How to Catch a Trade in a Vertically-Trending Market (Part 2)

06/02/2009 11:38 am EST


Timothy Morge


Now let's look at a related market that has gone vertical and see if I can show you how to find quality entries once a market goes vertical. Let's take a look at the Canadian dollar against the US dollar:

Here's a look at the 240-minute bar chart of the Canadian dollar against the US dollar. You can see I found three great entries in this longer-term chart to enter and then add two additional legs to my longer-term portfolio position in this currency. When crude oil is trending, you can bet I am also trading the Canadian dollar, either against the US dollar or against the Japanese yen.

Click to Enlarge

By using the outer warning line and waiting for my favorite entry, the “test and retest” of the warning line, I easily found the first two entries in this monster move down (meaning the Canadian dollar is strengthening against the US dollar). The third entry came at a test and retest of the major red, down-sloping Median Line. These are very high-probability trade entry set ups and if the stops are acceptable relative to my perceived profit targets, meaning the risk/reward ratios are higher than 4 or 5 to 1 when position trading, I take these trades every time I see them.

But what do you do if you are using smaller time frame charts and price has already gone vertical? Is it possible to identify high-probability trade entry areas with quality stop loss orders? Let's look at 20-minute charts of the Canadian dollar and see if we can find quality entry areas, even though prices have gone vertical:

Click to Enlarge

Price falls in a near vertical fashion and then forms a countertrend rally to about 1.1360 before trading to new lows. When they break below the prior lows around 1.1180, I add a new down-sloping red Median Line and its parallel lines. Now I watch as price comes down to test the down-sloping red Median Line several times (these tests tell me the line is meaningful, because it is acting as support) and then price turns and heads higher, testing and breaking above the red, upper Median Line parallel.

More tomorrow in Part 3. Read Part 1

Timothy Morge

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