Let's look at a live trade in the market which could yield a potential profit opportunity.
We are going to use a very simple method anyone can understand and apply for profits.
For the purposes of this illustration we are writing for Monday's trading session.
You can use any of the free chart services on the net, the one we are using is futuresource.com and looking at the futures contract although the logic is the same for cash forex.
Indicators to use
We are going to use
1. Simple support and resistance lines.
2. Bollinger bands
If you don’t know how they work, check our other articles.
The British Pound V US Dollar.
The trend is up.
Look at the daily chart and you will see the Pound Dollar is bullish and looking to test recent highs.
In an up-trend the middle line of the Bollinger band (the green line) represents the longer term average or fair value.
Notice how dips to this line give buying opportunities and the line below it represents a line of support ( the red line)
Prices in a strong bull market should move up toward the top line of the Bollinger band (the blue line)
Layers of resistance on the chart are this line and the recent spike high and the double top that occured last week.
If this area of resistance is broken we could see the British Pound trade much higher.
We would not try and anticipate this happening, we would wait for a close above the daily highs on the chart to confirm the breakout to the upside and and trade with the break.
Swing trade opportunity
In the short term however there looks to be the chance of a swing trade against the major trend to the downside.
Swing trades normally last for a few days and are a reaction within the major trend.
If resistance holds and momentum falls we would look to go short.
So were bullish and bearish, depending on what the price action tells us.
We think a swing to the downside may come before the breakout to the upside.
How would we know there may be a swing trade opportunity to the downside?
Look at the stochastic.
This is a great short term momentum indicator.
You will see the pink line has crossed the blue line with bullish divergence and is pointing up indicating short term price strength.
We would watch the recent chart highs to provide resistance and look for a cross with bearish divergence to the downside to enter the market
The target would be the middle Bollinger band.
Don’t anticipate wait for confirmation
Here we are waiting for confirmation from price action of either a breakout from recent chart highs to go long or a fall in momentum to try initiate a short position.
These trades could go wrong, but support and resistance for stops are obvious on both potential trades so if we lose losses can be kept small.
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