by Jay Norris
Today gave us a nice trend trigger in GBP following the release of the Britâ€™s Monetary Policy Committee minutes this morning. The news gave traders insight into that countries interest-rate cut decision. Following the release, GBP gave us a text-book sell trigger in the same direction as the predominate trend on the daily chart, making it a trend-trade.
Chart courtesy of eSignal
The blue line marks the 17-month bull trend-line, while the thick black line marks the previous dayâ€™s high, and the thin black line is the daily pivot point. The trigger itself is both a crossover of the 5&5 simple moving average (sma) cross, and a close below the previous short-term sideways trading range. Even if you don't know the trend is lower, making this trigger a trend-trade, you can still see you are taking a short position below the previous high, and below the daily pivot point which gives you a good idea you are trading in the same direction of the predominate trend. This signal is a good one because it highlights why a lot of traders get spooked by trend-trades. The trigger comes after an 80 pip break, 5 minutes after a news release. Not easy developments to trade after. It also points out the counter-intuitive benefit of taking a sell trigger following such a long candle. Often enough a beginner will clutch on this trade because of the risk -- I know this from personal experience. What's actually happening here is market-makers are backing off because we have a market closing below the previous range, which happens to be marked by a long-term trend line. Market-makers -- or in the case of retail forex, dealers -- want no part of that so they're going to drop their bids as fast as they can which is exactly when we want to be getting aggressive by initiating, or adding, to shorts.
Because it's a trend trade you can let it run a bit more then you would with a counter-trend trade. You can key off the 60-minute or 240-minute charts for your exit â€“ this because you are positioned in the same direction as the daily trend, or if you are a nervous trader stick with the 15-minute chart, but be ready to go back in on a re-cross lower of the old 5&5 sma. Your exit would be a bull cross of that same 5&5 SMA. To learn what a 5&5 is, click on the link below, or give me a call.
Todayâ€™s price action highlights the effectiveness of trading with the trend. If you are not sure of how to differentiate between trend and counter-trend triggers (trades) donâ€™t hesitate to e-mail me or give me a call.
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