below contrasts and compares the use of trailing stops and trendlines to ride the trend and exit when trend has reversed. The first, using trailing stops, would give you a net pip profit of 5393.8 pips.
The second, using a trendline, would have given you better profits. The choice is yours. Both methods are good.
As I said in another article, I don’t trade price action in isolation. I look for other signs like momentum, volatility, and the story the price action tells before deciding on a course to take. Some traders trading forex would use volumes which I have considered in the past, but I think that volumes are unreliable because the forex market is decentralized and different forex brokers would give different output for volumes. Just my POV though.
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