The Importance of Thinking Strategies Before Entry in FX

Before trading in FX, do you confirm the charts and establish a solid strategy?

The quality of your trades can vary significantly depending on whether you create a strategy or not. Therefore, it’s important to look at the charts and outline a rough strategy before trading.

However, when it comes to a strategy, it doesn’t need to be overly complex. Just saying, “I want to buy (or sell) at this pattern” is often sufficient.

How to formulate my strategy

When you hear about trading strategies, you might think that you need to examine charts in great detail, but there’s no need to check much.

In my case, I primarily focus on short-term day trading, so I start by checking the 1-hour chart to check the overall trend.

For example, let’s say the current chart looks like the following:

At a quick glance, it appears to be in a downtrend.
Therefore, you can establish the strategy of starting with a bias towards selling.

Then, the next thing to consider is, “Where to enter a short sell position?”

In my case, when a trend is established, I primarily look for opportunities to sell on pullbacks.

To identify these potential entry points, I draw horizontal lines at what seem to be significant levels.

For example, like this:

Once you’ve drawn horizontal lines on the chart as described and have roughly determined entry points, you then anticipate the price action leading up to those lines.

In the case of this chart, starting with the bottommost horizontal line, I personally wouldn’t prefer to engage in short selling near this level.

This is because the distance from the recent low to the bottom horizontal line is only about 30 pips, which may not yield significant profits.

Furthermore, since there’s congestion near the low, it’s likely to act as support, making me even less inclined to trade there.

Moving on to the middle horizontal line, it serves as both the neckline of a head and shoulders pattern and a starting point for selling.

Therefore, it can be recognized as a highly significant level.

For this reason, a strategy can be established here to “actively engage in short selling on pullbacks.”

Lastly, with the uppermost horizontal line, when the price retraces this far, it exhibits a relatively strong pullback.

Therefore, I consider two strategies at this level: one for selling and one for buying.

First, concerning short selling, even though the uppermost horizontal line serves as a strong resistance, when the price retraces to this extent, I assess that upward momentum is strong.

Therefore, if I were to engage in short selling, I would wait for clear reversal signals. In my case, I would wait for the formation of a double top pattern.

This is because if the price attempts to break above the uppermost horizontal line twice and fails, it tends to signal to both buyers and potential sellers that “it’s unlikely to go higher.”

This often leads to profit-taking by buyers and new short selling positions being initiated.

Now, for the buying strategy, in this scenario, if the price convincingly breaks above the middle horizontal line, I will aim for buying on pullbacks.

This is because the middle horizontal line also serves as the starting point for selling. When the price convincingly breaks above this level, it leads more people to conclude that a “short-term trend reversal has occurred.”

As a result, sellers may start to feel uneasy and decide to take their profits. Furthermore, there’s approximately a 70-pip price range from the middle horizontal line to the uppermost horizontal line.
So, even if I’m aiming to buy, I can target a reasonable profit potential.

Therefore, when the price firmly breaks above the middle horizontal line, I will also consider buying on pullbacks.

However, if you are aiming for a buying opportunity on a dip, the overall trend is still bearish, and it will be up to the top red line.

Otherwise, you might get engulfed by the overall trend, and even though you had unrealized gains, there is a possibility of losing it all.

Therefore, in the case of this chart, as a trading strategy,
you can consider:

– Short selling on the middle horizontal line.
– Short selling on the top horizontal line.
– Buying on the dip at the middle horizontal line.

You can create three strategies like these.

In this way, by establishing a strategy before trading, you can handle the situation with composure when it arises.

Conversely, without a strategy, when you reach the entry point, you may often panic and make poor entries. (Based on my personal experience…)

Now, let’s check what actually happened next with the chart image below.

It indeed cleanly reversed at the middle horizontal line.

As expected, the middle horizontal line is a significant level, so it was likely an attractive point for short selling.

Using multiple timeframes can increase the level of difficulty.

In the above, I explained how to formulate a strategy for a single timeframe. However, when trading using multiple timeframes, the level of difficulty increases significantly.

This is because you need to synchronize your strategies effectively across different timeframes, such as long-term and short-term.

For example, if you are primarily focused on short-term trading with a 5-minute chart, you will typically analyze and trade while considering multiple timeframes like:

– 5-minute chart
– 15-minute chart
– 1-hour chart
– 4-hour chart

As a result, when aiming for buying on the dip or short selling, it’s common to find that:

– Short-term timeframe shows a downtrend (uptrend).
– Long-term timeframe shows an uptrend (downtrend).

This means that short-term and long-term trends are often in opposite directions. Therefore, without effectively combining these timeframes, there’s a risk of making entries contrary to the major trend direction, like selling in an uptrend or buying in a downtrend, leading to frequent stop-loss situations.

Hence, when trading with multiple timeframes, formulating strategies can become somewhat challenging, so it’s crucial to be cautious to avoid confusion.

If you want to learn more about how to effectively synchronize long-term and short-term timeframes, you can read the following article.
Synchronizing Multiple Time Frame Charts for FX Trading

The skills necessary when making a trading strategy.

In the above, I’ve shared my approach to formulating a trading strategy, and I believe it wasn’t particularly challenging.

That’s because trading strategies can be developed with fundamental skills like:

– The ability to assess the overall trend.
– The ability to draw horizontal lines.

If you find it difficult to create trading strategies from charts, consider:

– Confirming the overall trend.
– Drawing horizontal lines at significant levels.

After that, search for potential buying on the dip or short selling opportunities and practice observing how the market behaves afterward.

By repeating this process, you should be able to develop your own trading strategy.

If you’re unsure about how to confirm trends or draw horizontal lines, please consider referring to the following article for guidance.
Why Dow Theory Works? Insights from Crowd Psychology

The Key for Drawing Effective Horizontal Lines

Summary

In the case of FX trading, having a strategy in place beforehand allows you to respond without feeling rushed.

Furthermore, as explained above, even if it’s a rough plan, formulating a strategy before entry significantly enhances the precision of your trades.

Therefore, if you haven’t been creating a strategy before trading, I encourage you to challenge yourself in this regard.

Once you understand how to develop a strategy, wouldn’t you like to become proficient in assessing specific entry points?

If you think so, please consider reading the following article.
Pinpoint Entry Strategies Using 1-Minute Charts in Day Trading