Short-Term Currency Trends

Cashing in on Short-Term Currency Trends

Most of the time, markets don't show a clear trend - they bounce back and forth between support and resistance levels. This sideways movement is called a trading range. Below is a strategy that can help you identify entry points on short-term trends, while protecting your profits with trailing stops.

Trade Set-up

The strategy uses two charts with different time periods (10-minute and hourly), along with two technical indicators: a 200-bar moving average and a 14-bar slow stochastic study.

Step 1: Identify a trend

Compare the moving averages on both charts. A trend may be developing when price is consistently above or below the moving averages on both charts.

Step 2: Pinpoint entry

Once you've identified a trend, look for the following two conditions at the same time on the 10-minute chart:

• Price is no more than 20 pips above (to buy) or 20 pips below (to sell) the moving average.
• The "fast" stochastic (%K) crosses above the "slow" stochastic (%D) below 20 (to buy), or crosses below the "slow" stochastic above 80 (to sell).

Step 3: Ride the trend

Set a trailing stop after the trade entry.

On a LONG position, the stop order should be 10 pips BELOW the 200-period moving average on the 10-minute chart. You'll RAISE the stop as the trade goes in your favour.

On a SHORT position, place the stop 10 pips ABOVE the moving average. You'll LOWER the stop as the trade goes in your favour.

An example: EUR/USD, June 2002

Step 1: Compare the hourly and 10-minute EUR/USD charts.

On the hourly chart, price is almost exclusively above the 200-hour moving average, indicating a persistent uptrend.

On the 10-minute chart, price moves (and remains above) the moving average in the last third of the chart.

Step 2: Pinpoint the entry zone

When the market is within 20 pips of the moving average on the 10- minute chart, and the stochastic lines cross. As indicated in the chart, conditions are right around 8pm on June 27.

Buy EUR/USD at .9883
Protective t-stop set at .9858 (10 pips below MA)

Sell EUR/USD at .9992
Protective t-stop has moved up to .9967

Profit = 109 pips, or US $1090

+ Remember that contingent orders such as trailing stops may not necessarily limit your losses.

Technical Indicators

Using Indicators

Material taken with permission from Forex.com. Adaptation - International Trading School d.o.o. Beograd