After you manage to successfully identify current trend, you may enter the position immediately, or you can wait to get a better price within that trend – wait for correction. If you decide not to wait, it will be necessary to use wider stop loss to protect your entry.
If you wait for correction, tighter stop loss will be sufficient and potential margin for profit will be higher. Hovever correction within the trend is often times also a potentional breaking point of a trend. There are other groups of traders that might see this correction as opportunity to sell.
Pullback formation that is too aggressive and wide might lead to trend destabilization and its potential reversal. Therefore, size of the pullback should not be more than 50 percent of previous swing in direction of trend.
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Market swinging back too much means only one thing. Forces (bulls/bears) opposing the trend are gaining strength, as they were able to push the price too far against it. This may signalize that price belt (range) may start to form, or in some cases: immediate trend reversal may begin.
How to time your position in forex
In general, you should always look for signs of weakness on correction, to time the trend following trade just at the end of the correction.
Declining volume on the correction. Volume should fall on every correction candle. Signalizing low involvement of traders in correction, and general lack of interest in trend reversal.
Narrow (flat) candles in correction wave. This strongly signalizes low involvement of traders in move against trend. For better position timing recognize candle patterns and again look for weakness.
Chart formations. In some cases, end of the correction confluences with chart patterns (reversal/continuation).
Forex indicators. Oscillators such as RSI, Stochastic, CCI or DeMarker are all tools that can help you with position timing. To apply oscillator on your currency pair and forex strategy, some research needs to be done. Experiment with different indicators settings (periods) to get best results in your forex strategy
Stop loss in correctly timed position in forex
Position timing in forex trend: Use smaller position with wider stop loss. Avoid being washed out of the trade, when it is fundamentally correct.
Position timing in range: Use tighter stop loss and position with bigger lot size.Sell only at the top of the range, buy at the bottom of the range. Use correct technique for drawing trendlines (support and resistance zones) as the boundaries of the range.
By using proper position timing, you can easily improve your risk reward ratio and ratio of profitable trades. This may very well, be the difference between profitable forex trading and failure.