With trend following strategies, most wining trades will be held through at least one or 2 minor corrections. As the trend starts to develop there are often opportunities to take one or more of the following actions:
- Add to the position with pyramid staking strategies
- Move the stop loss closer
- Refine the original profit objective
I posted details of an RSI divergence set up in EUR:CAD on 2nd November. It looks like there could be an opportunity to take all 3 of these actions with this strategy.
Original Set Up
The original set up involved early entry to a double top based on an RSI failure swing. This is shown on the chart below. You can read my post discussing the logic behind the entry strategy by Clicking Here
Adding to the Position
Many trend following traders use a staking plan where they add to positions as the market moves in their favour. This increases risk but can improve results over time by really “milking” the big winning trades to maximum advantage.
A key to success with pyramid staking is to make sure that each new position is smaller than the previous ones. For example each new position could be half the size of the previous one. Otherwise there is too much risk of giving up all your unrealized profit and more.
Corrections can throw up good opportunities for pyramiding because the stop on the whole position can be moved just behind the completed correction. This reduces the size of potential losses on the bigger position.
As you can see from the chart below, the recent correction looks like being an “abc” structure. If it stops at the current Fibonacci cluster this is a set up that could be used to add to the position. Of course, traders not already short may consider this as an opportunity to enter a new position.
An approach to entry strategy here would be to enter on a close below yesterday’s low.
There is another Fib cluster around the 61.8% retracement level. I’ve left the projections for this off this chart to avoid a forest of lines appearing. But if there is no set up at this level, an alternative is for price to push up to that 2nd cluster level for a set up at a higher price.
Moving the Stop Loss
If the current rally fails around here, it will represent a successful retest of the double top support level. For good measure, a peak at one of our 2 Fib cluster levels will also be respecting the resistance zone of the 200 day moving average.
Either of these developments would be typical reasons for trend followers to move the stop down even if they were’nt adding to the position.
Other traders would use a retest like this as a set up to enter a new trade if they were’nt already short on the orginal double top.
Adjusting the profit target
The original target shown on the first chart was based on the 50% retracement of the last major uptrend.
If yesterday’s high turns out to be the end of the correction we can also do some Fib projections using this new peak. This shows a significant cluster down at the 61.8% retracement which coincides with a projection that the swing down from “b” will be the same size as the swing down to “a”.
This provides a logical reason to run the trend further and move the target down by around 100 pips to 1.2480
There is also a Fib cluster at the old 50% retracement target. If price stops at this cluster there is a danger the trend will end at that point. One way to deal with this is to start using a tight trailing stop if price hits that level.
Finally of course, if the downtrend was to end at one of these profit objectives it could very well be a set up for a larger ABC buy. But that’s a story for another day.