When I covered the EUR/USD last Friday, I noted that the market had rallied to my ‘line in the sand’ just above the 1.3950 area on 13 March. Since then, the market has been edging down – but not before making a traditional kiss on my lower tramline.
So today, I want to show you how you can use a tramline kiss to make a low-risk trade. This is especially useful if you have missed the first opportunity.
Keep an eye out for this tradable event
A tramline kiss is a common feature following the break of a tramline. And when a tramline is broken, that indicates a change in trend. This is a tradable event – and it’s like manna from heaven for a trader who is following my tramline methods.
But even before this stage was reached, I had an excellent short entry based on my smaller-scale tramline pair:
As noted, the downward break of the triangle (outlined in green) in conjunction with the lower tramline break combined together to give me my trade signal. And a close protective buy-stop could be placed just above the upper green line, giving a low-risk trade. Remember, I am only interested in low-risk trades.
If I have a possible trade where a logical stop would be too far away, I refuse it. I suggest you adopt the same strict policy.
With the move lower, I then searched for a larger-scale tramline pair. This is what I found:
The tramline pair I found was very satisfactory, with the PPPs (prior pivot points) on the upper line. The gradually sloping line is my line in the sand. Recall this line is two years old and represents major resistance. This is why I expected the trend to change from up to down.
How to know when the trend will change
Of course, many traders could have missed this first low-risk trade entry. It is always mentally difficult to anticipate a change of trend, because such a small dip could be mistaken for normal market noise in an ongoing bull market.
But if you can recognise a likely trend change early, then you have a low-risk trade. Why low-risk? Because if the trend has not changed, the market will move up and take you out for a small loss.
Remember, I am only interested in small losses.
So is there another low-risk opportunity now that the market has moved lower and has likely confirmed a trend change?
Since Friday, the market stabilised and moved up and made a kiss on the lower tramline. In fact, there was a slight overshoot as the market had a knee-jerk reaction to the news that the European Central Bank was not ruling out instigating a quantitative easing (QE) operation of its own. Such a development would likely be bearish for the euro.
Here’s the reason why I trade the spikes
Incidentally, when a surprise market-moving news item appears, traders’ emotions run high as they try to digest this new information. This often leads to a very volatile market which dies down after only a few moments.
The kiss ended just shy of the Fibonacci 62% level, which is the most common level where turns occur. The market was battling the very strong resistance of the lower tramline with the natural rallying tendency to reach the 62% level.
This tug-of-war action is common at such volatile times. That was why I was not surprised the market missed the ideal turning point.
In any case, the spike up and down was over in just a few minutes – and this illustrates my strategy for trading these spikes.
After a tramline break and if I anticipate a kiss, I will enter a resting limit order and my stop level before the hoped-for event. That removes the necessity of continually staring at my screen, which is normally a distracting habit anyway.
And the best part is that now I have a second low-risk entry.