Let’s Trade Flags

Today I say Let’s trade flags.  And  no, I’m not saying you should swap flags among your flags. The flags I’m referring to are chart patterns used in price action analysis. Sure, they are less popular than triangles wedges, and other price action patterns. but they’re just as reliable as the other patterns. So we’re gong to do as we always do. We’ll find out what these flag patterns are and how to trade them. So of we go.

 

First up is:

What are Flags?

A flag is a continuation pattern where a strong primary trend is followed by a period of consolidation before it resumes in the direction of the dominant trend. Shaped like  a rectangle,the flag is formed by parallel lines that slope  against breakouts emanating from support or resistance levels. Once the flag takes shape,an upward or downward trend,courtesy of the bulls and the bears,respectively suggests that the previous trend is about to resume.

When it comes to identification, the flag can be very difficult to spot. flags can form whenever a currency pair’s price consolidates. However,the most important factor to watch out for is a strong breakout above or below support and resistance levels. They may not completely eliminate the possibility of a reversal,but they do lower the odds.

Let’s take a look at illustrations of bullish and bearish flags.

bullishflag-bearishflag

As you can see,both the bullish and bearish patterns exhibit continuation patterns at the resistance and support levels.  Notice the tall poles that form after breakouts  at both resistance/support levels of the uptrend and downtrend. They help lower the possibility of a reversal.

Next we’re going to look at three Components of a Flag Pattern

First:

Flag  Pole

The flag pole is the main facilitator as far as price action goes.  It is represented quite well by both the uptrend and downtrend. The question bugging most people is “How do you calculate the flag pole’s price move?” Well, calculate the previous swing high or low from the current swing high or low. Let’s  see an illustration below.

flag-pole

Keep watch over the  tall flag pole you see to your left in the bullish pattern. Like I said in my description, the flag pole is the main initiator in the price movement.  Wondering about measuring the price movement?Just calculate the last high/low to the current high/low.

Flag

At the risk of repeting myself, the flag is the real McCoy in this pattern. Like we said earlier, it starts with a strong trend  followed by a period of consolidation where the main players take a breather before resuming hostilities regardless of whether it’s an uptrend or downtrend. Just to refresh your memory,let’s take a look at another illustration of the flag in action.

flag2

 

This is a classic flag move. You have a classic bullish move followed by a period of consolidation, as indicated by the two trend lines. After taking a huge breather, the bulls resume their journey. It goes without saying that long breathers,or long periods of consolidation can lead to aggressive breakouts. It’s like the calm before the storm.

Last but not least:

The Continuation 

This is where the main actors have finished taking a breather and are resuming their journey. In other words, the market  has finished consolidating and the main players are continuing to follow the trend-  whether it’s an uptrend or downtrend.

continuation

This is what  a continuation looks like.  After a taking huge breather(my short for consolidation), the bulls march on upwards. The blue and red trend lines represent  the period of consolidation. Nice looking trend if you ask me.

Now to  the burning question of the day

How Do We Trade Flag Pattern?

Well,

Trading Signal

Just like any other trade,look for a trading   signal. You  can find this trading signal in the breakout. If you are trading the bullish flag, make sure you make your buy trade when the candle closes above the upper side. If  you are trading the bearish flag, place your sell entry on the lower side of the bearish flag pattern.

Stop Loss

Of course, after you make your entry you put in a stop loss. You’d be crazy not to do that. Wouldn’t you?Anyways,for the bullish flag,place the stop loss below the lowest bottom in the flag. Conversely, for the bearish,flag,place your stop loss at the  highest top.

Take Profits

Close out 1/3of your position size and take the profits. This to protect your trade against  any unexpected U-turn by the market.. Also to protect your position, raise your stop loss target just above the initial  profit target. So that if the price reaches your second profit target, you will close another 1/3 of your trading position and lock in with further profits. No what do we do with the remaining trade? You readjust your stop loss just below the second profit target. If the price continues to soar, keep watch over the price action and hold the last 1/3 of your trading position for as long as you see fir.

Let’s take a look at the GBP/USD chart.

Technical-Analysis-Using-Flag-Patterns

As you can see the green circle represents th moment the price broke through the upper  part of the flag. BINGO! That will be the perfect time to make your entry trade. Once you execute the trade you put in your stop loss as shown in S/L1.  Then with each target, you move the stop loss upwards, locking in profits,as price surges on. The magenta nd purple arrows  show the size of the flag and size of the pole. And as each target is hit, the stop loss is adjusted to protect the trading position.

The end comes when the price breaks the third stop order(S/L3).  As I’m sure you’ve noticed,the price reverses, creating unpleasant consequences for the long trade. Now I hope you’re sensible enough by then to get out while you cano r else…….Kum ba yah.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

That’s wrap for “Let’s Trade Flags.”  I hope you make significant profits with this flag pattern, Till next time take care.

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We’re Going To Talk Channels

Today we’re going to talk channels. No, I’m not talking ESPN, the Shopping Channel,nor the Cartoon network for that matter.If that’s what you thought I had in mind,sorry, you’re at the wrong cable company. The channels that I’m  referring to are just another price action tool forex traders use to identify areas on the forex chart to buy or sell. And  just like the  aforementioned channels, they’re fun to watch-That is if you get your trading decisions right.

So what’re we going to do?As usual, we’ll start with a definition, then we look at three types of channels, and finally, VOILA, How to trade these channels.

First and foremost:

What Are Channels?

Well, channels are areas between two parallel trend lines  recognized as defined trading zones that traders can buy or sell.  Assuming you lay out the channels properly, you should see higher highs and higher highs or lower lows forming.  And just so you know,channels are very popular price action tools with forex traders?Why?Because they’re easily recognizable with the naked eye on the forex chart, if you know what you’re looking for.

Now there are three types of forex channels we are going to be looking at. they are ascending channel, descending channel and horizontal channel. I have this gnawing feeling that some of you have already put two and two together concerning these three channels. If that’s true,then you guys are much smarter than I thought.

Anyways,first things first.

What’s an Ascending Channel?

Well the ascending channel is a bullish pattern where the price action is restricted within two parallel ascending trend lines with the price surging upward while richocheting off higher high and high low price peaks You have an extra trend line running parallel to the right hand side of the main trend line mapping the uptrend line.

Ascending channels come highly recommend because of their spot on prediction of general changes in the uptrend.  So long as prices stay within the price channel, the upward trend, led by the bulls continues. However, when prices go beyond the channel,  expect to see a strong buy or sell signal. Let’s take a look at what an ascending channel looks like.

 

Ascending-channel

As you  can see the ascending channel is equipped with trend lines.You have the main trend line with the parallel line keeping company. The higher highs and higher lows represent the bullish trend. Add support and resistance strategies,and you have a great opportunity to enter a trade.

How Do I Draw An Ascending Channel?

First, draw the trend line. Don’t forget that to draw  a trend line by connecting two lows. Once you take care of the trend line, draw another trend line,parallel to the first trend line. And make sure it touches the highs created by the price increase. If you’re worried about being Einstein precise when drawing the second trend line?No need.The price will penetrate it regardless of your level of precision.

When drawing the channel at the beginning of the uptrend, look out for two higher lows and one higher high. Connect the two lows with a line  and  then draw the second parallel line through the higher high. Let’s see  an illustration of the drawing.

ascending_channel

Notice the two lower lows at the lower end of the right parallel line.  Also look out for the higher high along the left parallel line. So long as you’ve got these two scenarios,you have an ascending channel.

How Do I Trade The Ascending Channel?

Put in your trade entry when price touches the lower line(or support level).  However,to put in your sell entry,make sure the price touches the upper trend line(or resistance level.  Next, llace your stop loss on just outside the channel or just above the high of the candlestick (for a sell order) or just below the low of the candlestick (for a buy order)

Let’s see how it looks like.

up-trade

As you can see, sell is indicated on the end of  upper trend line, and buy at the end of the lower trend line. You’ll be well advised to make sure both buy and sell entries are placed at the exact positions.Anything less,and guess what?Kum ba yah.

Next up is:

What’s a Descending Channel

You don’t need much rocket science to deduce that a descending channel is the complete opposite of an ascending channel. Unlike the ascending channel, the descending line’s price action si contained between two slopping(or downward)parallel lines. And just like ascending channel,  descending channels are very useful in establishing whether the short term trend in price will continue. The trend continues only if the price remains within the region defined by the channel.

However, when the price breaks out of the channel, things get real interesting. If price surges upward out of the channel, a signal to buy flashes. When prices heads for the valley outside of the channel,  you see a signal to buy. To make a long story short, if the price break out upward out of the channel, the trend is bullish.If price breaks out downwards, it’s a bearish trend. Let’s see what a descending channel looks like

descending-price-channel

As you can see,   the descending channel  is made of the two slopping parallel lines and the ensuing price action in between. The price action is considered a channel because the price is trending downwards.

I guess the question burning your minds is:

How do I Draw The Descending Channel?

Make sure you draw the channel parallel to the trend line. Of course you have to establish the downtrend first before laying out the channel. Once you’ve established the downtrend, you draw a parallel line at the same angle as the trend line.  You then move the parallel line to touch the most recent low. Please make sure you do this at the same time you draw the parallel line or your account could really suffer. I know, I know, it’s hard doing two things at the same time. But you will be the better for it. this time. Trust me. Let’s look at an illustrationdescending_channel

As you can see, the parallel line lie is drawn at the same angle at the trend line. Notice how the parallel line   touches the most recent lower  low.If you’re into trading ranges, this’ll be the perfect time to go short and put in a sell entry. Just put in your entry at the low peak.

 

How do I Trade The Descending Line?

It’s no different from the ascending channel. If you want to make a buy or sell entry, you make sure the price touches both trend lines. And just like the ascending channel,  you place your stop loss on just outside the channel or just above the high of the candlestick (for a sell order) or just below the low of the candlestick (for a buy order)  if it shows signs of rejection.

And last but not least:

What’s a Horizontal Channel

Just like ascending and descending channels, horizontal channels take shape through trend lines that are drawn for both high and low prices on the forex chart.  The only difference being that it is flat. The horizontal channel comes about when prices remain the same,or constant over a period of time. And when that happens, the slope of both trendlines takes on a horizontal appearance. Inevitably a horizontal channel is born.

Oh, and lest I forget. The horizontal channel trend lines represent both the support and resistance levels. If prices break out of  the resistance  level, a buy alert is generated. While a sell signal is generated when prices break out of the support level. However, a horizontal channel is not considered a trend in forex trading circles. Why? because the main players are in consolidation. They’re just taking a breather before resuming hostilities. And  the market is moving sideways.  Let’s ta look at what a horizontal channel looks like.

horizontal-channel

As you can see , the horizontal trend lines represents both the resistance and support levels. The three points along the resistance level are labels for the newly formed highs.  What you have here is major congestion going on,in that no clear trend has been established. Instead,the major players are taken a breather before  resuming their journey. I’d strongly suggest you not trade until a clear trade has been established.  Failure to  heed this warning could cause you to say” Kum ba yah anybody?”

 

How Do I Trade Horizontal Channel

To Sell

  • Wait until the resistance level is established at top3.
  • Once the resistance level is established at top3, you enter with a sell stop . Make sure you enter your trade on confirmation with a bearish reversal. The candlestick must close before you enter or else?guess what? Kum ba yah.
  • Place your stop loss 5-10 pips outside of resistance level. Or place your stop loss 3-5 pips outside the bearish reversal pattern.
  • Place your take profit target exactly on the support level.

If  You Want To Buy

  • Once top3 forms and price moves down to bottom3 at support level, wait for bullish reversal candlestick pattern. Then place your buy order 3-5 pips above high peak.
  • Next place your stop loss 5-10 pips outside of support level. Or you can place stop loss 3-5 pips below the low of the bullish reversal pattern.
  • Place your profit target a the price level around the support level.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s a wrap for “We’re Going to Talk  Channels”. Hopefully you’ve gained a painless understanding on how to trade channels. I hope you all have fun with  trading channels  whether demo or live.Till next time, take care.

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Find, Enter,Manage

Don’t let the title scare you.This is not a shrink session. We’re just going to take a walk on how to find,enter,and manage our forex trades. We’re going to hold each other’s hand and try to find a trade signal, set the profit margin, et the stop lossand   Hopefully, by the time this session is over, there will be no clouds left as to how to trade price action setups on the charts.

First up:

How Do I Find A Trade Signal?

Where else would you find a trade signal? On the price charts of course.  You need scan through your price charts to look for possible trade signals. While you look for your signals, you should have at the back of your mind which currency pairs you’re comfortable trading with. Make sure to do this everyday at the same time. I suggest you do your analysis between the time that the New York session goes to sleep and the European session wakes up. Why this time window? because this is when market activity from the previous day tapers off, and Asian traders take over. By the way, Asian market session is not as feverish at the New York or Europe.The more reason why you stick with the former.

Now where are the best areas to look for trade signals? Conventional trading  wisdom has it that you point your focus at the following places:trends,levels, and good old price action. These three areas is where the action is. The trend lookout can be tricky,but to make life less  complicated for yourself, just look for higher highs/higher lows and lower lows. I hope you remember these two. If not, quickly refer to Trade Trends With Price Action Analysis. You can also apply moving averages by looking out specifically for the 8 and 21 EMA’S(Short for Exponential Moving Averages).If you’re not sure about your moving averages, get with We’re Moving Averages Part I and We’re Moving Averages Part II.  Let’s take a look at illustrations of the above:

Starting with Finding An entry signal on a Trending Market

Long_short

As you can see there are entry signals for long position on the uptrend and short position to sell on the downtrend. So long as you’re clear in your mind of a  trend developing,you can jump in with your entries.

Next is:

Support/Resistance

support.resistance

 

As you can see,the bull and the bears are bouncing and breaking out all over the place .  Keep your focus on the breakouts at the support and resistance  levels. Because that’s where you’ll make you trade entries.

Next up is:

How  do I Place A Stop Loss?

Again,as conventional trading wisdom would have it, place your stop loss at the most logical level.  Some you’re probably murmuring among yourselves”What does he mean by ‘Place Your Stop Loss At The Most Logical Level’?” Well, basically you want the market to tell you tha your trading position is in danger of taking a hit.You can do this through a strategy known as ‘Set and Forget.” You just set your stop loss and go enjoy life while the market does the dirty work.

Now why in the world would I want to trigger a stop loss against my trading position? Because you want to protect your trading position from sustaining a massive hit in case the direction of the prevailing market trend does a 360 on you. I mean look at it this way: You want to give your trade enough room to breathe.In so doing , you put your stop loss at a level that is not too close,and not too far from your trading position  – talk about walking a fine line.

And you definitely do not want to commit trading suicide by placing your stop loss to close to your trading position in a desperate attempt to make a humongous profit. That’s not a trading mentality, that’s a gambler’s mentality. You’re building a business, and so must be disciplined and patient in your trading decisions. You place your stop loss based on the trading signal and prevailing market conditions. You can’t let greed override your sense of logic.

Now that we’ve let of some steam, let’s take a look at a few illustrations of placing stop losses.We’re going to use a few of the most popular trading strategies out there.

Starting with:

Pin Bar Stop Placement

 

pinbar_setups

Notice the little black arrow pointed at the pinbar in the bullish trend. You place your stop loss below the pinbar’s long stick-or higher low. See the same black arrow pointing at the pin bar in the bearish trend. The difference here is that the pin bar in this instance is standing on its head with the long thick stick pointing upwards.To protect your short position, just above the high of the pin bar’s tail.

Next up is:

Inside Bar  Stop Loss At Bullish Trend

bullish-insidebar

Notice the inside bar at the beginning the bullish trend. The inside bar is characterized by a higher low(The long tail) and a lower(high) the small tail. The stop loss is always inserted at the lower high end of the inside bar.  Insert the stop loss anywhere else, and you risk singing kum ba yah for a very long time.

Now let’s move on to:

Placing Stop Loss on Inside Bar on Bearish Trend

bearish- insidebar

As I’m sure,you geniuses have deduced by now, the inside  bar can also be spotted at the bearish trend, except that they look different.  Unlike the uptrend,where it looks thin and skinny,this inside bar here,is bigger and full with smaller wicks at the high and low ends. If you don’t want to be singing kum ba yah over your trading account, I’d strongly suggest that you place your stop loss just above the upper wick. This way you save your  selling position from  sustaining a major hit.

How Do I Place My Profit Target?

When placing your profit target,  aim for a risk ratio of 1:2. Let  say your initial risk is 100 pips. You then look place a reward distance of say 200 pips. Let’s get one thin straight. You should think  measurement not risk.You’re spreading the pips around to offset any major losses.

Then check to make sure they’re no support or resistance levels in the way of  your  profit target. The last thing you want is to  get caught up in any bull/bear conflict. You want to make sure the coast clear for you to make your profits without any hustles. In any case, even if there is the whiff of a bull/bear tussle,just use your discretion as to whether you want to take the trade or not. Left to me alone I’ll let it go.

Let’s take a look at how placing a profit target is done

profit-target

As you can see,  the profit target is as far away  from bull/bear conflict as possible.  It’s in a very good place,minding its own business. The last thing you want is dodge bullets from bull/bear consolidation at the support/resistance levels. You’d be better off erring on the side of safety here.

 

A word of warning though: Don’t get greedy here: Take more than your 1:2 profit ratio ONLY if it exists on the chart. If  you start imagining things, kum ba yah will be weighing on your conscience again.. If you’ve inserted a trail stop in the hopes of racking a huge profit based on what is really showing on the market. Just don’t get the urge of setting a new profit target once price closes in on it, or even worse,you develop this delusion that the market will always have our back forever. The forex  market has no friends,and it’s not a Santa Claus either. So you need to get your signals ,stops, and profit targets straight before making your entry.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s a wrap for “Find, Enter, Manage”.  Hopefully, you’ve learnt that you don’t just jump into the market. You need to identify certain conditions before you trade-depending on your trading strategy of course Till next time take care.

Looking to open a forex trading account?

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Download Free eBook on Forex Analysis

 

 

 

 

 

You Need To Sharpen Your Trading Edge

If you want  to rake  in the cash as a forex trader, you need to sharpen your trading edge. And no, I’m not saying  act like you’re the hottest thing since Muhammed Ali.  Having a trade edge requires you to identify conditions in the forex market that enhances the probability of you making a winning  trade. And please,forget about using indicators,or any kind of weird gizmo to develop your trading edge – They are  not going to help you. You need a deadly combination of knowledge of the market and plain old instincts to develop your trading edge.

We’ll  look at what a trading edge really is and then learn how to sharpen our trading edge.

I guess the first question we need to ask is:

What is A Trading Edge?

Well, a trading edge is basically a set of conditions  in the forex market that increases the probability of you chalking  a winning trade.  These conditions must be present in the market in order for your entry trade to be a winnable one. if  you are able to recognize these conditions, you have the edge over everybody else especially those  traders who have the gamblers mentality rather than the  traders mindset. If the conditions aren’t present, DO NOT BOTHER ENTERING A TRADE. Failure to listen to that still small voice could be fatal for your  trading account.

 

Can You Give Us Examples Of A Trading Edge Please?

Sure. For instance could base your trading edge on identifying the when the market is trending. You want to look to look out for the bulls heading for Mount Everest or the Bears heading for the Grand Canyon. For those of you wondering”What is he talking about?” The bulls represent the bullish  trend initiating a strong upward surge  when price goes up.While the bears represent the  bearish trend heading downwards after the price takes a tumble. Just in case some of you have completely forgotten what trending markets look like?Let’s take a look at a graph of the aforementioned.

bullishbearish-trend

These,ladies and gentlemen  are two illustrations of  bullish and bearish trends   In the bullish chart, the blue candlesticks surging upward represent the bullish trend.  Whenever you get a bullish candlestick engulfing a bearish candlestick(black..But could be any other color depending on platfom).( That’s means a bullish trend is developing or the bulls are heading for the hills.  Please make sure you get at least two more bullish candlestick confirmations before you enter your trade. If you jump in straight away, you risk losing some much needed cash

In the bearish chart pattern,the black  candlesticks heading downwards  represent a bearish trend. This is where the bears take over and force the price to take a tumble. And, the bearish trend kicks off a bearish candlestick engulfs a bullish candlestick. Make sure you get at least 2-3 bearish candlestick confirmations to establish a bearish trend. And please, look to sell on a bearish trend NOT BUY.(You only buy on a bullish trend). You make the mistake of making entering to buy,that will be your own massive headache.

So if your trading edge is bullish and bearish trends,this is what you need to identify when looking for trades.

Another example of a trading edge is support and resistance levels. If you’re the type who gets a huge thrill from trading support and resistance levels, this is for you. .  Again,in case some of you have forgotten, the support level  catches price as it falls. Meaning that it bounces of this level  rather than break through it .  So basically it acts as a trampoline of sorts. But in case price breaks through this support level, it continues dropping until it bounces off another support level.

The resistance level is the complete opposite.It rather acts as a barrier against price as it rises.But once price breaches this level, it heads for the hills until it runs into another resistance level. Now let’s take a look at illustrations of both levels

support_resistance

 

Ladies and gentlemen,this is an illustration of support and resistance levels in action in the USD/JPY session.  At the resistance level,the bears are playing trampoline as they try to break through the support level. However, when the bears do break through, don’t forget put in a trade.Will you? But , at the resistance level, the bulls basically tell  the bears”Get out of our way” as they breach the resistance barrier and head for the hills.

So  if you   prefer trading as support and resistance level as your trading edge, these are the conditions that must be present on the market for you to trade these levels. If anybody is seeking information on trading support and resistance levels, get in touch with my Identify Support and Resistance Levels With Price Action Analysis post.

Let’s get one thing straight. The above strategies are just two examples  that you could use as your trading edge. You could use any of  the other trading strategies that we’ve discussed on this blog as your trading edge.Just make sure the conditions for these strategies are present in the market for you to trade them That is assuming you really care about not blowing trading account to smithereens.

Now that we’ve identified what a trading edge, how do we sharpen our trading edge?

Well, there are a few ways  of getting your trading edge sharpened like a knife. Starting With:

Pay Attention To The Price Action

As a price action trader, naturally you need to pay attention to the price action – no ifs,no buts. You  need to watch what’s happening on your price action chart like a hawk.  Be on the look out for trading opportunities in conditions such as support and resistance levels, trends, and general trade behavior. Let’s take a look at the graphic below.

price_action

This is an illustration of what you will be staring at. As you can see, there are so many trading opportunities along the support level that you can take advantage of. You just need to keep your eyes wide open.

Some of you may be wondering “I thought pattern trading was also part of price action trading.?” Sure it is.But you’re only looking at  the last two candlestick entries as signals. Besides,these candlesticks are  a few of several candlesticks on the charts. Now I’m not saying ditch pattern trading altogether -absolutely not! I’m just saying you need to be more holistic in your analysis.

Learn One Price Action Setup At A Time

If  you want to maintain your sanity as a price action trader, learn one price action setup at a time. If you think cramming all the price action setups  all at once, you’ll suffer mental meltdown. You see the way a nuclear reactor melts down after overheating. That’s exactly how your brain will react when you try to force it to cram  every price action setup. Just allow your brain to digest one price action setup at a time,and you’ll eventually ease into the flow of the forex trading process

Once you’ve perfected  your chosen setup,you can then  look to make your entry. Like I said earlier, As I said earlier look at strong trends,whether price is rejecting support or resistance, and   whether there is leg room for price to maneuver,et,c.

Not sure of which price action setup to work with?Let me give you  two setups you can work with. We’ve dealt with these setups already on this blog in the not too distant pat.,but this is to refresh your memory.

First:

Pin Bar Reversal

pinbar_setups

As you already know, the pin bar is characterized by a long stick, popularly known as a wick. Anytime you see this candlestick, think sharp reversal or rejection of price. The bullish trend suggests a  continuation after the bulls take a breather from butting heads with the bears.

The same scenario  pertains in the bearish trend. and   The pin bar in this scenario also   represents a sharp reversal or rejection of price by the bears. The same continuation pattern also exists in the bearish pattern with the bears heading down south after taking a breather from butting heads with the bulls.

So if  you want to make the pin bar reversal your trading cup of tea,these are the conditions to look out for. For more information on the pin bar, look up Pin Bar Strategy – How To Trade It

Next is:

Inside Bar

insidebar_setup.jpg

As you can see the inside bar is a two bar situation where the smaller bar(inside bar) is within the higher to lower range of the previous bar. The candlesticks  encased in the squares in both the bearish and the bullish trends represent the inside bar  setup. The bigger candlestick is affectionately called the mother bar.(Almost like mother hen).  Whenever you see such a setup,- whether bullish or bearish,it’s time to enter a trade.

If you want to know more about Inside Bar strategy, look up Trading The Inside Bar.

Less Is More

There is a painful reality you need to accept in forex trading. It is basically this:LESS IS MORE. The notion that trading more  makes your forex account looks good completely baseless.. If anything, it puts your account in harm’s way especially when you make losing trades. Picture this scenario: You enter an average  trade without thinking it through.  You then recognize a juicy trade,and you say to yourself”..Hmmmm time to make up for a lost trade.” Luckily for you, you make a decent profit,which excites you to no end.

I have a huge problem with this trading mentality. Why? Because you lost an average trade, you’re then forced to jump back into the market  just to break even. I have traded like that in the past. And believe me,it;s not fun at all. You’re stressed out, struggling to look out for what you believe to be the best trade out there to make up  for lost money. Not only are you putting your blood pressure in harm’s way trading this way, but you’re also puting your trading account under pressure . Imagine if your forex account could talk. It’ll probably be screaming in your face saying”YOU DONT KNOW WHAT YOU’RE DOING.” Now that will be very humiliating. Wouldn’t it?

The morale of the story is just concentrate on one trade that will bring you maximum profits. All you have to do is develop the sniper mentality where you lie in wait for the best trade to come along. Once the trade shows up on your charts, you pounce like a lion,make your trade and earn some  nice profits. Just make sure the trade has a high probability of sucess. If you want to know how to identify high probability trades, refer to  How To Spot High Probability Trades.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s a wrap for “You Need To Sharpen Your Trading Edge.”.  Hopefully, you’ve learnt that you don’tjust jump into the market. You need to identify certain conditions before you trade-depending on your trading strategy of course Till next time take care.

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Forex Trading Basics – Top to Bottom Part II


Hello

Last time we started part I of a two part series on Forex Trading Basics. –Top To Bottom Part I. I decided to do this for you out there who are itching to jump into the trade but don’t have enough ammunition to do so. Today is the second and final part, Forex Trading Basics – Top To Bottom Part II. Yeah, I know wish this series could go on and on. But all good things must come to an end. But does doesn’t mean your interest in the forex trade comes to an end. You can apply what you learn here in your price action analysis/trading. So onward:

 

First meal on the menu today is:

Types of Forex Orders

What do we mean by “Order” in the forex trade? Well, order merely refers to how you enter or exit a trade.Except that we’ll be looking the different types of forex orders that are placed  in the forex market. Some of you’re probably wondering  ”When are you going to show us how to place these orders?” Well, easy easy.  I’ll show you how to place each order-After I’ve explained what each one of them is about of course.

First in line.:

Market Order

A market order is just simply  simply to buy or sell at the best available price. Let’s say bid price for EUR/USD is currently at 1.2140 and the ask price is at 1.2142. If you want to buy EUR/USD then it will be sold to you at the ask price of  1.2142. Your trading platform will then execute your order at the sound of you clicking to place your order. Let me show you a pic of this scenario:

market-order

Here is an example of a market entry exit and exit with EUR/JPY currency pair. Here,we have a pin bar set up in motion. The order to sell is executed because the bulls are losing momentum.The stop loss is executed when the market does a reversal.

 

Next comes:

Limit Entry Order

A limit entry order s a bit more conservative than the full market order.Here,you place your order below the market price or sell above the market at a specific price. Let say EUR/USD is sold to 1.2050. You opt to go short(sell) if the price hits 1.2070. The way I see it, you have two choices: You either sit in front of your PC and wait for it to 1.2070(In this case you click a sell market order).Or you set a limit entry order at 1.2070 and go for your morning jog. Once the price hits 1.2070,your trading platform will execute  a sell order at the best available price. However,you only choose this option if you believe in your heart of hearts that the market will do a 360 on the price you chose. Let seen an illustration of the limit order.

limit -order

 

 

Ladies and gentlemen,This is the limit order in action.As you can see, buy limit order is set below market price while the sell limit order is set above market price. You can either wait for priceto hit the intended target, or go  out for a bit while your platform executes the order after the intended target is reached.

 

By the way.I’ll  take up the second option if I were you.You;d be better off smelling the fresh air than sitting in front of your PC all day.

 

Stop Order

A stop order is the complete opposite of the limit order.Here you want to buy above the market or sell below the market at a specific price. Say, GBP/USD is going for 1.5050 and is heading for the hills. You’re betting your last dollar that the price will keep marching outwards if it hits 1.5060. I n that case,and as in most cases in life,you have two options: you sit in front of your  PC(That PC again) and watch the price hit 1.5060, or set a stop-entry order at 15060 and go out and smell the roses. Let’s see the stop-entry order in action.

 

This is the classic example of the stop entry order being activated once the asking(buy) price hits entry price. Same stop order is also activated when the bid(sell) price also hits his target. Just make sure you’re nowhere near the PC when the price hits. There is so much fresh air out there. Feel it blowing through your nostrils.

 

Okay who is next in line?

Stop Loss Order

A stop loss order is like an insurance policy against your trading position. You place a stop loss order for the purposes of preventing additional losses if the market does a 360 on you.  Keep this order in mind because you’ll definitely need it when the market starts sneezing. Let’s say you go long(buy) EUR/USD at 1.2230. To avoid sustaining a massive hit set your stop loss order at 1.2200.  So that in case, against your better instincts, EUR/USD drops to 1.2200, your trading platform will automatically trigger a stop loss at a 30 pip loss(Ouch! I feel the pain). And if you don’t want to pull your hair out worrying whether you’ll blow all your money, well  I’ve got a simple solution for you. LEAVE YOUR PC ALONE! Just set a stop loss against all your positions and go to the gym.Your  trading platform will cover for you while you’re gone.  Let’s see how a stop loss works using GBP/USD.

stop_loss

As you can see, the stop loss has been set at the resistance level. Like I said earlier, you will definitely need the stop loss when the market goes into reversal mode, Failure to trigger the stop loss could be deadly for your cash register.

 

Finally,

Trailing Stop

The trailing stop is a stop loss order with a difference. This is only attached to a trade when price fluctuates. Let’s say you decide to sell USD/JPY at 90.80 with a trailing stop of 20 pips.  This sets your stop loss at 91.00.So that if the price drops and hits 90.60, your trailing stop will move back to 90.80(or breakeven). By the same token, if USD/JPY hits at 90.40, your trail stop moves to 90.60-giving you a 20 pip profit. Let’s  see a trailing stop in action with EUR/USD

stop-loss

 

As you can see,the trail stop  has been set at the resistance level during the downtrend – which is bears territory. As  I said earlier, as price fluctuates,trail stop widens – creating profit opportunities  for you. However, I have to warn you;if the market turns against you,your trail stop remains the same. This of course,will hurt  your cash register(Your forex account). So keep that in mind.

 

Now that we’ve gotten the entry orders out of the way,

Should You Start With A Demo or Live Account?

Conventional wisdom dictates that you’d be better off getting started with a demo account. Now before you accuse me of denying you the opportunity to feel real cash in your hands, hear me out. First off, a demo account is absolutely free.Sure,the cash on demo account is virtual, and not real.But it does have the functionality of  live account where you get to practice your trading skills without any stress. In fact,you can afford to lose a few thousand dollars and learn  from your mistakes. Even more important, you get to learn the ins and out of your broker’s trading platform without much risk before deciding to take the plunge into the lion’s den with real cash.

And while you’re practicing, do me a huge favour. Stick to one currency pair. You don’t want to give yourself too much work to do trading several currency pairs at once when you start demo trading.Sticj with one of the major currencies(like GBP/USD) since they are more liquid,and you’ll get tighter spreads and more constituency. Plus, by starting with one currency,you’ll develop better trading habits and creating a solid trading system. These should stand you in good stead when you decide to go live into the lion’s den. It’s possible to be a successful trader, but just like any other endeavor you have to start from somewhere. And you need to be focused,patient, and develop sound judgement.

Now there is one hard truth you need to learn about forex trading. And that is:

 

Forex Trading Is Not A Get-Rich –Quick- Scheme!

Yes, you heard it from me! Forex Trading is not a get-rich-quick scheme. When I started trading, I thought, “hmmmm….I could be hit the jackpot within days.” I found out the hard way within minutes of  entering my first trade.You see a lot of rookie  traders  trade the forex market as if they’re playing black jack. They think they can risk $10,000 and make 50 times what they invested. Well,I’ve got news for you black jack traders! You have to treat your forex account as a business.You are the CEO of your account and you must hold yourself accountable for every trading decision that you make. Even more important, you must develop a trading strategy and perfect it before you enter the lion’s den. Because if youdont, you will be eaten alive. This why you need to get started with a demo account so you can perfect your  trading strategy before going live into the lion’s den called the forex market.

Because of the forex market’s humongous size,it’s easily prone to speculation. And it’s this speculative that makes so called black jack traders that they can make an instant killing. WRONG! You can’t succeed with a short  term mentality  on the forex market. You need solid discipline, patience,and focus to make it in the lion’s den. You need to  develop a trading strategy devoid of inconsistencies and massive losses. If you can’t do this,then you’re nothing but a gambler.

Eager to get started on a demo account, sign up with EasyMarkets

If you’ve staggered on to this  post curious about the forex trade,  find out Why Forex Trade Is So Popular

 

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interpret what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.

 

 

That’s a wrap for Forex Trading Bascis – Top To Bottom Part II.  It’s also the end of our two part series on Forex Trading Basics-Top To Bottom.Hopefully all of you out there now have a solid foundation on how to get started as forex traders. Now that you’ve gotten the milk you can start chewing the bones. Once you’ve figured your way around you can then follow my price action posts where you can add more grease to your trading elbows. Till next time take care.

If you missed out on Part One, Here Is Forex Trading Basics – Top To Bottom Part I.

 

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Forex Trading Basics – Top To Bottom Part I

Ever since I started this forex trading blog, I’ve gotten some amazing feedback from you readers. Infact, some of the  reviews of my  have been so tremendous I’ve felt my head expanding  as big as cyberspace itself. Now I don’t want to jump ahead of myself, but I’ve a feeling some of you would like to join the forex trade bandwagon. But you don’t know how. So,being the nice guy that I am,  going to do a two part series on Forex Trading Basics-Top To Bottom Part I. It’s my version of Forex Trading 101 where you’ll be fed the fundamentals of forex trading. I basically want to feed you the milk before you start chewing the bones of the forex trade.  You’d be tak  crazy to take  the plunge without the necessary tools right?

So let’s get started with:

Exchange One Currency For Another

The only motivation behind forex trading is to exchange one currency for another. That’s all!- Nothing sinister going on here. By exchanging one currency for another, you’re hoping that the price will change so tha the currency that you bought  initially will shoot up in value as against the currency that you sold.  Let’s take a look at the little graph below:

Trader’s Action EUR USD
You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800 +10,000 -11,800*
Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500 -10,000 +12,500**
You earn a profit of $700 0 +700

** EUR 10,000 x 1.25 = US $12,500

 

What you see here is the exchange rate in action. The exchange rate is simply the ratio of one currency  valued against another currency. Per this definition, the USD/CHF shows how many U.S dollars need to buy one Swiss franc or how many Swiss Francs you need to buy one U.S dollar.

You Need To Know How To Read A Forex Quote

If you want to make it as a forex trader,you need to know how to read a forex quote.  There is no getting around this one. If you can’t do this,you’re in trouble. Seriously though, currencies have always been quoted in pairs since time memorial. I’m sure you’re aware of famous partners such as GBP/USD AND  USD/JPY . They’re perfect examples of a forex quote. Now why’re they quoted in pairs? Because in every forex transaction, you’re doing two things at the same time – buying one currency and selling the other. Let’s take a look at British Pound/U.S.Dollar

GBP-USD

 

The first currency listed to the left of the slash symbol is termed the base currency(In this case the British Pound). While the second currency on the right  is labelled the counter or quote currency(In this case U.S.dollar).

When you buy, the exchange rate lets you know how many units of the quote currency you need to pay to get one unit of the base currency. So going by the above example, you have to pay 1.51258 U.S. dollars to buy 1 British pound.

But it’s a little bit different when you sell.  Here, the exchange rate lets you know how many units of the quote currency you get for selling the base.  Again going by the GBP/USD pair, you will receive 1.51258 U.S. dollars when you sell 1 British pound.

And please get this once and for all. the base currency is the main catalyst for the buy or sell routine. For instance if you buy EUR/USD, you’re buying the base currency and selling the quote currency at the same time, In Tarzan talk, “Buy EUR, sell USD.”  You buy the pair if your trading instincts tell you that the base currency(EUR) will gain in value as against the quote currency (USD). You sell the pair when those same trading instincts scream in your head that the base currency will take a dip as against the quote currency.

 

Know How To Go Long/Short

You need to know how to go long or short. In other words, you must decide whether you want to buy or sell. If you want to buy(buy the base currency and sell the quote currency), let the base currency rise in value and then sell it back at a higher price. And if you want to sell(sell base currency/buy quote currency), the value of the base currency must drop  for you sell it back at a lower price. So  remember these two formulas: long=buy. short=sell . Let’s take a look at theAUD/JPY graphic below.

Long-short

This is a classic illustration of entering long/short using AUD/JPY in the 1hr time frame.  You go long when you spot engulfed candlesticks. By engulfed candlesticks,when a bull(strong candlestick) engulfs a bear(white candlestick. This suggests the value  has risen,and it’s time tobuy.This is exactly the case at the lines of support and resistance where the strong bull(white candlestick) engulfs  the bear(blue candlestick). The bulls are basically saying  the value of the currency has risen,and so they’re putting in a bid to buy. When you see something like this,why waste time?

As the short entries suggest,the value of the currency has dropped enough in value. So it’s time to sell. That’s according to the bears. Since they helped drive the price down,they’re now in the driver’s seat calling the shorts.

Know How To Ask/Bid

Not only should you know how to ask/bid as a trader,but you should know the difference between these two terms. For the record,all forex quotes are quoted with two prices –  The bid and the ask. Let’s see the graphic showing both terms.

bid-ask

This EUR/USD graphic illustrates the bid/ask scenario.. The bid is the price at which you’re willing to buy the base currency in exchange  for the quote currency. It is the best currency at which you(the trader) will to sell to the market.

Th ask is the price at which the broker is willing to sell the base currency in exchange for  the quote currency. It is the best currency at which you(the trader) will buy from the market. The ask is also known as the offer price. After all,if you want something you ask for it.Right? Also,let’s make one thing absolutely clear: The bid price  is  usually lower than the ask  price. Try do it the other way round, and you’re sure to get a massive rejection from your MT4 software.

Wanna know the difference between the bid and the ask price? It’s popularly known as the spread. On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588 The ten pip difference is known as the spread, which we will be getting to next..

What Do We Mean by Pips In Forex Trade?

A pip is a popular acronym for price interest  point. Basically the pip measures the amount of change in the exchange rate for a currency pair.Most currency pairs are rounded up to four decimal places, so that one pip is 0.0001. The only exception is the yen,which is rounded up to two decimal places(0.01). So keep that in mind in case you decide to experiment.

However, forex  brokers are getting sexy these days.  They’re now offering fractional pips called pipettes to add extra precision when quoting  exchange rates for certain currency  pairs. Just so, you know a fractional pip is equivalent to 1/10 of a pip.So for instance, you can round  EUR/USD currency pair to five decimal places while the yen moves up a notch to three decimal places. Makes life more   for you  yen traders out  there . Doesn’t it?

Forex traders also use pips to make reference to gains and losses they’ve sustained in their trades. So when you hear a trader say “I made 40 pips in this trade,” he’s basically saying “ he profited by 40 pips.  However, the actual cash representation of these pips depends squarely on their value.

Speaking of which:

How Do I Determine Monetary Value Of Pip?

“How Do I Determine Monetary Value Of Pip” translates into “How Do I Calculate Profits.”Well, the monetary value of a pip is dependent on three crucial factors: the currency pair being  traded, the size of the trade, and the exchange rate. Let’s say a $300,000 trade between the USD/CAD pair closes at 1.0568. Here is how the profit is calculated.

  1. Determine the number of CAD each pip represents by multiplying the amount of the trade by 1 pip as follows:

300,000 x 0.0001 = 30 CAD per pip

 

  1. Divide the number of CAD per pip by the closing exchange rate to arrive at the number of USD per pip:

30 ÷ 1.0568 = 28.39 USD per pip

 

  1. Multiply the number of pips gained, by the value of each pip in USD to arrive at the total loss / profit for the trade:

20 x 28.39 = $567.80 USD profit

Seems fairly straight forward isn’t it?

Just to solidify your understanding of the calculation process, let me show you another example using the EUR/GBP pair and   using the same steps above.

Currency Pair Exchange Rate at Close Pip Change Trade Amount
EUR/GBP 0.8714 +29 350,000 EUR
  • Number of GBP per pip: 350,000 × 0.0001 = 35
  • Per Pip Value: 35 ÷ 0.8714 = 40.17 EUR per pip
  • Trade Profit / (Loss): 29 pips × 40.17 = 1, 164.93 Euros

Hopefully this example helped smooth things.

If you want to find why the forex trade is the biggest industry on the planet refer to Why Forex Trade Is So Popular?

 

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interpret what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.

That’s a wrap for “Forex Trading Basics From Top To Bottom Part I.” Hopefully you now have a feel for what you need to know to get started as a forex trader.. Next I’ll share with you more things you need to know  to make money as a forex trader in “Forex Trading Basics From Top To Bottom Part II.” Till then,take care.

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Drawing and Trading Trend Lines

Hello People

This week, we’re going to tackle drawing and trading trend lines. Yes, I know a lot of you out there are literally geniuses at applying support and resistance lines. Left to you alone, you could make a fortune on just support and resistance lines. But mention drawing trend lines, and I’m sure I’ll get thick frowns from you guys that will make Godzilla look like a boy scout.

As a matter of fact, drawing trade lines is the most common and most popular among most forex traders.  Not only are you identifying the trend, you’re also determining the strength of the trend. You’re putting all the dots together as to  whether a setup can be traded or not.

So we’re going to do a few things. We’re going to define what trendlines are including looking at two types of trend lines. Next we’ll get to the most exciting part – How to draw trendlines, including ground rules on drawing trend lines. Finally we’ll touch on trading trend lines.

 

But first things first!

What Really Are Forex Trend Lines?

Well, forex trend lines are levels that help you identify and  detect the direction of market  trends. Imagine looking into the crystal ball and predicting what your future will be like. Well,that’s what  traders do with trend lines.  Some of you might be thinking  “yeah right” but trend lines do offer  value information as  far as potential trades go.  Not only do trend lines depict  the current direction of a price move, but they also help identify  support and resistance levels for the price. Trend lines also help you make up your mind on crucial factors such as entry and exit stops, profit taking and placing protective stops to avoid the harrowing possibility of your account going up in smoke.

 

How Do I Draw a Trendline?

Fairly straight forward. If you’re have a chart with an uptrend in front of you(i.e. the bulls charging upwards), start your trend line from the bottom of the line. Then draw the line a little further until it connects with two or three swing low/high points without interfering with other parts of the price action.

But it’s the complete opposite with the bears downtrend. You start the trendline at the highest possible price point(Imagine looking down from the summit of Mount Everest). Then continuing stretching the length of the trendline until  it touches two swing high/lows without interfering with the price action.

 

Now there are two types of trendlines you will be using when measuring trends. Most of you may have across these trends while reading my posts. But it doesnt hurt to refresh your memory.

First off:

Bullish Trendlines

As if it’s not obvious to you  now, bullish trendlines are utilized to measure bullish trends that are on the up and up. In case some have forgotten, bullish trends have the bulls running the show.In other words,the value of the currency pair is rising, with higher highs and higher lows being the end result.

Now Where Do I Place The Bullish Trendline?

Just place the bullish trend line below the price action. Next connect the higher lows of the trend line, creating a level of support for the bullish trending. Now let’s see what the bullish trendline looks like.

bullish-trendline

 

As you can see, the green line represents the bullish trendline. The two arrows point to  the higher lows or swing lows, as they’re popularly known. Just connect the two swing low points and you’ve got yourself a bullish trend line. The more lower lows contained in the trend line,the stronger the trend line.

Next up is:

Bearish Trendlines

You don’t need me to tell you that bearish trends are the complete opposite of their bullish brethren.  As the name suggests, the bearish trend suggests a drop in price with lower highs and lower lows being the end result of the bears downhill slalom. In this case, you use a bearish trendline to ascertain price action while the price took a nose dive.

Where Do I Place The Bearish Trendline?

Insert the bearish trendline at the highest point of price action(Imagine what it feels like looking down while standing on top of Mount Everest). And then connect the lower highs and lower lows.  Let’s see what the bearish trendline looks like.

bearish-trendline

The sloping red line is the bearish  trendline.  And the two candlesticks indicated by the red arrows represented the highest points on the price action. Just connect these two points and you have yourself a bearish trendline.

Now before we wrap up:

A  Few Things To Keep In Mind

  • To get a valid trend line, make sure you see at least two highs or lows. Just to confirm, you may need  at least three tops or bottoms.
  • Make sure your trend line is not to too steep. Or else you may end up with a distorted view of the price action-which of course could blow your profit prospects to smithereens.
  • Just like support and resistance levels,  trendlines also have a strong backbone. With every hit that they take, they become more stronger.

And lastly, PLEASE PLEASE And I repeat- PLEASE! PLEASE! Whatever you do, do not force your trendlines to fit the market. If your trendline does not reflect the prevailing price action, it’s not a valid one. Dont push and force anything that isn’t there, unless you don’t really care about the sanity of your forex account.

Here are some even more critical facts you need to keep in mind.

Think of The Trend As an Area Not a Line

When drawing a trendline, you need to think of the trend not as an isolated line but a whole area. Just because the price action breaks the trendline  doesn’t necessarily mean that the trend  has been broken.  Some of us have this weird impression that just  because the lower ends of the candlesticks strays off the trendline it means the trendline has broken. NEWSFLASH! ABSOLUTE NO! You need to keep in mind trendlines take a while to mature, and when they do mature, you’ll catch a lot of price reactions along the trendlines. And often time,these price reactions transform into the dreaded false breakout traps  that rookie traders always seem to fall into.

Let’s take a look at a trendline in action on the USD/CAD currency pair.

USDCAD-pairRight in front of us is long bearish trendline. courtesy of the bears. The third lower high(third arrow pointing at the full-bodied candlestick)  confirms the trend. Like I said I said earlier,you’ll need a third  top  to confirm the trend. Then notice the yellow circle encircle the lower low. That candlestick has gone off the trendline.Again, as I mentioned earlier, just because a candlestick’s wick strays off the trendline does mean the trendline has been broken. It’s all part of the trendline’ maturation process.

However, numerous candlesticks hovering around the area suggests a major rejection exercise being carried out against the price as it tries to break through the trendline. consequently, price drops before it finally breaks through the trendline at the final attempt.

And Finally:

Trading Trendlines

Now comes the fun part-trading trendlines.We’re going to look at three trading scenarios that  unfold along the trend line. The first one is:

Trading The Trending Move

First make sure you have your three confirmations. Once you get your third confirmation, you now have the green light to trade on that trendline. Let’s look at a”Trading the Trending Move”  illustration on the AUD/USD graph

Trending-Move

Here the blue trendline represents the bearish price drop(Or the bearish slalom as I like to call it.) The green arrow pointing at the full bearish candlestick represents the third  confirmation signal that we alluded to earlier. Once you get that confirmation, you can enter your sell trade(or go short as we also say).

Also notice that another lower low forms, causing another correction to the trend. This causes the price to take a further plunge, thus,creating another lower low.  Now take a very close look at the bullish candle circled in red at the end of the trendline. That’s a clear sign that the bears momentum is evaporating, and that it’s time close the trades. So when you see such a situation unfolding in future trades you know what to do.

Next up is:

Trading Trendline Breaks and Reversals

Now that we’ve gotten past  trading swings using trend and counter trends, let’s look at trading trendline breaks and reversals.  In as much as we love the bulls shooting for the hills,we also know that situation is not always permanent. That as some point, there is going to be a reversal, sometimes of astronomical proportions. And when that happens, the grizzly bears take over and push price downwards, forcing it to roll down the hill -sometimes at dizzying speeds.

In as much as we’d like trend reversal confirmations to be straightforward, it’s not always the case. The veterans of this sometimes crazy business will tell you that it’s not an exact science. It tallies with my assertion earlier that just because a candlestick accidentally strays off a trendline doesn’t mean the trendline has been broken. So to make life easier for you rookies out there I’m going to show you four scenarios you should recognize when using trendlines to confirm a trend. We’ll use the ever famous GBP/USD pair to illustrate.

GBPUSD-Trend-Reversal-1024x458.png

 

What you see above is the four scenarios which help confirm a trend  reversal. Now, since I’m a very nice guy, I’m going to break down and explain all four of the above scenarios to make life just that much easier for all of you.

We’ll  start with:

  1. Price Breaking Trendline

Phase one shows the price breaking the bullish trendline acting as a resistance level.. The strong red candlestick  in the red circle represents the actual breakout by the bears. It’s the beginning of their traditional slalom run.

2. Price Decrease Below Previous Bottom

The bears continue to hold sway as price continues to decrease further. The strong red candlestick  in the red circle is indicative of the bears pushing the price below the previous bottom and the  initial swing low that was created as a result of this price drop. The horizontal line  at the circled swing low serves as the alarm bell or triggern for the eventual trend reversal.

3.Broken Trendline Under Attack

The Bears are really milking their newfound momentum like nobody’s business. They re really attacking the trendline by constantly retesting the broken resistance trendline to try to put it out its misery  and roll downhill. You can place your trade entry after the close of the strong red candle. However,  there is one little secret about these trend reversals you need to know. The retest doesn’t have to touch the trendline.Why?because the trendline is considered an area, not a level. Even further, the price may do even do a 360 on you by shooting upwards beyond the decimated trendline.

 

4. Support Level Also Takes a Hit

So, not only does  the resistance level take a hit from the bears, but the support level suffers the same indignity from the bears also. The black line in this scenario happens to be the poor support absorbing all this punishment. But take a close look  at the strong candle stick closing strongly below the support line. This would be the perfect place to put in a  sell order(or go short as we say).

If you’re still pulling your hair over drawing and trading trendlines, I suggest you seek the advice of Identify Support and Resistance Levels With Price Action Analysis

Well, that’s a wrap for “Drawing and Trading Trend Lines.” As you can tell, trendlines are crucial too; for forex traders as far as predicting the future price action goes.Just make sure your trendline fits directly on the chart and you will reap the benefits nicely. Till next time take care.

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interprete what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult How to Spot High Probability Trades.

Looking open a forex trading account?

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How To Ace Price Action Trading

One fine day while I was sifting through comments from readers in reaction to my various posts, one  caught my attention.  This comment came from a reader who simply called himself diet band wandwagon(same name as his youtube channel).  He loved my What is Price Action Trading?  post so much that he said,”Very energetic post. I liked it a lot. Will there be a part 2?”  I thought to myself, “Do I really need to do a part II to this post.

But then I thought “Yeah it makes sense to do a part II to the original post. After all, you do need to know how to perfect your craft as a price action trader right?And besides, most movies have sequels these days.So I have come  to the  conclusion that my original post deserves a sequel “How To Ace Price Action Trading”. I think it’s an appropriate name for a sequel because you need to really hone your skills as a price action trader if you want  to separate yourself from the chaff so to speak. So I’m going to share with you a few tips to help you be the perfect price action trader that you can be- or at least close to perfect. . So Mr diet bandwagon, this is for you.

Focus On The Hills and The Valleys

Focus on the  hills and the valleys is my streetwise way of saying focus on the highs and the lows. It’s not for nothing traders say the trend is your best friend. The hills and the valleys provide valuable information about trend strength   and market direction that you’d  be crazy to ignore. And they can even drop clues on the trends losing momentum and impending  trend reversals.

Here are a few things to consider when analyzing the hills and the valleys

  • Do the hills and the valleys establish a wavy pattern with small pull backs?By that I mean do the hills and valleys establish protracted trend patterns with small pullbacks?If that’s a case this has all the makings of a strong trend, not to mention a huge opportunity to cash in.
  • However, when price barely clears the scales making higher highs and higher lows, that should tell you that the bulls are losing momentum and that the bears have started bearing their teeth.
  • If you see pervasive volatility or longer candlestick wicks while price generates new highs and new lows, be very worried. This could be a slippery turning point where the trend loses momentum.
  • Another attention grabber you ought to pay attention to(for want of a better term) is where price fails to make a higher high on an uptrend. That should also tell you that the bulls are losing momentum. You can be sure the bears are salivating at this development.

Now let’s take a look at the EUR/USD.highhigh-highlow

The EUR/USD graphic is a classic illustration of the highs and lows that we’ve been discussing above. Higher highs and lows can be valuable when looking for signs of trend strength.If you’re not sure of your trend trading, refer to my Trade Trends With Price Action Analysis post.

Pick Trades That Have High Probability Of Success

You’d be better off to pick trades that have a high probability of success. Even if you spot the juiciest price signal you do your profit chances a world of good by only taking trades that have a significant probability of profitability. In other words, these trades should be located in zones considered important and meaningful. It does not make sense picking price signals,regardless of where they occur, and then wonder why they have such a low winning rate.

Some of you are probably  wondering “How Do I detect trades that have a higher probability of success?” Well,you can start by drawing support and resistance levels on the chart.Then wait for price to touch those levels;and only take a price when a price signal lights up at your pre-marked price areas. Not only does this spare you from pulling your hair out, but the quality of  your trading improves significantly. Let me show you an illustration of what I’m talking about.

forex-location

 

This is an example of a trade with meaning. You have resistance  levels that are well-defined. Once the price touches these levels, that should be your queue to enter your trade. If you want to know how to identify support and resistance levels, see my  Identify Support and Resistance Levels With Price Action Analysis  post.

Put Trades in Proper Context

If you want all your hair still in one piece, put your trades in their proper context.  It flies in the face of trading common sense if you go on some candlestick treasure hunt to fit some template you’ve designed or just satisfy some candlestick criteria you’ve created for yourself. One thing you must understand about price action trading, is that the price action you see on your screen is relative in relation to what happened previously. In other words, there is a link between past,present and future.

For instance you may run into a situation where  you find multiple pin bars. The first two pin bars may be tiny compared to the previous price action. Since these  pin bars don’t tell you much with regards to trading signals,they eventually fizzle out. Let’s take a look at the NZD/USD graphic.

 

NZD-USD.png

As you can see from the uptrend,there are multiple pin bars. But the first two are midget in size, and since their trading signals are mere whimpers,they just evaporate like meteorites. Notice how the pin bar at the very puts on a strong rejection and yet it was bigger than the previous candlesticks. Samesituation goes for the bears . They also have midget pin bars that don’t giveyou much to gon.Eventually,they also fizzle out. So if you see pin bars that look like they’re famished, FLEE!

If you want to know what price action trading is all about look up What is Price Action Trading Analysis?  And If you want to know how to trade pin bars. Visit Pin Bar Strategy – How To Trade It.

Four Clues of  Candlesticks and Price Action

There are four clues candlestticks you  have to instantly recognize when trading with price action. Remember when I said you need to act like a sniffer dog when trading? You need to put on that mentality in this situation.You have to put the pieces together to avoid blowing your account into smoke. Lookout the following hints to avoid making disastrous and dangerous  blunders.

Long Wicks

Long wicks spell danger and uncertainty.

This so happens especially when the market is congested.In other words when the market is going sideways.

forex-congest

The long wicks in this graphic illustrate the danger that I’m referring to. They’re the skinny ends of candlesticks. Even worse,is the congestion in the graphic. This happens when the market is going sideways or where there is lack of clarity in the market. Unless a break out happens, DON’T TRADE.

Bullish vs Bearish Wicks

Anytime the bears generate long hicks going downhill, it suggests  rejection and failed bearish attempts.failed-bearish

As you can see from the AUD/CAD graphic, there has been a major bear rejection resulting in a false break of some sort. You’d be wise not to fall for such a deception.

Position of Candlestick Body

You need to ask yourself whether the position of the candlestick body is closer to the top or bottom of the candlestick. Bodies that close near the top suggest strong bull activity-especiallyif the candlestick has a long wick.

candle-body

The blue candlestick illustrates what I’m talking about. If it closes at the top, it means the bulls are on top, If it closes at the bottom, the bears are in the neighborhood. If you want to know about candlestick action refer to You Need To Know Ten of These Candelstick Patterns.

Ratio Between Body and Wicks

The ratio between the candlestick body and the wicks speaks huge volumes about who is on top at the market. Candles with large bodies and tiny wicks suggest humongous strength. Whereas candlesticks with a small body and tiny large wicks spell indecision among the trading actors. Let’s take a look at this ratio.

 

 

candlestick -ratio

The black and white candlesticks(representing the bulls and the bears respectively) with long bodys and tiny wicks reflect the overwhelming strength of both the buyers and the sellers. notice the the two  black and white candlesticks to the left of their larger brethren. Their small bodies and longer wicks reflect significant indecision on the part of the bulls and the bears.They’re losing serious moment and are not sure whether to buy or sell. They both looked famished if you ask me.

Keep The Noise Out Of Your Market Selection

I f you want to keep your winning streak going as a price action trader,you have to keep the noise out of  your market selection at m You need to pick currency pairs that have the highest probability of making you a decent profit. This means cutting out  all that congestion, consolidations and narrow trade ranges which bring you nothing but misery. Just sit down and come up with about 6-8 currency pairs that can ring your cash register on a regular and consistent basis.

Not only is it important that you adopt effective market selection,but you also need to select markets that can give you clear cut price action You want to stay away from markets  that give you nothing but volatility and a nervous break down. You want straight out consistency and a healthy account. Also don’t get too stuck on specific pairs. I know we all have our favorites but please! Let’s have some variety here – rotate the selection and have some fun with your trades.

highprob-trade

This is a classic illustration of a price action set up.  You don’t see any congestion consolidation, or any other confusion. This is clear and unadulterated price action,and it is a high probability trade too. It’s a simple uptend with the bulls break through the resistance and heading for the hills as usual. You can’t miss on this setup!

 

If you want to learn how to spot trades  that are straight forward and less  noisy,don’t and make a lot of noise, refer to the following: Trading Chart Patterns Part I , Trading Chart Patterns Part II , and How To Spot High Probability Trades.

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interprete what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult How to Spot High Probability Trades.

That’s a wrap on “How To Ace Price Action Trading.” Mr Diet Bandwagon, I hope this sequel was to your liking.On serious note though, this post should arm you with enough ammunition to profit profusely from price action trading. With straight forward high probability price action setups, your forex account should put a permanent smile on your face. Just make sure you’re able to recognize these setups of course. So till next time take care!

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Trading Forex Chart Patterns Part II

Hello people,

Last time we touched on the first of our two-part series on trading chart patterns –Trading Chart Patterns Part  I.  This week we cover the second and final part ,Trading Chart Patterns Part II. Like I said last time,you can make a killing trading these patterns. You just have to put on the mentality of a sniffer dog where you spot the explosions before they actually happen.

People,we have lots of exciting patterns to cover today.  We’ll  look at several profit-making patterns that  can ring your cash registers(forex accounts) several decibels over.Hopefully you’ll be so excited about these patterns that you can’t wait to trade them on the market.

First pattern is:

Double Top Pattern

A double top pattern is a reversal setup that comes about when there is an extended uptrend. This is where the bulls have the run of things up the hill. Peaks are formed when price hits a level that can be penetrated- thus the name “tops”. Once price hits this level, price ricochets ever so slightly,  and then returns to test the level again. It’s like a fighter jet dropping a bomb on a target, and then moments later it comes backs to drop another bomb on the same target again. If the price launches off that level again,you guessed it, a DOUBLE TOP is born!Let’s take a look at a double top in living color.

Double-Top-Forex-Chart-Pattern

Now as you can see from the chart,the two red bears encircled in red represent the double tops. Like intimated earlier,the two peaks came about after a strong surge up the hill(or uptrend).You see how the second top was not able to top the high of the second top?This is because a reversal is about to take place. The reversal is occurring because the bulls buying power is diminishing

So How Do We Trade The Double Top?

Place your entry order  below the neckline(or resistance level) in anticipation of the reversal of the bulls trip up the hill(or uptrend). Now let’s watch the price break through the neckline

doubletop-break

 

It’s a good thing we decided to place our entry level below the necklineWhy? Because as you can see,the bears’ reversal is in full swing with the bears breaking the neckline and ‘slaloming’ towards the bottom of the hill. Keep in mind that double tops form after the strong surge upwards loses momentum and reverses.So be on the look out for this development.

As you can also see, the height of the bear drop is equivalent to that of the double top pattern.You’d do well to keep a note of that in your mental registry as it will coming very handy when setting your profit targets.

Next in Line is:

Double Bottom Pattern

Just like the double top. the double bottom pattern  is also a trend reversal. Except unlike the double top,the double bottom is formed at the bottom of the hill.  The double bottom comes into being after  a long period of bear domination,(or extended downtrend). Two valleys or “bottoms” are then formed as a consequence of this long period of bear domination. Let’s take a look at a double bottom in action.

doublebottom

The EUR/AUD chart show two classic illustrations of double bottoms . The two sets of circles symbolize the double tops . Whenever you see two sets of engulfed candles at the bottom of a trend, remember DOUBLE TOPS. The two valleys that  you see on the chart came about because the bears had reached the end of their rope.They’d lost their momentum.

Wanna know why the first double bottoms couldn’t top the second double bottoms? This goes back to what I said in the previous paragraph about the bears losing momentum. Their selling capacity has pretty much fizzled out,which can only mean one thing -REVERSAL.

How Do We Trade The Double Bottom?

As the labelling  recommends,place your entry order a few pips above the neckline in anticipation of the reversal. Nothing more, nothing less. Now let’s take a look at the reversal.

doublebottom-breakout

You see why it’s important never to go  against your better judgement? As you can see, the bulls break through the neckline and head for Mount Everest. If we hadn’t put the entry order above the neckline, our account would most definitely have been barbecued. Also notice how the  bull surge is about the same height as that of the double top formation.

Just remember that double bottoms only take shape after a strong bear slalom(or downtrend). So be on the lookout for that while weighing your trade options.

Next in line is:

Head and Shoulders Pattern

the head and shoulders pattern is also a trend reversal just like the others. But this reversal is a weird one. It is formed by a series of peaks with a peak(shoulder) followed by a higher  peak and then a lower peak(shoulder).Yea I know some of you think you’re dealing with highs and lows of a typical trend.NEWS FLASH! It’s not! This is a different kind of animal. A neckline is then created by connecting the two troughs. The slope is usually either up and down(makes for a pretty wild ride.Doesn’t it?). However, if you’re looking for a reliable trade signal, choose the downward slope. Let’s take a look at head and shoulders

Head_Shoulders

This, my friends is the head and shoulders pattern. The left and right shoulders form the initial peaks, while the head is the highest point of the mountain(I mean pattern). Although the shoulders are peaks in their own right, they don’t shoot past the height of the head. It’s called the head for a reason.

How Do We Trade Head and Shoulders

Just place your entry just below the neckline in  case  you’re caught by surprise by an unwelcome reversal. If you have a juicy profit target you want to reach, just measure the high point of the head to the neckline. This distance measures how far the price can push  down  the hill  once it breaks through the neckline. Let’s see the price break through the neckline.

headshoulders-break

As you can see the price has broken through the neck line and is sliding  down the hill  with reckless abandon like someone going skiing forthe first time.. Notice the way the beas   have even surpassed the profit target. And like, like I mentioned earlier, the size of the breakout is similar to the size of the distance between the head and the neckline. Now some of you are probably thinking” More Pips In The Bank After The Target.”Well, do so at the risk of getting your account blown to smithereens.”

Next comes head and shoulders sibling:

Inverse Head and Shoulders Pattern

Like I mentioned earlier, the inverse head and shoulders is the direct sibling of the head and shoulders pattern. In fact,it is also a head and shoulders pattern, except that it’s upside down.Ouch! Talk about standing on your head all day. Anyways, the formation kicks off with a valley(shoulder) followed by a much lower valley(head),and finally another valley (shoulder). The inverse head and shoulders comes about after a long slalom down the slope. Let’s see the inverse head and shoulders in action.

inversehead-shoulders

This, ladies and gentlemen is the inverted head and shoulders pattern. This pattern comesinto being  after an extended downtrend As you can see, it’s doing a great head stand with the head and two shoulders forming two valleys. Price, represented by the bulls, pushes through the neckline past the profit target and heads for the mountains.

How Do we Trade Inverse Head and Shoulders?

Just place your long  entry order above the neckline. And just like the head and shoulders, you calculate your profit margin by measuring the distance between the head and the neck line- which is approximately the distance that the price will push up after it cuts through the neckline. Now let’s watch the price slice through the neckline

inverseshoulder-break

Just watch the bulls  bulldoze their way through the neckline as if it’s a rag doll. They look like they’re shooting past the profit target also. is(The profit targets are blue shaped looking like the letter’I’). a Speaking of which,if they happen to hit your profit target, more grease to your forex account.Just remember that you can exit with some of your profits and still keep your trading position open.I’ll show you how later.

Next up we’ll be looking at three triangle patterns-starting with:

Symmetrical Triangle Pattern

A symmetrical triangle pattern takes place when the slope of the price’s highs  and the slope of the price’ lows come together to form something resembling a triangle. Basically, this formation suggests that the market lower highs and lower lows.And it also reveals a war of attrition between the bulls(buyers) and the bears(sellers). They simply do not want to push the price high enough to establish a definitive trend. In boxing lingo, you’d call it a draw. And  just to remind, it can be considered a consolidation also, as they’re taking a breather to protect their stock.

Let’s take a look at the symmetrical triangle in action.

symmetrical-triangle

This, people, is a symmetrical triangle at work. The upward line(higher lows) and the sloping line of the lower highs converge to form something resembling a triangle. And,  as you can   see from this graphic, both the bulls and the bears don’t want to budge.And when that happens, you get higher highs and higher lows. And when the two slopes inch ever so closely together,it can only mean one thing – BREAKOUT! You’ll have to be Houdini to guess which direction the breakout is going to go.But we know one thing: Something has got to give. Both parties can’t continue hogging the lines forever.

I guess the next question is:

How Do We Trade Symmetrical Triangle?

Fairly straight forward. Place your buy order above the slope of the lower highs, and then place your sell order below the slope of the lower lows. So now that we know the bulls will break out and head for the hills, Just enjoy the ride on the carousel. Now let’s watch the bulls breakout of the gates.

symmtriangle-break

As you can see the bulls are shooting high up like cruise missiles. You can take advantage of their jail break by  placeing your order above the the slope of the lower highs,and you’ll be riding high all the way to profitability. You then place your sell  order on the slope of the higher lows,but  please cancel the order and head for the exit the moment your order takes a hit. You’d be doing your account a huge favor,if you take this advice.

Right after the symmetrical triangle is:

Ascending Triangle Pattern

The Ascending triangle  pattern takes shape when a resistance level and a slope of  higher lows come into view. What’s happening here is that the bulls initially are   face strong resistance from the bulls. But they gradually regain the initiative through the higher lows. Let’s see the ascending triangle in action.

Ascending-triangle

The red resistance line and the dark looking slope make up the ascending triangle. As you can see from the graphic, the bulls are starting push up the hill through their creation of higher lows. The growing pressure the bulls put on the resistance level creates the perfect conditions for them to break out of the resistance level.

The question now is “Which direction does the breakout go?”Well the history books suggest that the bulls always win the breakout battle nine times out of ten. but there are times when the bears develop an attitUde and say “NO WAY JOSE!”It is the their way of putting up a strong rearguard action at the resistance level. Also it may be that the bulls just do not have enough cash to make that final push.

The moral of the story is do not pull your hair out over which direction the price goes. But you must have your ears on the ground which ever direction the price goes.

I guess the question plaguing your minds is:

How Do We Trade The Ascending Triangle?

Set your buy order above the resistance triangle and your sell order below the slope of the higher lows. Now let’s look at an illustration of the scenario we just described and  the ascending triangle trade in action

ascendingtriangle-pricedrop

NEWS FLASH! The bulls lose out to the bears. Naturally, the price takes a massive nosedive,which is music to the bears ears. So you see why I said the bulls don’t always win in these breakout scenarios?Also notice that the price drop is the same height as the triangle formation. And if  you had placed the sell order below the bottom of the the slope like I asked, your forex account will have you to thank.

The opposite of an ascending triangle is:

Descending Triangle Pattern

The term descending triangle pretty much speaks for itself. Doesn’t it? With descending triangle patterns, you have a bunch of lower highs forming a high line, Then you have the support level serving as a lower line – a line that the price is doing everything in it power to penetrate,but without success. Now let’s take a look at the descending triangle in action.

descending-triangle

As you can see the bears(sellers) are making up lost ground against the bulls(buyers) through the lower highs.

Remember when I said in the ascending  triangle presentation that often times the bulls win the breakout tussles, but sometimes they don’t? The same situation applies to the bears in the descending triangle. History also favors price as far as penetrating the support line and heading for  the valley goes. But some times, the support line turns into a wall concrete,forcing the price to ricochet and head on up in the opposite direction.

Then again, who cares which direction the price goes?  At some point the price is bound to end up somewhere right? Your job is to be on the alert when the price decides to make its move.

In light of this revelation:

How Do We Trade The Descending Triangle

Just place your buy order above the lower highs, and your sell order below the support line.  Now let’s see the trade in action.descendingtriangle-trade

See how the bulls shoot up like cruise missiles, after breaking out of the top of the triangle? Not only that but they conspire to to climb even further by the same vertical distance as the triangle formation. With such a clear-cut uptrend, just place your buy order at the top of the triangle – shooting for the skies as high as the triangle formation. You can’t go wrong with such a setup.

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interprete what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult How to Spot High Probability Trades

 

That’s a wrap for “Trading Chart Patterns Part II.” It’s’ been fun sharing these exciting trading patterns with you all. Like I said,you can make a fortune trading these patterns. You just need to keep your eyes and your senses open for those exciting possibilities.

Before,I close,sorry for taking so long to post this second segment. I promise not to keep youin suspense like this again. Till next time take care.

Looking to open a forex trading account?

Sign Up With EasyMarkets

Download Free eBook on Forex analysis

 

Trading Forex Chart Patterns Part I

This week we’re starting a two part series on trading forex chart patterns.  Let me let you in on a secret. You’re going to have a lot of fun with  trading chart patterns.Why? because you will be able spot huge moves on the market before they happen and get that chi ching effect from your cash register.. Think of chart patterns as sniffer dog sniffing explosives.You will be able to spot the explosives before they explode.

So what we’re going to do? We are going to learn a bunch of chart formations and how to trade them. But before we get started, I have a little suggestion to make. If you’re here and you happen to stray in on this post with absolutely no idea what price action trading is all about, but would still like to learn, I humbly suggest you refer to the following posts:

These four  posts are what I call my Forex 101 session.  You need to read these four  posts in order to gain a foundational  understanding of price  action analysis. Your understanding of these posts are absolutely crucial in your grasping of my other posts, including this current series  on chart patterns.

Now on to our chart patterns. The first continuation chart is:

Falling Wedge

Now what really is the falling wedge? It sure isnt a cliff rock falling of a cliff;I can tell that. Actually  a falling edge acts as both a continuation single and a reversal signal. Now a continuation signal is an alert that a trend is about to resume.Basically traders take a break from jostling for position on the market.Once they’re done recharging their batteries, they resume the trend. Whereas reversal signals suggest that a current trend is about to do a 360. If a reversal forms during an ap uptrend, expect the price to head downwards. Conversely if a reversal forms during a downtrend,  the price heads up.

Before we continue with the falling wedge, let’s see examples of the continuation and vertical patterns-starting with the continuation pattern.

falling_wedge_reversal_strategy

This is a continuation chart pattern in a downtrend. The bears breaking through the support level  suggests a resumption of the downward trend.

Now let’s look at the reversal chart pattern

Reversal

This is an illustration of a reversal pattern.  Notice how the reversal starts right at the uptrend. The bulls dominated with the uptrend,but the price does a 360 after the bears refuse to buy at the price the bulls were offering them.This sets off a trend reversal with the bears heading for the valley.

Now back to our initial discussion on the falling wedge. Like I mentioned earlier, the falling wedge acts as both a continuation signal and a reversal signal. When it takes the form of a reversal signal it takes up residence at the bottom of the downtrend.. This suggests that an uptrend is about to start,with the bulls heading for the hills. However, when the falling wedge switches to a continuation signal, it forms during an uptrend, meaning that the upward price action will resume after the bulls take a breather from jostling with the bears.  The falling wedge is considered a bullish pattern because of its upward stance.

Let’s look at illustrations of of the falling wedge as a continuation signal and reversal signal  , starting  with the reversal signal.

fallingwedge-reversal

This is a falling wedge as a reversal signal in action. The reversal signal starts at the uptrend and is characterized by lower highs and lower lows. Notice the steepness of the lower highs compared to the lower lows.

Next we look at the breakout

grade7-falling-wedge-reversal-after2

Now this is where the reversal takes flight. Notice that it starts at the bottom of the downward trend with price making a strong surge upwards at a height equal to the wedge formation.

Next up is an illustration of falling wedge as a continuation signal

fallingwedge-consolidate

In this scenario, the price consolidates after a strong surge upwards. In this scenario,  the bulls are taken a breather and gearing for another surge upwards.

Now let’s look at the break out

grade7-falling-wedge-reversal-after2

After the bulls catch their breather,they resume their journey up up and away. See how they drive  the price to the top side and climbed even further.

How To Trade Fallen Wedge

Using the same graphic above, place your entry order above the red  falling trend line. Your profit target should be the height of the of the fallen wedge formation.

Next up is:

Rising Wedge

When I mention the rising wedge, I’m not talking about a plant shooting out of the ground. The rising wedge is the sibling of the falling wedge,but that’s where the resemblance ends. You see unlike the falling wedge, the rising wedge unfolds between upward support and resistance lines. In this scenario,the high lows form at the speed of light than the higher highs. When prices consolidate,word gets around that a major event is about to take place. Expect a breakout to happen either at the top or the bottom.

If  a rising trend forms after an uptrend,it’s highly likely a bearish reversal. And you what that means? The bears will drive the price down and head for the valley. But if this same rising wedge forms during a downtrend,it could signal a continuation of the reversal. Like I said,a continuation signal flashes after the main players take a breather to recharge. Either the way,the important thing to note is that when you see such a formation, get your entry orders ready. Let’s see a rising wedge in action.

rising-wedgebefore

The slope of the support line seems steeper than that of the resistance. The steepness of the slope is reflected by the speed with which the higher highs form compared to the higher lows. And  the formation of these highs and lows give  risetothis wedge-like formation.

Now let’s take a look at the breakout

risingwedge-breakout

See the price break through the resistance line and head downwards. It suggests a desperation by bears to go short(sell) than go long(buy). They’re basically dragging the price down to trigger a downtrend And just like the falling wedge, the price movement is equal in height with the rising wedge.

 

Now let’s look at the rising wedge as a bearish signal

risingwedge-continuationsign

As you will have noticed by now,the price starts of on a downtrend,and then consolidates as traders decide to catch some air. Then the bulls seize the momentum as they map out higher highs and lows. This is the bearish continuation signal for you.

Next in line is:

Rectangle Chart Pattern

Now a rectangle chart pattern takes shape when the price is caught between support and resistance levels. And as usual, a period of consolidation ensues with both bears and bulls caught in a war of attrition. Then the price drives at the support and resistance levels kamikazi  style before eventually breaking out for freedom in the trend’s direction of the break out, be it an uptrend or downtrend.

rectangle-example

It is pretty obvious from the above graphic that the price is swinging between both support and resistance levels. It’s only a matter of time before one of these dams breaks l and heads for the hills or valley,depending on the strength of the trend.

Now that we’ve gotten the introduction out of the way,we’re going to look at two types of rectangle chart patterns. The first rectangle pattern is

Bearish Rectangle

Whenever I see the word bearish, the first word that pops in my head is consolidation. Because that is exactly what happens with the bearish triangle. The bearish triangle takes shape at the downtrend  where price consolidates for a while. here the bears take a breather from jostling with the sellers, and once they done recharging their batteries, they resume to drive the price down further.

Let’s take a look at an illustration of the rectangle chart pattern.

rec-chattern

See the way the red bears break the bottom of rectangle chart and continue on their downward slalom. If you’re thinking of making  a nice profit just place a nice order to go short(sell) just below the support level and you’ll be laughing all the way to the bank.

Now let’s watch a scenario where the bears drive the price down about the same height as the rectangle formation

price-height

Here the bears drive the currency pair beyond the level of support.  And, as you can see the price dip is about the same height as the bearish triangle. Also notice the way the bears have driven the price beyond the target(labelled in blue). tThe possibility of racking up huge pips and converting theminto profits  are massive.

Bullish Rectangle

Just like its bearish counterpart, the bullish rectangle experiences consolidation. Except that this takes place on the uptrend at the level of consolidation. And just like the bears, the bulls also take a breather from jostling with the bears(The bears can’t have all the fun)before resuming their upward climb.

bullish-rec

As I mentioned earlier,the bulls are taken a break  after jostling all day with the bears. Once they catch their breath they then continue with their upward climb. Now let’s see what happens with the bullish breakout

bullish-breakout

The bulls are really going for it. Aren’t they? They’ve really broken above the rectangle pattern(labelled red)and are heading for the mountains.

With such a well-defined uptrend, just put in a long order(buy) above the resistance level  and you should laugh all the way to the cash register. And just like its bearish pattern brethren, The bullish breakout is the height and size as the bullish rectangle formation.

And finally the last two chat patterns are,you guessed it,bullish and bearish pennants. But please, if  you’ve strayed in here dreaming of World Baseball Series pennants, you’re on the wrong blog. We’re  talking forex pennants here. But first:

What’s a Pennant?

Well, just just like rectangle chart patterns, pennants are birthed after significant movement on the forex market. the bulls(green)and the bears(red) take a timeout  after jockeying position while the currency pair moves upward or downward.Once they’re down with the timeout,they resume to work the currency pair along the same directional path. This constant pushing of the currency pair by both parties causes the price to consolidate( a situation where the bears and the bulls are locked in a standoff) and  results in the pennant’s triangular formation.

While both sides are still undecided, newly recruited bulls and bears take advantage of the standoff by riding on the coattails of the trend of the day. This sudden burst of excitement by these new recruits forces the price to bust out of the pennant formation and head for freedom.

Now we’re going to look at two types of pennants – bearish pennant and bullish pennant.But first:

Bearish Pennant

The bearish pennant takes shape after a very steep downtrend precipitated  by a huge drop in price.This causes serious division in the bear camp with some bears opting to close their trading positions to save whatever profits they have left. While the other bears decide to hold still on the trend. This war  attrition,of course causes the price to consolidate. In othewords, both sets of bears are at loggerheads.

Let’s take a look at an illustration of a bearish pennant’s break and consolidation

pennant-break

This steep vertical downtrend reflects a sharp drop in price. Immediately a herd of bears decide to jump on the trend’s band wagon and send the price on a wild slalom below the bottom of the pennant. The red triangle represents the price’s brief consolidation. This is a result of the bears taking a breather to resume their slalom. This consolidation is what creates this triangular contraption called the pennant.

Now let’s take a look at the downtrend’s resumption after the breakoutbearishpennant-resume

Once the bears are done with their breather, they resume their downward slalom This causes the price breakout to the bottom. If you’re having any fantasies of making serious mullah from this pattern, just go short(sell) at the bottom of the pennant. However to avert the possibility of the market  faking you out just slowly put a stop loss above the pennant.

And finally our last chart pattern for today is:

Bullish Pennant

When you see the word bullish,it can only mean one thing  – The bulls are about to head for the hills again.  The bullish pennant is formed as  a result of them making a sharp vertical climb. After a period of respite(consolidation), they resume their rock climb to drive the price higher which they  eventually succeed in accomplishing.

Let’s look at an illustration of the formation of the bullish pennant

bullish-uptrend

The bulls head for the hills, courtesy of the uptrend..They then take a breather inside the triangle to recharge to continue the upward climb.The triangle of course reflects t  Now let’s look at the bull’s breakout and  eventual continuation.

bullishpennant-continuation

As expected, the bulls break out of the triangle and head for Mount Everest . And just so you know, the size of most breakouts in pennant formations around the height of the previous moves, or the same size of the previous moves. Pennants may be small, but make no mistake: they can make you tons  of money.

How To Trade Bullish Pennant

Go long above the pennant and place stop order at the bottom of the pennant to protect yourself from hugely embarrassing  fakeouts by the market.

That’s a wrap for “Trading Patterns Part I.”  As I’m sure you’ve gathered by now, you can make a giant killing trading chart patterns if you keep your eyes wide open to the trading opportunities these chart patterns present. Next time we’ll look at more profit trading patterns. So till next time,take care.

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interprete what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult How to Spot High Probability Trades

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Let’s Trade the Bear Trap

Last time we learnt about Trading The Bull Trap. Today, let’s  trade the bear trap. And no,we’re not talking about a bear trap for eight hundred pound grizzlies.  We’re talking about a different kind of bear -The naive selling bear. Basically, the principle behind the bear trap  is still the same as the bull trap  – Setting us naive bear traders for a major crash. Except that this time it’s naive sellers taking the bait. So we’re going to find out what a bear trap really is, the characteristics of a bear trap to look out for,  how to avoid the bear trap, and how to trade the bear trap.

I guess the obvious question is:

What is a Bear Trap?

A bear trap is basically a contraption set up in the bullish trend for naive sellers.Just like their  brethren, caught in the bull trap, they fall for the possibility of making a huge profit. except this time, they get baited into believing tha And just like their naive bulls brethren,they’re left holding the bag. To make matters, they’re in a lot of pain. Why? Because all their initial profits are about to go out in smoke and their precious stop loss is about to take a massive hit. Basically these naive bears are about to incur a huge loss. They basically started counting your eggs before they were hatched.

Let’s see a classic example of a bear trap

bear-trap-in-forex-trading.png

This is a bear trap in action. The red bears  downward slide create the impression of an imminet sale only for the green bulls  to set a bear trap, at the support, level jack up the price and head for the hills. Unfortunately the naive bears they face the double-edged sword losing a lot of money and their stop loss order taking a massive hit.

Twos Features To Look Out For  In A Bear Trap

There are two features  you absolutely need to look out for in a bear trap. The first candlestick must be absolutely bearish. It must be seen to be breaking through the support level and closing after the support level . Even more important,  the next two bears in between the bear trap must be seen to be losing steam. When this takes place,  shorter candlestick body lengths take place. This represents the formation of a bullish reversal.

The second  feature to look out for is the bear trap breaking through the support level. The bear trap breaks the support level and  the bulls head for the hills, leaving the naive bears holding the bag. When this scenario unfolds,you have yourself a bear trap.

Let’s see an illustration of this scenario using the first graphic we looked at earlierbear-trap-in-forex-trading

Take a close look a the long red candlestick breaking through the  support level and closing after the support level. That’s the first feature of the bull trap. However, take a  closer look at the  red candlesticks in between the bullish at the base of the support level. They’ve started losing steam and the bullish trend represents the bear trap breaking through the support level. The naive bears are going to be hurting a lot.

If you are still not sure about support/resistance levls please hurry to my Identify Support and Resistance Levels With Price Action Analysis  post.

 

Where Do Bear Traps Occur?

As the purple line suggests, bear traps occur at support levels. Anytime you see candlesticks  nosediving towards the support level, start screaming BEAR TRAP! Don’t be a victim.

Now that we know about the monster called the bear trap,What are we going to do about it? Hear are a few tips on how to dodge the bear trap

Place A Large Stop Loss

Just like the bull trap, place a large enough stop loss to get you out of trouble when the bear trap rears its ugly head.  . You can place the stop loss at least 2 pips below the low of the bullish candlestick or two pips below the low of the bearish candlestick. Let’s take a look at the following graphic.                                                                                                                                             Bear-Trap-Chart-Forex-Trading-Strategy

The first stop loss is placed right underneath the low of the bullish candlestick(or the short end of the candlestick), as indicated by the number one label. The second stop loss is placed at the long end , or low  of the red bearish candlestick as indicated by the number 2 label. As I said earlier, placing a stop loss at either the bearish end or bullish end will save you from incurring huge losses.

If you’re a bit dodgy  on your candlestick patterns,  go to my post on You Need To Know Ten Of These Candlestick Patterns

Follow The Dominant Trend

If you want to beat the bear trap,follow the dominant trend-in this case the downtrend. If the breakout at the support level is not in the direction of the downtrend,it can only mean one thing -BEAR TRAP! And you know very well that the smart bulls will be only too glad to push the price up and head for the hills, and leave the naive bears licking their wounds. In case you’ve forgotten what a downtrend looks like,take a look

How-To-Trade-Support-Level-Breakouts-1.png

 

As you can see the breakout is in the direction of the downtrend.It has not taken any detours as you saw with the bear trap. If this scenario doesnt unfold on your screen, don’t bother entering a trade. If you do,you’d live to regret it.

If you’re still not sure of your trend trading, refer to my Trade Trends With Price Action  Analysis Post

Trade Retracement Instead of Breakout

Sometimes it makes sense to trade the retracement instead of the breakout at the support level. Some of you  are probably wondering “What is a retracement?”Well, a retracement is a temporary reversal of a currency pair against a dominant trend.  So instead of taking the risk of being bear trapped,  how about allowing the breakout to happen?And then once the price moves down,with downtrend still intact, wait for price to drop a bit and then you make your sale. Let’s see an example of retracement in action.

retracement

As you can see from the GBP/USD  graphic, the downtrend is heading towards the support level, which is indicated by the green line.  Don’t trade the initial breakout, but watch the price drop and then trade the retracement.

Keep Your Eyes Closely On Two Candlesticks After Breakout.

Keep your eyes closely on two particular candlesticks after  the initial downtrend break. Why?Because two things hit these two candlesticks -Loss of momentum and bullish reversal. If these two conditions exist, scream BEAR TRAP! You may also want to start heading for the hills with your profits or put  a stop loss to save potential blushes. Let’s take a look at the first graphic again.

  • bear-trap

As you can see from the graphic, the bear trap has triggered a major bullish reversal after the initial breakout.The naive bears were made to believe they were going to cash in massively, only for the smart bulls to drive the price up and head for the hills. These bears will be seriously hurting.

How To Trade Bear Trap

If you want to put your neck on the line to trade the dreaded bear trap, here are a few ground rules you need to keep in mind.

  • Wait for the bear chart pattern to form, and then wait for the bullish signal to form.
  • Buy a stop pending order at least two pips above the high of the bullish stick.
  • Place your stop loss at least 2 pips below the low of the bullish candlestick. Or  place it 2 pips below the low of the bear trap candlestick.
  • If you want to make a profit, aim for a risk:reward of 1:3 minimum . Or  use the previous swing trade high as your “take profit target”

Bear-Trap-Chart-Forex-Trading-Strategy

This EUR/JPY graphic illustrates  the bear trap  trade. Notice the stop loss  1  below the bullish and the stop loss numbered below the candlestick with the thin end.  Of course you see where to take your profit. Don’t get too greedy.

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interprete what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult How to Spot High Probability Trades

 

 

That’s as wrap for “Let’s Trade a Bear Trap.” Just like the bull trap, the bear trap creates the impression of a major trend only to create a huge reversal, leaving  naive bears holding the bag.  Hopefully none of you will suffer the same fate  when you come face with the bear trap this week. Till next time take care.

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Trading The Bull Trap

 

Today we start our three-part series on false break strategies by  saying “Trade The Bull Trap.” No,  the bull trap is not meant to trap live bulls. However, the bull trap is set up for a different kind of bull – the naive  buyer on the  forex market. Sometimes, buyers are easily sucked into an uptrend,thinking it’s safe to enter a trade. Then,much to their shock and horror, the bears springs  out of nowhere and drag the price down, leaving the bulls with the tails between their legs. That’s what the bull trap does to naïve bulls. It lulls them into a false sense of security, and then pulls their legs from underneath them.

So we’re going to do a few things today. We’re going to find out what a bull trap is all about. Then we’ll look at three bull trap patterns you need to know about. And finally, we’ll learn how to avoid the bull trap.

But first things first:

What Really is a Bull Trap?

Well, a bull trap is a contraption set up for naïve bulls in the uptrend. You see,the price surges through or breaks through the resistance barrier and heads for the hills so to speak. The sad part about this sordid mess is that naïve bulls, looking to make a quick buck fall for this sucker punch. They’re like “hmmmmm………The market looks very promising .How about  we cash in right now while the iron is hot?” Sounds like a good idea right? Well unfortunately for the naïve bulls, the uptrend like a Boeing 747 running out fuel across the Atlantic Ocean.

Then the unthinkable happens. The bears burst out of the  woodwork and drag the  price down. The price  drags down  leaving the bulls literally holding the bag.  Not to mention the fact that all their stop loss entries take a major  hit as a result of this huge reversal.

The question we should be asking ourselves is:

Who Is Behind This Carnage?

Well,it turns out that the main culprits are big time professional traders in a desperate search for cash to fund their huge trades. They basically say to themselves” How about setting up our rookie traders for a huge crash? We make them believe  an uptrend is about to start and then boom! We set the trap on them and then we cash in on the price drop. This may sound sadistic to some of you out there,but it seems perfectly legal. In fact, you can also cash in on the bull trap.You just need to keep your eyes wide open as  the bull trap unfolds. Let’s look at an illustration of the bull trap

bulltrap-example

This, my friends is a classic example of the bull trap in action. See how the price gives the impression of a strong uptrend,but  then the bears burst out of the woodwork and drag the price down, leaving the bulls in a huge fix. I guess the moral of the story is don’t count your chickens before they ‘re hatched.

Three Bull Trap Patterns You Need to Beware of

I assume you are all aware of the famous sign “Beware of the Dog”. Mentally you should also have the sign”Beware of the Bull Trap.”  As a matter of fact, I’m going to show three bull trap patterns you need to beware of  out there on the market.

Bull Trap#1- Candlestick Break and Close

Bull-Trap-Chart-Pattern-1-1024x485

This bull trap pattern shows a price break at resistance but then the bearish downtrend resumes almost immediately.

Bull Trap#2 – Candlestick Breaks Resistance Level But Closes Below Candlestick

bull-trap-chart-pattern-2-1024x476

This bull trap pattern shows an uptrend breakout at the resistance level but the bears eventually take over  and head for the valley.

Bull Trap#3

bull-trap-chart-pattern-3-1024x476

Another classic case of a bullish breakout at the level of resistance, and the bears taken over. Once the first two candlesticks kick in downwards, that’s the beginning of the bull trap.

Now that we know how deadly the bull trap can be, I guess the most obvious thing to do is to learn:

How To Dodge The Bull Trap

1. Place a Large Enough Stop Loss

Place a large enough stop loss to avoid getting caught in the bull trap. The trick is knowing high the price will climb before it crashes.

2. Only Trade In The Direction of the Trend

You’d be better off if you only trade in the direction of the trend. Because 90% of the time if the breakout does not follow the trend, it can only mean one thing-BULL TRAP! And you sure do not want to be at the mercy of those smart traders do you? If you  still aren’t sure about how to trade trends, do me a huge favor, and visit myTrade Trends With Price Action Analysis post.

3. Trade The Retracement.

While you’re considering other options, you may want to consider trading the retracement In case some of you  have forgotten, a retracement is a temporary reversal of the prevailing trend. With that in mind, just wait for the price to temporarily drop, and then you place your buy order.

Keep Your Eyes On The Next Two Candlesticks After Breakout

If you really do not want to get caught in the bull trap, keep your eyes on the next two candlesticks after breakout. Why?  Because these two candlesticks trigger the  bull’s loss of momentum and the unfolding of the dreaded bull trap. So here is what you need to do when these two scenarios occur

  • Take all your profits and head for the hills. You do not want to be laughing at the wrong end of your mouth.
  • You can also put in a stop loss to trail stop your trade and gather whatever is left of your  valuable profits
  • Or use some of your profits to move stop loss to break even point or move stop loss to lock in some profits. This is a very risky option, so you may have to think long and hard about this.

Let’s see a classic graphic of what I’m referring to.bull-trap-trading-warning-signs-1024x486

As you can clearly see from the graphic, The bulls have been sucked into this hot uptrend. But notice the momentum stall once the first two bearish candlesticks kickstart the downtrend. The bull trap alarm should be ringing in your head, the moment you see this scenario unfolding.

 

How To Trade Bull Trap

If you want to sink your teeth into trading the bull trap Here are a few ground rules you need to follow

  • Watch out the price surge towards the resistance level and see if you can spot a bull trap pattern.
  • Upon spotting the bull trap, place a stop pending order at least two pips below the low.
  • Next place a stop loss at least two pips above the high
  • But if you want to make a profit,  either aim for the previous swing price at the lower low or risk reward of at least 1:3

If you’re not sure of your support/resistance level trading, see my Identify Support and Resistance Levels With Price Action Analysis post.

If you’ve stumbled in here looking to join the forex trade bandwagon,  look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?    And to be able to analyze/trade  with price action data, You Need To Know Ten of These Candlestick Patterns.  If you can’t interprete what your candlesticks are telling you, you cannot trade  with price action data.

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult How to Spot High Probability Trades

 

Well that’s a wrap for “Trading The Bull Trap”. The bull trap can be a huge tease if you fall for it easily. But it can be profitable if you know what you’re doing. Next time we’ll touch on trading the bear trap. Isnt it great to turn the tables on the bears? Till next time ciao!

Looking to open a forex account?

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How to Trade Fakey Pattern

 

Hello, Last week we kicked off our three part series on pin bar trading strategies with Pin Bar Strategy-How To Trade It. For our second installment on pin bar trading strategies, we’re going to learn how to trade a tricky but rewarding trading strategy, called the the fakey pattern. Some of you’re probably wondering,  Is this something straight out of an American football playbook”? No, the fakey pattern  is a trading strategy popularized by renowned Australian forex trader, Nial Fuller.  Nial Fuller describes it as “a reliable indicator of potential near term(and sometimes) long term market direction. I guess the first question we should be asking ourselves is

What is a Fakey Pattern?

Basically a fakey pattern is the false break of an inside bar structure. Price goes in one direction, but then does a sharp reverse, creating a false break of the inside structure.  The main feature of  the fakey pattern is the running  of stop losses by veteran traders. They create this huge vacuum by trying to lure naive rookie traders, thus creating this huge black hole in the market. Unfortunately the price then does a sharp 360 and reverses in the opposite direction. It’s as if the big time traders are playing a prank on the amateurs.

These same veteran traders also cause the fake pattern when they react to a major market event . which has caused price to sharply turn the opposite direction from an initial breakout. So if an inside bar creates a false break at the resistance level, the price moves downward opposite the the direction of the initial breakout.

A Few Examples of Fakey Set ups

bullish-bearishAbove are classic illustrations of bearish and bullish fakey signals. The inside bar  creates the  illusion or false breakout of the inside bar pattern, resulting in the formation of the fakey pattern.

Note of Caution

Not every fakey signal comes out with an inside bar pattern.In some cases, the fakey signal may have a pin bar pattern where you have only one bar as opposed to the two bar false break. You may also run into three bar false breaks although those scenarios are quite rare.

fakey-reversal

Here we see a bullish pattern with a pin bar reversal acting as the false break of the inside pattern.

Which finally brings us to

How To Trade A Fakey Signal

You can trade a  fakey signal in  ny market condition except a choppy market. Why? Because conditions are not too favorable for trading fakey signals. But you can trade fakeys in a trending market, or range-bound market, or even against the trend,- if it’s at support or resistance level. The fakey should provide  you with an high probability entry point as well as a stop loss placement.

If the fakey forms at the level of support  you place your stop losss just below the lowest point of the two bar false break. However, if you want to make a trade make sure the fakey  is at a level of confluence i.e. the support level and the uptrend.If  fakey signal forms at key resistance levels, that’s a great opportunity to enter a sell trade.

 

bullish-bearishfake.png

So as you can see below you have fakeys developing at bot levels of support and resistance levels. These two scenarios create great opportunities to make trades.

If you’re still pulling your hair out over support/resistance levels,consult  my Identify Support and Resistance Levels With Price  Action Analysis post.

If you’re stumbled in here looking to join the forex trade bandwagon look up Why Forex Trade Is So popular.  Next,if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots,  get started with What is Price Action Trading?  and then build up from there by reading the other price action posts on the blog.

That’s a wrap for “ How To Trade Fakey Pattern.” As you can see fakey patterns can be useful if you ‘re alert enough to spot the opportunities.  If you’re a  rookie trader look out for those black holes created by veteran traders or else you could get sucked in easily.

Next time we’ll finish our final installment – the Inside Bar pattern. If you missed the first lesson on the pin bar set up, or you want to review, click here.

If you’ve stumbled in here wondering what price action trading is all about refer to What Is Price Action Trading?  And if you’re curious about forex trading, find out Why Forex Trade Is So Popular?

Till next time, take care.

Looking to  open a forex account.

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Pin Bar Strategy – How To Trade It

 

Today we kick off our three-part series on price action analysis by taking a close look at the pin bar strategy and how to trade it. We’ll first  define the pin bar take a look at its anatomy and  then show illustrations of how to trade pin bar setups But first:

A Little Introduction To The Pin Bar Strategy

The pin bar pattern represents a  strong rejection and reversal of price.  The rejection usually occurs at a very crucial stage in market activity. The good news is once you familiarize yourself with this pattern you stand the chance of laughing all the way to the bank. The first question we need to ask ourselves is:

What Is a Pin bar?pinbars

Well, the pin bar is a thin bar with  the following attributes:  a long upper or lower tail, wick or shadow, and a smaller body or real body. The pin bar also belongs to the candlestick family(We’ll touch on candlesticks real soon)- very popular with forex traders because they’re easy on the eyes as far as price action goes.

 

Anatomy of the Pin Bar pinbar-anatomy

  • The  pin bar has a long tail or wick as it’s popularly known.. As indicated in the above graphic,  the tail is the pointed part of the bar that resembles a tail and which indicates rejection or false break of a level.
  • The body represents the area between the open and close of the pin bar. And it’s usually colored white or another color, when the closing price is higher than the open price. However, if the body color changes to a darker color, or some other color, then the closing price  becomes lower than the opening price.
  • The open and close of the pin bar should be close to or equal to the same price.
  • The tail, popularly known as the shadow protrudes fr
  • The tip of the tail is referred to as the nose.
    • The  pin bar has a long tail or wick as it’s popularly known.. As indicated in the above graphic,  the tail is the pointed part of the bar that resembles a tail and which indicates rejection or false break of a level.
    • The body represents the area between the open and close of the pin bar. And it’s usually colored white or another color, when the closing price is higher than the open price. However, if the body color changes to a darker color, or some other color, then the closing price  becomes lower than the opening price.
    • The open and close of the pin bar should be close to or equal to the same price.
    • The tail, popularly known as the shadow protrudes from the  other bars. For your sakes, you’ll be better off with a longer bar a

Now we’re gonna see illustrations of how to trade pin bar setups with respect to bullish and reversal  formations.

Bullish Reversal Pin Barbullish-pinbar

In a bullish reversal set up, when the pin bar’s tail points down, it suggests rejection of prices or a level of support(either support or resistance).  This triggers an upward trend or rise in price, and when that happens, it’s time to make a buying trade.

Bearish Reversal Pin Bar

The pattern on the right of the bullish reversal pin bar is the bearish reversal pin bar. This the complete opposite of the bullish reversal pin bar. Here prices are rejected at the level of support, resulting in a  drop in price. This triggers a downward pattern, and when that happens, it’s time to sell.

 

How To Trade Pin Bar Strategy

If you want to make serious money with the  pin bar strategy, make sure it’s well defined. Refer to the characteristics  of the pin bar we discusssed earlier if you find yourself in sixes and sevens.Why do I say so, because not all pin bar patterns look the same. So it pays to trade the pin bar patterns that satisfy the above characteristics. But just to clear any clouds swirling in your head, let me show you what a defined pin bar looks like.

def-pinbar

This is a pin bar formation in a downtrend. As the two arrows sugest, the pin bar has a long narrow wick and a small body. So keep that in mind when looking out for  the pin bar pattern.

Also,make sure that you trade pin bars that display confluence with another factor.  Sure, some of you are scratching your heads like “What does he mean by confluence.Well, confluence is where tow or more levels come together on the chart.  On    The alignment of these levels creates opportunities for trade signals. A classic example of pinbars displaying confluence is at the support level where you have multiple trade signals long the line of support. Let me show show you a classic  example of confluence of factors along the line of support

03-Using-Pin-Bar-Price-Action-Trade-Forex-Confluence-1024x480 (1).png

This,ladies and gentlemen, is a classic example pin bars displaying confluence with another factor along the lines ofsupport and resistance. The three arrows represent trading signals along these two lines. When such a convergence, occurs,  prepare to ring the cash register.If you want to  sink your teeth further in multiple confluence of factors  stop by  my Something Called Multiple Confluence of Factors Post.

 

That’s a wrap on “Pin Bar Strategy – How To Trade It.” Tomorrow we’ll touch on the second of our trade setups- Fakey Set Up. I’m sure you’re looking forward to that. Till next time take care.

Interested in getting into price action trading and a career in forex trading?

Read the following posts: Why Forex Trade Is So Popular and What Is Price Action?

 

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