How to Make 120 Pips One Day Part 1

It is better to begin your trading day with an open mind and accept what ever the market is doing. This includes understanding that there are times when the market is inside of consolidation. When this happens there will be fewer trading opportunities that are successful. During times of consolidation many trading systems will generate an entry signal but they end up going nowhere and the trades get stopped out.

On the other hand, it is also important to identify when the market is breaking out of consolidation and there may be a trending day.

Trending days or breakouts of consolidation are usually due to the release of economic data. Sometimes even statements from a Fed official or government agency might do the trick. Whichever the case is, most likely the consolidation just before the breakout is due to anticipation of the news or some event that can cause a change in the valuation of the currency pair you are trading.

These two concepts are very important and will make a big impact in your trading success if you understand them. These two concepts are also directly related to how often you will be able to make 120 pips in one day. So having a solid understanding of economic data and how it affects the currency pair you are trading is vital to your success. It is also confirmation for many of the technical trades you may find.

Now onto the technical side.

It has been said that one of the easiest trades to identify is a break out of consolidation. This is most likely due to the tight range that is easy to identify on your charts. If a breakout of consolidation leads to a trending day, it could set up the opportunity to make 120 pips in one day.

(This of course would be easier if you are trading more than one currency pair)

The challenge with trading breakouts of consolidation is trying to avoid false moves or head fakes as they are sometimes called. There are methods that can help you identify a possible head fake. One of the first methods I use is watching my indicators. If I see some divergence between price and the indicator, I will usually treat the moves out of consolidation with caution.

A very important tip that I think may really change your trading method for the better is something I learned very early on in my trading career. I only analyze closed candles.

For example, if I see price moving outside of consolidation I will usually wait until that candle closes before I make my decision to enter or not enter a trade. I will only enter if I have solid confirmation and a technical trade that has developed before the breakout of consolidation.

This principle of waiting for the candle to close before I analyze it is something I have applied to my trading for many years with great success. It works no matter which time frame you are trading with. Give it a try and see how it works. You will notice that if you try it for a while, it may keep you out of many bad trading decisions.

The three key concepts so far are:
1. Learn to identify the difference between consolidation and a trending day.
2. Learn to identify divergences between price and the indicators you use.
3. Wait for a candle to close before doing your analysis.

Now some technical details.

Using my original explanation of consolidation will probably be one of the easiest ways to explain this method. Consolidation for most people is one of the easiest price patterns to identify. However when the markets become quite choppy it can cause quite a bit of confusion for the inexperienced.

Another tip that may help you is get to know the normal consolidation range for the currency pair you are trading. Most traders understand that each currency pair has a different price range.. What I am referring to is the normal or average high and low for the day in a given period.

For example GBP/USD can move a great deal farther than the EUR/USD when it is trending.

Just the same, when GBP/USD is inside of consolidation, the consolidation range is usually a little larger than EUR/USD.

You may want to take some time and do a little back testing. Back test your favorite currency pair and identify consolidation ranges just before big breakouts and trending days. Once you identified the consolidation range measure the high and the low of that consolidation range. What you’re looking for is enough back testing to create an average consolidation range for that pair.

Having the average consolidation range data will help you confirm when you find consolidation in a live market.

How to trade it.

All of these tips can be helpful but what traders really need to know is where to enter the trade.
It’s like the old saying goes “knowledge is only potential power, it is useless unless you apply it.”

My favorite way to trade a break out of consolidation is to start off with identifying market sentiment and being well aware of any economic data that may be released after I enter the trade. I prefer to have economic data already released and out-of-the-way before I enter a trade.

I also wait for a candle to close outside of the consolidation range. In addition, I use my indicators for confirmation and I do not want to see any divergence between price and the indicator on a breakout.

Once I have a candle that closed outside of the range with confirmation I feel it is safe to enter however before I place my trade I need to identify a stop loss level. A typical stop loss level incorporates support or resistance. If I do not want to risk more than 40 or 50 pips as a stop loss level I may need to be patient and allow price to move outside of the consolidation range and wait for a pullback. This pullback would appear to be testing the high or low of the breakout range of consolidation.

Once I have this pullback which appears to retest the breakout range, I then look for a candle pattern such as an evening star or morning star depending on the direction of the trade. When I have this candle pattern that’s my entry. As far as targets I would look for Fibonacci extensions or support and resistance. I also prefer to take trades that have targets equal to the stop loss level I use or double.

This method requires practice and patience. Many traders become quite excited when price begins to break out of consolidation ranges. Many times they jump in too soon and price falls back in the consolidation. By waiting for the pullback and using the method I described, I will have plenty of time to confirm market sentiment, any news that has been released and I also minimize my stop loss level.

Thanks for reading and good luck trading.