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Forex Trading Strategy – Confirmation Entry USD/CHF 07/06/2011

Hey guys and gals….hope every one’s trading day went alright. Very strange day for us in the forex trading room this today. Half of the 6 pairs we watch were stuck in tight ranges of 25 pips or less and the USD/CHF broke correlation to the USD for most of the session. As a general rule of thumb when the Euro and the Pound are going up the USD/CHF should move down and vise versa when the Euro and the Pound are going down. Today however the USD/CHF blatantly broke that correlation and everything moved to the upside during our forex trading session. Seeing the USD/CHF run out of correlation to the rest of the market is not very common as of late and therefore we saw some strange price action, and in part I believe this lead to the stagnant movement in the GBP/USD and EUR/USD.

Correlation is a massive part of my forex day trading style. In fact when the market breaks correlation I usually will not place a trade until it comes back in all pairs, or at the very least most. I think of correlation as a filter of sorts. Some traders use forex indicators as a way of filtering out lower probability day trading setups, but I have found correlation is far superior. Very often retail forex traders try to complicate trading with every form of indicator there is. At the end of the day, trading really boils down to one very simple question….and if you get it right you’ll win the majority of your trades. The question is, “is the USD going to get stronger or weaker”.

Now this question obviously applies to only pairs containing the USD. For example if your trading the GBP/CHF, knowing the direction of the USD really isn’t going to help you. If however you are trading the GBP/USD, EUR/USD, or USD/CHF as we do in the room, then knowing that one question is the difference between a positive trade and a negative one. Notice how I didn’t say you need to know the direction of the Pound or the Euro but rather the USD. The reason for this is the vast majority of the time if the USD is strong then all the pairs will be moving towards USD strength. If it is weak then all the pairs containing the USD will be moving towards USD weakness. IMPORTANT – When I refer to “all USD pairs” I’m only talking about the ones we trade which are the GBP/USD, EUR/USD, and the USD/CHF. These 3 majors stay in correlation the majority of the time where as the others tend to break more often.

Well I wasn’t really planning on going off on a tangent about correlation…..but as you can see I did lol:) Anyway on to today’s trade! We only had one trade today, and unfortunately I took my first losing trade for the month. I wanted to cover this one because with every trade win or lose there is something you can take away from it to better yourself as a forex trader and this was no exception.

Very simply this was a standard setup that meet all the criteria of the confirmation entry forex trading strategy. We had some previous resistance shown by the black line that the USD/CHF was coming into. Notice candle #1 comes into that resistance level and then closes below it, therefore satisfying the criteria for the reversal candle which is the first candle in this 3 candle trade setup. In the case of a short setup as we had here, the second candle is the confirmation candle. As per the rules a confirmation candle must close below the body of the reversal candle and it very clearly did that. The third candlestick is called the entry candle. The entry should be taken during the third candle when it pulls back into the body of the reversal candle (candle #1). As you can see this trade never even tried to move down and we got hit for -20 pips which brought our total so far this month down to +70 pips, which is a touch under +4% if you risk only 1% per trade.

The one thing I didn’t like looking back on this trade was what the other 2 pairs we watch were doing. Both the GBP/USD and the EUR/USD were coming into resistance when we took this trade. The entry of this trade was right around 9AM EST today and if you look at the two pairs mentioned you will see the resistance that I’m talking about. This again all goes back to correlation….if the GBP/USD and EUR/USD are coming into resistance and do end up stopping and coming back down, then the USD/CHF will more than likely go up. This was just a very simple oversight on my part. I’ve been trading for a long time and I’m completely ok with admitting that I still make stupid mistakes from time to time. That’s just part of day trading. The big key with this situation is to not force the next trade to “get back at the market”. Revenge trading never works as most of you reading this well know. I hope this lesson helps, and I’ll see you all tomorrow more than likely for the next recent trade update. Happy trading everyone!

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