In a world of abundant trading opportunities, how to select the very best ones?
Firstly, abundance is a good thing. If we lack opportunities, we tend to force things – taking trades that are sub-par.
Secondly, we need to be very clear on our objectives. The first step to trading success is extreme clarity. If we don’t know what we are looking for, then every opportunity will look like a good trade.
Be clear on the number and type of trades you are looking to take, and then go hunting for the best one(s) to fit your specific criteria.
Thirdly, you want to be aligned in your thinking. Ever find yourself short EURUSD, but buying the EUR on the crosses because you see a nice candle pattern? This is a lack of alignment, and it causes confusion. Confusion is one of your biggest enemies (and of course the opposite of clarity).
Let’s dig into some details.
Check other pairs
Remaining aligned is quite simple in practice. As you are reviewing a trading opportunity, review the other pairs containing the currencies you are looking at trading to see if you like them.
In particular, if you are trading on the crosses, look to the major pairs.
For example, if you are considering this trade to buy AUDCAD, you would want to look at both AUDUSD and USDCAD to make sure you are comfortable with each of these positions.
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Trade Example: AUDCAD by SamEder on TradingView.com
Click play to update the chart and see how the trade went.
As you are looking to buy AUD, you should have a bullish view of AUDUSD. In this example if we look at the chart, we can see that a double top is forming, and the MT (Market Type) is sideways (in the downward phase). Additionally, the RBA shifted to a more dovish stance in the last week. This is bearish.
If we look at the CAD leg of the trade, we can see that we are sitting at a key level. Typically, key levels are a two-way street. Until price either reverses off the key level, or breaks out above that level, the direction is unclear.
So you can see how, given our bearish view on AUDUSD and our indecisive view on USDCAD, it may be best to stay out of the AUDCAD trade for now.
Let’s look at a second example.
This time we are looking to sell EURJPY. To assess this trade, we want to look at USDJPY and EURUSD.
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Sell EURJPY by SamEder on TradingView.com
Click play to update this chart and see how the trade went.
We can see a bearish engulfing candle has formed on USDJPY, after taking out the key 107.00 level and Brexit high. This is bullish JPY.
If we move over to EURUSD, we can see the currency pair is breaking out into a bearish market type, and holding below the key 1.10 level. This is bearish EUR.
You can see in this case that our view is bullish JPY and bearish EUR. This is in alignment with our EURJPY thesis.
It’s about routine
The key to effectively employing this approach in your trading is routine.
Get into the habit of conducting your cross currency pair analysis on a regular basis, and write down your views.
Then in the heat of the moment, when your excitement levels are up, you can refer back to your notes for a cool rational analysis of each leg of your trade.
Take care.
Cheers,
Sam
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.
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