We have seen some very big moves in markets since the GFC. If things continue as they are in Europe, there is every chance we will see more.
This situation has created some great opportunities for big picture traders willing to adopt strategies that may take months to unfold. Of course there will be plenty of losing trades along the way and risk management is as usual essential. However, traders using big picture break out style strategies, have had conditions made to order since the GFC. This type of strategy aims to enter near the beginning of a large new trend but with a relatively close stop.
How to capitalize on this situation? One approach is to use some longer term strategies as well as your normal short term trading. This can position a trader to really milk some of these big trends while continuing with their day to day trading. A key to this approach is to build both long and short term strategies into a single risk management framework e.g. make sure that your combined long and short term exposure to a single instrument is within the overall limit you have set.
The current GBP: USD triangle looks to be a potential example of this big picture break out set up.
I’ve shown the triangle on a monthly chart to provide a zoomed out view. As you can see, big picture triangle traders had a good opportunity here in 2008 with the break below triangle support at “1”.
The current triangle potentially forms the 4th swing in the major move down since the peak in November 2007. The fast stochastic is trending down with the red %D still well outside the oversold zone.
Both these factors provide a clue that a break below the current triangle support may be the beginning of the 5th and final swing down in this major decline.
A typical entry strategy would be to apply a price filter to the triangle support e.g 50 pips. Entry would then be triggered if price falls 50 pips below the support line.
The target shown on the chart projects the height of the pattern (i.e. 4 down to 3) from the triangle support line.
If we get a setup, I’ll post a follow up discussing an approach to stop loss strategies