In my previous article, I mentioned a trade I was looking at on AUD/USD. My bias (long) was based on the fundamental driver of a divergent path for interest rates between the Fed and the RBC while the entry, stop and target was based on the technical aspects of support, resistance and Fibonacci. Then, I tied them together to set up a proper reward to risk ratio with the goal being to remain profitable with the lowest percentage of winning trades as possible (the real secret of successful, long-term trading).

Gaining the correct bias is the more time consuming aspect, because it requires you to do some research. This means looking at the news, knowing who’s speaking, what they’re saying and what it means. However, there’s a big advantage to be gained here because all of this information is readily available and basically, everyone is looking at the same news, statements and data.

Likewise with the technical aspects, what you want to look at are the most obvious points because they too are things that everyone basically sees. For example, when any tradable commodity has been moving within a range, once it breaks out you can be sure that everyone has taken notice. Support and resistance, especially on daily charts, also provide visual cues that are widely noticed.

I especially like to use Fibonacci on the daily charts, and the longer the trend whose retracement I’m measuring, the better.

Now, here’s an old saw that I’m sure you’ve heard but that few traders actually have the courage to use; buy low and sell high. The reason it’s difficult to do this is because in general, buying low requires for the most part that you go long after price has gone down. However, the way to get around this is to understand the concept of trend as the “big picture” in that you want to trade with it while not allowing every little movement within it to change your bias.

In looking at the AUD/USD chart from last week, we see that the pair has been in an uptrend since about Feb 2, a good 2+ months, and that there was a much larger up-trend which began in Feb 2009. We’ll also note that the pair has basically range-traded since last November and that the last swing high occurred back then at around .9400.

I put a Fibonacci on the chart that is measuring the decline from Nov. 16 to Feb 2, because it is this period that I want to measure the retracement of. You’ll notice an extra fib level that I use-the 80.9, which is the next number in a fib sequence that begins with 50. These levels are important because as you can see, the 80.9 acted as resistance while the 50 acted as support.

Now, at the time I wanted to get into this trade on April 7, price had already gone past the resistance at the 80.9 level the previous day. However, my entry was to be when price retraced slightly to the 80.9 fib level, which it did.  The reason is twofold-I want to buy as the former resistance acts as support and because I want to “buy low.” My target is the Nov. 16 high because now that price has broken out, and because the fundamentals in my opinion support the view, I believe that the market can at least go to where it has been in the not-too-distant past.

It also allowed me to set up a 3:1 reward to risk ratio, which is what I prefer to use because it allows me to be profitable with just a 33.3% winning percentage and because it allows me to break out even if I win just 1 in 4.

Extra Credit: Put a fib on April 6. You’ll be amazed at where April 8 and April 9 found support.

Related Posts:

  • Don’t Overlook The Importance of The Reward To Risk Ratio (Part 1)
  • The Real Secret of Trading
  • Live Trading Room Summary – November 6, 2007
  • Strategies That Work: Trading With Pivots
  • Live Trading Room Summary – October 5, 2007
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