On the USDCAD Daily Chart, we can see a head and shoulder’s pattern forming. Generally, I prefer head and shoulder chart patterns at the end of an uptrend, and not in the middle of a down-trend.
That doesn’t mean that the pattern won’t fulfill itself, it’s just a personal preference. A trade on this chart pattern won’t be valid unless we have a break of the trend line (red line), and the USDCAD continues with the downtrend.
What this particular trade set-up has in it’s favor is:
- The medium (50 EMA) and long term (200 EMA) trend is down.
- We have a divergence in the MACD Histogram.
- ADX is starting to pick up in trend strength
- MACD is already bearish and pointing downwards
While by no means does this guarantee a winning trade, it’s about stacking up the probabilities in the favor of the trade as much as possible. And even then, this trade may just crash and burn.
No matter how “good” an entry system is, the entry system is only one of the legs of a table. Without the other legs, the table can’t stand.
What are the other legs?
- Your Trade Management (i.e. Initial stops, trailing stops, exit targets, etc)
- Your Position Sizing (i.e. how much of your trading capital to risk on this one trade)
- Your Trading Temperament (i.e. the ability to follow through on your trading plan, no matter which way the market moves)
There are many components required to be a successful trader. That’s why it takes time, education and experience to not just to learn all the necessary tools and strategies, but in knowing how and when to apply them.
While the many other traders continue chasing after the latest “trading system”, by knowing that the entry system is only part of the entire package required to be a successful trader, you are one step closer to becoming a truly successful forex trader.
Update:
This particular lesson is followed up here in this post.