Spotting Early Breakouts
Forex Volatility Patterns
by Ken Calhoun
Want to catch 40 to 100 pips in each trade? Here's how you can find those entry and exit signals to make your forex trading a success.
Capturing volatile breakouts and reversals in currency pair trades has long been a challenge for active foreign exchange traders. But how often do traders actually trade high-volatility patterns correctly? Trendline projections in lagging indicators such as moving averages/exponential moving averages (MAs/EMAs) often whipsaw traders out of positions and need to be modified for successfully trading volatile currency pair chart patterns.
To successfully trade the spot FX market, traders can use precision technical analyses to pinpoint specific entries, but only when signals are combined in a systematic, professional manner. Many traders tend to use multiple indicators and time frames incorrectly, causing needless stops and losses in their currency trades. Developing an arsenal of easy-to-understand signals that clearly identify entry and exit triggers is critical to forex trading success.
ARE YOU GETTING STOPPED OUT?
Single indicatorbased trading seldom produces consistent trade results, particularly in the currency markets, due to the range-bound nature of many pairs. Traders get stopped out because they overtrade weak single indicatorbased signals (such as moving average crossovers), or fail to exit their positions using careful, technical exit signals in combinations that produce clearly defined exit signals.
For example, when trading strongly trending pairs, it becomes especially important that traders enter breakouts early enough to be able to capture a sizable part of the move before it pivots back into its previous trading range. By combining two or more technical indicators (such as ADX, MACD histograms, cup patterns, and trading ranges), traders can harness the power of confirming technical signals to help improve their trade accuracy for both range and trend trading.
COMBINING FOREX TECHNICAL SIGNALS
What pattern combinations work best? There are three primary volatility patterns that produce strong signals for identifying volatile forex moves: ADX + cup breakouts, ADX + MACD histogram, and 10-day average trading range (ATR) pivots. Each of these three patterns can be used to trade specific entry and exit signals on an intraday or swing trading time horizon.
One key is to experiment with and test various parameter and step intervals to find out which works best for the specific pair(s) that the individual trader is trading. The goal is to produce as many correct positive signals (and as few false positives) as possible, using carefully designed signal combinations to capture 40- to 100-pip moves in each pair.
FIGURE 1: GBP/USD HOURLY. Here you see long breakout signals indicated by the combination of bullish cup breakouts accompanied by ADX > 40 values.
...Continued in the October issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the October 2007 issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.
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