Last updated on April 15th, 2020
Over the years, much has been written in these trading articles about how simple trading can be. This does not translate to “easy” however simple still works in trading.
It’s not just a play on words but hammers home that the work you do to find trades, manage risk, and other variables that make up the act of trading, is simple. Doing it consistently is another matter and that’s when “not easy” comes into play. A trading method is only a part of the battle.
I want to focus this article on the term “simple” by using the USDCAD pair to highlight the following points:
- a simple pattern
- a simple entry
- a simple risk reduction
- a simple exit from a trade.
For this example, let’s keep the context in mind as you look at the charts which will be
- Steady uptrend in the USDCAD
- Two weeks in Jan of large momentum moves
- 10 weeks of the market in a pause
Simple Trading Channel Pattern
A simple channel was drawn on the daily chart once lows and highs were locked in and could be used for anchoring and duplicating. There is nothing magical about channels but they do tend to highlight the rhythm of the price action quite well.
An interesting time is when the channel is broken with momentum and those can offer some solid trading opportunities if you know how to trade them.
Channels can highlight trading ranges, trends, and even pullbacks. A simple tool with many uses and to keep it even more simple, I just consider any type of channel, a volatility compression or consolidation.
This channel though showed more of a range in the action of the price with a slight upward slope. I think we can agree that the price action is making some sloppy moves inside the channel and nothing is really clear cut. It is showing that neither side is willing to push price in a direction which indicates a rough agreement on the current price range.
In hindsight, sure you could sell the top as we see in the middle of the chart however, unless you were day trading on lower time frames, this price action is not conducive to a clear trading opportunity for me.
Simple Trade Entry
There was a clear setup as shown with the orange circle and I certainly could have moved my line so that the shadow broke it however, consistency matters in trading and I missed that trade. For me…with my setup….this was not a trade entry.
The green circle is another matter.
It’s a reversal type candle of course but the highlight for me was that it probed below the bottom channel and was quickly rejected. Did it trigger sell orders and then quickly reject them forcing traders to buy to exit and helped form a strong bull body candle? The details behind the scenes was not important but this failure test was an entry for me into a long trade.
TIP: You don’t need to know the reason behind everything that happens. There are many variables at play on a chart at any one time.
As a matter of fact, I did not wait for the close of the daily candle (front running) because location, context, and sharp rejection was enough for me to risk on this trade.
Simple Risk Management
The stop was below the low of the entry candle and I find setting stops on these types of plays very straight forward. Mean reversion trades are another matter as setting stops on those setups come with their own sets of issues. One of those issues is that pullbacks are angular which can present a problem with a defined placement of your stop using price. You may want to experiment with using an ATR type of stop with pullbacks once momentum starts to move price in your direction.
One easy was to cut risk is to take trading profits at 1R. In these range plays, I usually cut half of the position off which will leave me with no risk on the trade. You can see on this chart where my position was reduced.
Risk reduction and management is critical for your long term trading success. Check out this post on winning and losing streaks along with probable losing runs.
SIMPLE TRADE EXIT
What had me trigger into this trade was an obvious reversal candle at a prime location in a market that is in an uptrend.
What gets me out of this trade is an obvious reversal candle that shows up in the middle of a range…a range that has seen some sloppy price movement.
The candle that gave me my risk reduction also closes as a candle with a small bear body and a long upper shadow as pointed in the trading chart above. It was impossible to ignore that candle and my stop was ramped up just below the low. You can clearly see that I was taken out of this position leaving me USDCAD flat with 134 pips on the scale and 53 on the profit stop.
Simple Still Works Regardless Of What You’ve Heard
There are clues on charts however not every clue builds a case big enough to base a trade on.
Not every move is playable but at certain points on a chart, there is the possibility of the supply/demand imbalance being big enough to give us a playable move. Simple price patterns that have been around since there have been price charts…..showing up at certain points in a market…..can offer the astute trader plays that are worth risking some of their bankroll on.
It does not have to be complicated. It is not reinventing the wheel. It is using simple trading tools or indicators as discussed, what has shown to give a slight edge, and getting the most of it until the time comes to exit. Then just allow compounding to help grow your account.