If you’ve been reading TradeGeek from the start, you surely know the importance of systematic market entry for safe and profitable trading.
One way to ensure that is by always plotting a potential trading area. It’s the zone in which you think carries the biggest probability of success.
By constantly logging this trading data to your journal, you assess the effectiveness of your entry strategy and adjust it as necessary. Remember, entry is the start of your trade, thus, it should be well-executed.
The potential trading area is the chart zone that you think has the biggest chance of yielding you high returns. Remember that it’s you who defines this zone.
This zone stands between the current market price and your buy limit order or entry trigger.
Having this entry zone or area, you avoid trading blindly, which can be too detrimental to your investment.
Again, determining the potential trade area is based on your discretion. However, if you’re still unaware of the process to do it, here are the three trading concepts that suggest the price’s future direction, which helps you determine the trading area in which the risk/reward ratio is in your favor.
Japanese candlestick patterns are a series of candles representing the battle between the buyers and the sellers.
Seeing a bunch of green (white) candles in a positive slope trend channel indicates that the market is bullish. Otherwise, red candles in a downward slope trend channel signify a bearish market – an opportunity to execute short positions.
By spotting, analyzing, and interpreting these patterns, you have a valuable signal about the potential market reversal, continuation, or consolidation.
Another way to identify potential trading areas is by analyzing the support and resistance levels of the market.
Support represents the market level at which the sellers cannot bring the price lower. On the other hand, resistance is the market level beyond which the buyers have difficulty trading.
When the price touches either level, it’s expected to reverse.
Note: Support and resistance are often used by technical traders in conjunction with chart patterns like candlesticks.
Not convinced about the benefits of identifying a potential trading area in your forex trades? Let’s look at how this works in a real forex scenario.
Imagine you're analyzing the EUR/USD currency pair. The price is currently fluctuating between a support level at 1.1000 and resistance at 1.1100.
Based on a recent bullish candlestick formation and an upward trend in other key indicators, you anticipate a breakout to the upside.
You identify a potential trading area between 1.1050 and 1.1070.
This range sits just below the resistance level at 1.1100 and provides a reasonable entry zone where you expect a price reaction. You believe that if the price moves into this zone, it has a high probability of pushing further toward the resistance level or possibly breaking through it.
Within this potential trading area, you decide to place a buy limit order at 1.1060. The idea is that if the price enters this area and maintains upward momentum, it will likely push towards the next resistance at 1.1100 or even higher.
You also set a stop-loss slightly below 1.1050 to minimize risk in case the trade moves against you.
After you’ve placed your trade, log the details in your trading journal. Record why you chose the 1.1050 to 1.1070 area as your potential trading zone.
Perhaps you identified bullish candlestick patterns, strong market sentiment, or support from other technical indicators like moving averages. Include your entry price, stop-loss, and target levels.
Once the trade has completed, review the result. Did the price move as expected and hit your target? Or did it drop below 1.1050, hitting your stop-loss?
Reflect on how accurately you defined the potential trading area and how well it aligned with the actual price movement.
Use this information to fine-tune your strategy. If you find that your potential trading areas within certain zones tend to result in higher-probability trades, refine your approach accordingly.
Adjust the conditions under which you define these areas and keep analyzing your journal entries to improve your forex trading.
By identifying and logging your potential trading area in forex, you gain better control over your market entries, improve your risk/reward ratio, and continuously sharpen your trading strategy.
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