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Checklist for a Trade Setup Confirmation
10/09/2012 9:00 am EST
Traders know that attempting to jump in front of a move before it’s confirmed can be riskier than it’s worth. Tyler Yell of DailyFX.com shares key signals to watch.
The USDJPY has been on a strong downward move since earlier this year. The trend started from a turnaround at the 84.00 level and became a legitimate downward move as we see lower highs and lower lows below the 100-day moving average since May.
When approaching any trend, we first want to look for confirmation. When a trend has held for the better part of the year, we find levels the trend does not break and we can then look for set up on a smaller time frame based on those levels. The key level on USDJPY is 78.80, which is the 100 day simple moving average price.
Traders know that attempting to jump in front of a move before it’s confirmed can be riskier than it’s worth. So what are we to do?
A trend confirmation checklist will help you see if the trade is worth adding to your watch list. This trend confirmation checklist can apply to many trends you find.
- Lower lows and lower highs to confirm downtrend (or higher lows and higher highs for an uptrend).
- Respect to the moving average. In this case, the 100 period moving averages have been honored three times since the break and is testing it a 4th time.
- Heiken-Ashi is used here to average out the candles so momentum is clearly displayed.
- RSI resistance on a downtrend as the indicator has stayed below the overbought level of 70 (support is around 40-50 on an uptrend).
NEXT PAGE: Another Helpful Checklist|pagebreak|
For entries on a set up similar to USDJPY, we can walk down to the 4-hour chart to find momentum shifting in the direction of the trend. Using more than one time frame when locating trading set ups can improve your overall probabilities. Once we’re on the 4-hour chart, we’ll use the Slow Stochastic Indicator. This is a momentum indicator that shows you when a turn is likely because momentum to one side has been exhausted.
Here is the Checklist on the 4-hour (or any smaller time chart from the original trend identification chart):
- Load up the Stochastic so that you can identify momentum shifting on the smaller time frame in the direction of the overall trend.
- Locate the entry zone via a price range to know if the trend is continuing.
If the trade set up is confirmed on any trend, we will then look to target twice the number of pips that we’re wanting to risk. This is a fundamental but key concept in trading well known as your risk reward ratio.
In the image above, we want to make sure the downward channel isn’t broken by price breaking above the recent swing high. This would invalidate our set up and is no longer worth your time. Also, we’re looking for high probability set ups, so we set our stop outside of the falling channel and our target zone within the falling channel.
Tyler Yell can be found at DailyFX.com
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