How To Trade 50% Trade Retracement Strategy With Price Action Analysis

Don’t worry! We’re not going to learn how to retrace your footsteps to recover lost cash. Instead, we are going to learn how to to trade the  50% retracement strategy with price action analysis to make a lot of cash. Makes sense doesn’t it? By the way the 50% trade retracement strategy is one of the most powerful trading strategies you’ll ever trade with. You most certainly need to learn this pattern like the back of your hand if you want to rake in the moolah.

So we are going to three things: As usual,we are going to define what the 50% retracement strategy is.  Next , we’ll learn how to find the 50% retracement strategy

But first things first: and finally, how to trade the 50% retracement strategy.

What on Earth is a Retracement?

Well a retracement is a temporary reversal in the prevailing trend. It could be a pull back in an uptrend or a strong rally in a downtrend. As I’m sure you’re all aware by now, the market rarely moves higher or lower in a straight line. Look up any price action chart,and the evidence is abundantly clear. So once the market triggers the initial surge, a reversal  takes places. By the way, a retracement is a regular event on the forex market.And this regular occurrence gives you free passage into the market and partake in the huge surge.

To help you understand how  a retracement works, let me paint this nice picture. A group of investors  have this gnawing feeling in your gut that the bulls are heading for the mountains. So they put in a bid to buy higher. Of course, the investors’  decision to buy higher causes the market to  push higher also. Traders also  notice this spike  and are  like”Heck,we’re going to jump on this gravy train also.”Why? Because they figure they will miss out big time,if they don’t get in on the act immediately.

These investors then close out their positions  thinking “We’ve made enough money.Let’s getout while the iron is still hot.” So what  do they do?  They decide to sell to the very investors who jumped on their gravy train. It’s at this juncture that the market starts pulling back. Once the market pulls back about halfway, these investors then huddle up and as themselves”How about we cash in again since the other traders are exiting like flies because their stop orders have taken massive hits?” Once these investors have made up their minds, to cash in some more, they start adding to their already bulging  profits. Their already bulging prosperity sends the market surging one last time,  causing the process to restart.That’s how the retracement pattern works.

I guess the next  question we need to ask ourselves is

How Do We Find  50% Retracement Level?

First identify whether the move starts with a high or a low. Now once you have identified the Genesis of the price move, we then apply a very popular tool  called the Fibonacci tool to click and drag the other end of the Fibonacci tool to the end of the price move, where the price move terminated. You should find “100.0” in the top right hand of the Fibonacci tool  and “0.0” at the bottom of the tool.” Some of you are probably going “This confusing. Why is 100.00 starting at the beginning of a price move?” Well retracement basically means pullback.  Meaning, that by the time the market goes into reversal mode, it goes back to where it started from. And if it retraces back up or down on the same move, it would have retraced to 100% . Let’s take a look at a 50% retrace in action on the EUR -USD pair

Image result for Forex - How to use Fibonacci tool to find 50% retrace in eur/usd pair

This, ladies, and gentlemen is an illustration of how to find the 50% retracement level  of the EUR/USD pair in a downtrend. Now as you can see,  the line is dragged with the assistance of the Fibonacci tool from the 100% level(as indicated by the orange line) all the way to the end of the price move. Now notice the price signal forming at the 50% retrace level.  This signal takes place after the temporary reversal when price hits 1.4023.

Now let’s look at the drawing of the 50% retracement level on the uptrend using  the USD/JPY pair.Image result for Forex - Drawing 50% retrace with fibonacci tool

Here is another illustration of finding the 50% retrace  pattern, this time,on the uptrend. The Fibonacci tool draws the line from 100.0 all the way up to 0.0 where the trend ends. Notice the temporary  reversal  at the 50% retracement level where price finds support.

Now that we’ve identified how to find the 50% retrace, I guess the logical question will be:

How Do We trade price action signals from 50% Retracement Level?

Well, the moment your eyes tell you ” Hey  we see a price signal on the chart” just use the Fibonacci tool to connect the signal to the 50% retracement level. So long as both scenarios match, you  got yourself a trade. Now if you can also spot a key level of resistance also that should make you say “This is great confluence going on here.”After spotting the price signal, you have two options. You can can enter at market prices, or wait for a pullback to tighten up your stop loss and reduce general risk to your trading position. Let’s take a look at a USD/CHF graphic

 

Image result for how to trade price signal on 50 retracement

As you can see, price slides down to previous resistance level. See  coincidence of the previous resistance level with the 50%  Fibonacci level, which of course translates to confluence.

Now if you ‘ve forgotten what confluence is all about, check out my post  Something Called Confluence.

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.  Don’t 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 ” Trade 50% Trade Retracement Strategy With Price Action Analysis”   I hope you now have a clear understanding on how to find and trade 50% retracement patterns Just remember that whenever you spot 50% retracement patterns in a prevailing trend, it makes sense to label them on your chart and then be on the look out for any juicy price signals.  You could make some huge moolah from these setups.

Til next time, take care.

Looking to open a forex trading account?

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Identifying Dynamic Support and Resistance Levels

 

This week we’re going to try identifying dynamic support and resistance levels. Remember when we tackled   Identify Support   and Resistance Levels Using Price Action Analysis?  Well, dynamic support and resistance levels are what I call the supersonic siblings of the static support and resistance levels that we covered earlier. They reflect the constant change seen on breakouts of support and resistance levels.

Although static models such as pivot lines, trend lines and channels are useful for price action analysis, they don’t adjust themselves based on the market action. Dynamic support and resistance levels reflect that evolutionary change. They are able to self-adjust as price action changes.

So we’ll look at a couple of tools that are popularly  used for dynamic support and resistance assistance.

The first tool is:

Moving Averages

As you are well aware, moving averages   calculate the average price of a currency pair over specific time frames. Ask most traders, and they’ll tell you that moving averages is their favorite indicator. Why? Because moving averages is a better reflector of the speed of light changes occurring on the market. With moving averages, you put in your  order when price dips and touches the moving average.

Now since we’ve already covered moving averages on this blog, we’re not going into much detail. So for the rest of you if you want to refresh your knowledge on moving averages, or you’ve stumbled in here wanting to know about moving averages, check  on  We’re Moving Averages Part I and  We Are Moving Averages Part II.

Let’s take a look at a 15 minute GBP/USD chart using the 50 EMA Moving averages can also act as dynamic support and resistance

Looks like the 50 EMA is holding its own fairly well. Whenever it took a hit from the pair, it resisted strongly, forcing price to bounce back like a ping ball. Keep in mind that there is no such thing as a perfect bounce. There are times when price will miss the barrier a little bit before heading back in the trend.

There are also times when price will say “The heck with this. Let me just blast through the line altogether.” What you could  do in this situation is that you set up two moving averages , and ONLY put in a buy order when price hits the middle of the space between the two moving averages.

Let’s take a look at the 15 minute GBP/USD chart, this time using the 10 and 20 EMA’s.Area between moving averages can be a zone of support or resistance

 

As you can see price climbs past the 10 EMA by a few pips. But then it proceeds to take a tumble afterwards. The whole idea is that moving averages should be treated as zones of interest just like the traditional support and resistance levels. Why? Because that’s where the price action is. Thus, the middle space between moving averages could   be considered a zone of support and resistance.

Which brings us to a burning question?

Can Moving Averages Be Penetrated?

Of Course Yes. Just like any other support and resistance level, moving averages can also break and fold. Let’s take another look  at the 50 EMA on the the 15 minute GBP/USD chart.

As you can see, the 50 EMA is holding firm as GBP/USD keeps ping ponging off the barrier. Unfortunately, repeated body punches sustained by the 50 EMA forces it to bend over, creating the escape the bulls need to head for the hills. Price, feeling so confident all of a sudden pulls back and decides to hit the 50 EMA some more at the support level. Unfortunately for the bears, they run into a bulwark of a 50 EMA at the support level.

Because of the dynamic persona of moving averages, you don’t need to stare at your PC all day. Why? Because it’s always changing. All you have to do  is something popularly termed “Set and Forget.: You set the moving averages on your screen and go grab a cold drink outside the house while the moving averages spot potential  resistance and support trading zones. In other words, GO AND SMELL THE ROSES.

The next tool is

Price Channel

The price channel is another useful tool as far as dynamic support and resistance levels go. The price channel is similar to the traditional trend line, except that it has another trend line running parallel to it. So within the layout of the price channel, you have well defined limits for tops and bottoms.

I guess the first question we need to ask is:

How Do We Trade The Price Channel?

We first start by drawing a line on the chart. To do that we start by identifying a price in the price action where the tops and bottoms are moving with similar gusto. If your eyes are glued on the uptrend, you can draw a line through the tops and bottom. Then draw another line parallel to the first line, which passes through the tops of the price action. If you are able to accomplish these two procedures, you have yourself a price channel.

Let’s take a look at how the price channel looks like on the USD/JPY chart

Channel-Trading-Indicator

 

Here is a typical trend line drawn on a bullish trend. This bullish characteristic is confirmed by the lower level of the channel passing through the bottoms of the price action. Notice the upper level is parallel to the lower trend line, connecting the diagonal boundary where the price action takes place.

Let break this down to the bearest minimum. The lower level is the support level, while the upper level acts as the resistance level. The black arrows indicate the support and resistance   actions on the price channel. See how price dips to the lower level  of the channel and launches off the barrier like a ping ball? Next the price tries to reach out and touch the upper level of the price channel and does its ping balling routine there also.

 

Entry and Exit Trading Points

As you can see, channels are very useful for marking entry and exit trading points. When the price channel starts acting bullish, you look to make your trade once the price ricochets off the lower level. Then hold your trade until the bulls reach out and touch the upper level of the channel. Once the price bounces off the upper level, you can choose trade the bearish move to the lower level. But I wouldn’t make that choice if I were you, since the price moves are relatively smaller than the general trend moves.

The Moment Price Breaks Out

At some point, the price channel ability to withstand the blows of the bulls is bound to give way. And when that happens, the price, aided by the bulls shoots for the mountains through the upper or lower level. It then ends its run with a strong closure at the lower level. Let’s see an illustration of the price channel breakout

 

Channel-Breakout

As you can see, price initially stays in its lane. But then it suddenly breaks through the lower level (as indicated by the red circle). And here, the bearish influence is everywhere, as evidenced by the strong presence of the bears. The bearish presence also accounts for the price’s dip in value. If you want to kno more about price channels, look up  We Are Going To Talk Channels.

Last but not least is:

Linear Regression Channel

. Now the linear regression channel is similar to the price channel except that it has a middle line which is a median price value. Now avoid unforeseen collisions, the upper and lower levels are clearly distanced from the median line. You can also use this line to facilitate trades going in the direction of the prevailing trend. Let’s look at a pic of the USD/CHF pair

Linear-Regression-Channel

This, ladies and gentlemen is the Linear Regression Channel. Nicely lined are the upper level, lower level, and the median line. The black arrows points to price massaging the median line at both support and resistance. But watch when price pierces the median level. It triggers a shift to the opposite channel line. The Linear Regression Channel is also useful for confirming trades, especially breakouts. Simultaneously, you can also use the median life to execute exits from trades.

If you want to know some more about trading the Linear Regression Channel  look up Trading Linear Regression Channel.

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.  Don’t 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 “Identifying Dynamic Support and Resistance Levels ”   As I said earlier, Dynamic and support resistance levels are a relection of the speed of light changes occurring on the forex market. Thanx to tools such as moving averages and price channels, you can better the capture the price changes,breakouts and other moves happening on the price chart.  Next time we’ll tackle another exciting topic on the forex trade.

If you really want to understand understand dynamic support and resistance levels, I suggest you read up on their static sibling Identify Support and Resistance Levels with Price Action Analysis

Looking to open a forex trading account?

Sign up with EasyMarkets and Get a free eBook- The Beginners Guide to Forex Trading

 

 

 

 

 

Trading Linear Regression Channel

Hello

We’re gonna look at “Trading Linear  Regression Channel”.  Don’t panic! We’re not doing Michael Jackson’s moonwalk here. We’re going to look at an important trading tool called the regression channel. This tool is very popular among traders as far as price action analysis is concerned. Without wasting too much time,we’re gonna do the following: We’re going to look at what this regression channel is all about. Then we’ll transition into looking at the three lines that make up the regression channel,and finally we’ll end with how to trade the regression channel. But first,

What exactly is a Linear Regression Channel?

Well a linear regression channel is a technical indicator consisting of three lines. Well, that’s not all,if that’s what you’re thinking. The linear regression channel outlines the upper and lower limits of a live trend. It helps traders hunt for the best entry and exit points available  even if the price gives traders mixed signals. Which brings us to:

Structure of the Linear Regression  Channel

Now the linear regression channel is structured in three parts namely, the Upper linear regression line, the lower linear regression line, and median .  Now the upper linear regression line signifies the top of a live trend with the lower and middle line lines running  parallel with the linear regression line.

The lower linear regression line is pretty self-explanatory. The lower linear regression line marks the bottom of a trend.Now how does the lower linear regression line  come about? The lower linear line  comes about by cutting through the most obvious bottom trough of the trend. Of course the upper and middle lines trudge along as they run parallel with the lower linear regression line.

Last but not least, the median line is what we’d call the base of the linear regression channel.  It’s more like the conduit of the entire regression trading process in that it is draws the midpoint of a trend. So to avoid colliding head on with this trend the upper and lower lines are evenly distanced. They keep as far away from the midpoint as possible.  Let’s see the Linear Regression channel in action

linear-regression

There you have it. The linear regression channel indicator in all its splendor. You can see the upper line, lower line and median line, all nicely lined up. The black arrows point to the top and bottom projecting the most in the trend. While, of course, the three blue lines point nice to the upper lower and median lines.

Now there are two types of  regression channels- namely the bullish and the bearish regression channels. These two channels  have built their reputations based on the linear regression slope.  We’re going to take close look at both regression channels.

Starting with:

Bullish Regression Channel

The bullish regression channel makes itself known on bullish trends.  When you see the bullish regression channel setting up shop, that should tell you two things: price is increasing, and the slope is heading upwards. Let’s see the bullish regression channel in actionbullish-channel

Ladies and gentlemen, here is the is the bullish regression channel in the flesh. As you can see, the trend is bullish with the bulls in full flight with the regression channel in an upward slope.

Last but not least is:

Bearish Regression Channel

The bearish regression channel is the complete opposite of its sibling the bullish channel. Unlike the bullish channel, the bearish channel makes its home on  bearish trends.  In  this scenario,the bears drive down the price, causing the slope of the linear regression to  dive downwards. So basically everything is slaloming downwards in the bearish scenario. Let’s see the bearish regression channel in action.bearish-channel

This is none other than the bearish channel. As you can see the trend is bearish. And when you have a bearish situation,it can only mean one thing:the bears have come out to play. And when this happens, the  channel slopes downward as illustrated above.

I guess  the question burning on everybody’s mind is:

How Do We Draw The Linear Regression Channel?

There is not much to it.  Just draw the linear regression channel.Okay, on a  serious note, pick the starting point of a trend and strecth the regression indicator for all its worth until it reaches and touch another significant point of the trend. Meanwhile,the three lines will correct themselves according to the most obvious top and bottom of the trend.Let’s see the drawing of the regression channel in action.drawing-regressionchannel

Right in front of us is the live drawing of the regression channels in an uptrend.  And   as you can see, the regression channel(on the left) starts from the bottom of the uptrend and touches the engulfed candle at the top of the uptrend. A word of warning though. Dont ever force a regression channel to fit a trend. Do  so at your peril.

What to Look For in Regression Line Analysis

Now that we’ve drawn our three lines, it time to analyze these lines. The main feature you need to keep your eye out for when analyzing regression lines is price reaching out and touching these lines. Whenever price caresses the upper or lower line  a sea change occurs on the chart,  be it uptrend or downtrend. And like I said,the three lines tend to correct themselves depending on how prominent the tops and bottoms of the trend are. Let’s take a look at such an illustration in an uptrend

linearregression-analysis

We’re looking at price action in a bullish regression channel. The black arrows at the bottom of the channel indicates the price action being contained within the channel.

Now let’s take a closer look a the lower line of the regression channel  indicator. If you have the   vision of the hawk, you’d notice a trading opportunity through the freshly created   bottom on the lower line. And  guess what your trading position should be:GO LONG OF COURSE. This is a bullish trend,and naturally your trading inclination would be to go long. You should be able to ride the trend’s momentum until you reach the top of the trend where the other black arrow is situated.

Take a closer look at the lower line, and you see a major reversal taken place.  The bears have taken over the show after putting so much pressure on the bulls. They’re basically saying “Anybody for a slalom ride?” Also take a close look at the pin bar formation followed almost immediately by another bear breakout at the low regression line. And if you want to know more about the pin bar formation,check up on Pin Bar Strategy – How To Trade It.

I guess the question everybody is burning to know is:

How Do I Enter Linear Regression Trade?

Wellif you’re dealing with a bullish trend,  buy  the pair once the price ricochets (bounces)   a second time off the lower line of the regression indicator. The second bottom at the lower line should signify the uptrend and announce the bulls presence. Therefore make your trade at this time, while the bulls’surge is on.linearregression-analysis

See how  the second bottom forms at the lower line where the second black arrow is pointing. Make your trade once price bounces off that area.You would most certainly want to take advantage of this bullish surge while you can.

I guess the next appropriate question will be:

How Do I Enter Bearish Linear Regression Trade

Well entering a bearish linear regression trade works similarly to that of entering a bullish trade. The only difference being that the bearish regression trade works in reverse.By reverse,I mean  a reversal occurs with the bears dominating things Let’s take a look at the situation.Structure-of-the-Linear-Regression-Channel-IndicatoYou can enter your trade at the second  bounce going down instead of going up-.See how the second bottom forms at the lower line.Excep that it forms towards the end of the slope,instead of the beginning. And just like I said for the bullish trend, you absolutely want to take advantage of this bearish slalom while you can.

Worried about safeguarding your trading position? I guess your question will be:

Where Do I Place My Stop Loss?

Before I even get started,you’d be crazy not to place a stop loss when trading linear regression channels. Your trading account wont forgive you for such negligence. But anyways, back to the question: Well, if you are  trading a bullish linear regression setup  below the high created by the high bounce from the upper line of the regression indicator.

Going the opposite direction, if you are trading a bearish setup, place your stop loss above the high created by the high ricochet from that same upper line of the regression indicator. Let’s take a  look at a bullish linear regression channel illustration.

Linear-Regression-Trading-Strategy-1-

As you can see this is a bullish line regression channel.Take a close  at the two bottoms labelled  numbers 1 and 2. These two bullish candles create the regression channel indicator. Such that when price takes a high bounce for the second time,we connect the two bottoms, using the  regressive indicator and prepare to go long(buy). However, to protect your trade against an unexpected U-turn by the market, place a stop loss below the new low.

However, some serious action is taking place at the median line(middle line). The bulls surge through the medial line, creating a swing in the process. Then the price,with the help of the bulls expand to the upper and

Upper  level. And when that happens, listen to that little inner  voice when it says “Close Your Trade.”

Watch the second trade form when the bulls reach the lower backyard  of the regression channel. The bullish candle goes up a notch once after touching the lower line and bouncing off the lower line. Look to enter a trade and then place  your stop loss below the freshly created bottom.

Once the bulls bounce off the line ,see how  these  head for the hills and manage to reach the upper echelon of  the Linear Regression Indicator with rapid speed. Once the bulls reach the upper line,it’s time to close the trade.

However, much to our surprise the unexpected happens. The price makes a U-turn back to the lower line o the Linear Regression Indicator. Notice the price bounce off the lower line again. What does this mean?It means we’;ll have to go through the process all over again. We buy the currency pair and place  our precious stop loss below,you guessed it,  the freshly created bottom. Then we hold our horses until the bulls reach the upper echelon(level) of the linear regression indicator.

Take Profit Rules In Linear Regression Channel

The way I see it, you have two options as far as take profits trading the linear regression channel is concerned.  First,you can put your trade on hold until the price hits the opposite Linear Regression level, as discussed earlier.

The second option would be to hold your trading horse until the price action pierces the median(middle line) opposite the dominant trade. What does it mean? If you decide to go long, until the price breaks the median line and heads downwards. But if you decide to close the trade when price dips below the median line and heads for the hills.

Oh, and by the way! You’d be commiting suicide If your trades arestill openwhen the price break the channel in the opposite trend. If a breakout occurs, just close your trade and get ready for the countertrend.

Now let’s look at a an illustration of these take profit rules using a bearish linear  regression exampleLinear-Regression-Trading-Strategy-2

 

The two numbered points are the bases of the Linear Regression Channel. See how price bounces off the upper line for a secondtime. /In such  a scenario, look to go short. You then protect your trading position with a stop loss above the freshly created top, as inidicated by the red horizontal line.

Also ,see how price takes a dip and goes below the median line. Since you want to protect your trading position at all costs, you’d do well to close the trade once the bulls break the median line from below.

And , just like the bullish regression line example,earlier, price comes back to hit the upper echelon of the linear regression . This bearish bounce off the upper line suggests that you enter a short trade, and, you guessed it, placing a stop loss above the freshly created top.

Take a close look at price dipping below the median line and touching the lower level. If you’re tempted to jump into the fray,DON’T! Wait untiluntil price makes a switch above the median line and then close the trade.

Have you noticed how the bears came back to create another bounce by hitting the median line for the third time? Seems the bears enjoy this hit and run tactics. Don’t they? Unfortunately you’d have to sell the currency pair and place  a stop loss  as the image suggests.

If you want to know some more about trading channels look up We Are Going To Talk Channels.

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 “Trading Linear Regression Channel. ”   As I said earlier, trading the the linear regression channel is very valuable to traders as a price action analysis too. You can  sure get some exciting trades using this tool even if the market tries to throw you off the tangent. Once you catch these opportunities on the regression channel, you are good to go.

Next time we will look at Trading Dynamic Support and Resistance Levels, the sibling of the static  Support and Resistance Levels.You may want to look up Identify Support and Resistance Levels With Price Action

Looking to open a forex trading account?

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Break Out Trading Breakouts

 

Today we’re going to break out trading breakouts. It’s my fancy way of saying we are going to learn how to trade breakouts.  No, we’re not talking about the major zit breakout you experienced when you were a teenager..  No this breakout happens around psychological levels such as support levels, pivot points, e.t.c.Breakouts are great opportunities  to make profits. They are a result of the bulls pushing the prices up and heading for  the hills. Breakouts are fun to trade because you get to pick up a ton of cash along the trail if you recognize the opportunities quickly enough.

So we are going to do what we always do. Find how breakouts occur, the types  of breakouts,  and how to trade them.

How Do Breakouts Occur?

Well,breakouts ‘break out’ (For want of a better word) of a consolidation or trading range. Once the heavy players have taken a breather , they continue with their journey. Breakouts also occur when a specific level  such as support and  resistance levels, pivot points,e.t.c.The main objective behind breakout  trades is to make your entry just when the price breaks out. You then enjoy the ride  until volatility  fades away.

Speaking of volatility

Think Volatility Not Volume

Why should you think volatility and not volume? Because it’s difficult having a graphic illustration of the volume of  trades. In view of  this deficiency, it becomes even  more important to rely on solid risk management  in order to take advantage of  a price breakout. If price movement increases within a short space of time, then volatility is considered on the high side. However, if   there is little price movement within that same short space of time then volatility is considered on the low side.

Sure, it’s tempting to move into the market when ti’s moving as fast as a speed train. However,you risk spiking your anxiety levels,resulting in poor decision making resulting in heavy losses from impulsive trading. In as much as high volatility attracts forex traders like a magnet, it is this same volatility that  kills of  al lot of forex traders of the forex market. So what’s the moral  of the lesson? Use volatility to your advantage.Instead of following the herd and lumping head on into the market, it makes perfect sense to scope for currency pairs with low volatility. This way you will be in a position to take advantage of breakouts and sky high volatility.

And while we’re still on the subject of Volatility

How Do We Measure Volatility?

You can use the following indicators to measure volatility. They come highly recommended . First:

Moving Averages

Moving averages are probably the most popular indicator used by forex traders. It may look simple, but  boy does it provide crucial data for as far as making trading decisions are concerned. In simple language, moving averages measure the average movement of the forex market over a period of time, wherever you want that time frame to be located.

Use moving averages to measure price volatility.

As you can see, the blue line represents the numerous averages set to measure specific periods over a period of time. If you want to refresh your knowledge of moving averages, read up on We Are Moving Averages Part One and  We Are Moving Averages Part Two  

Next up is

Average Truth Range

Don’t panic! The average truth range is not a lie detector machine. It merely averages the average trading range of the market  over  a period of time. You can choose whichever time frame that you want to analyze. Let’s say you set ATR  to 20 days on a daily chart . The ATR will show you the average trading range  for the past 20 days for the past  20 days. Let’s see how the ATR looks like.ATR

When ATR falls,it suggests volatility is dropping as suggested by the yellow shaded area But according to the coconut color, when ATR rises, it’s an  indication that ATR is on the rise.

Now onward to:

Types of Breakouts to Trade

There are two types of breakouts you need to keep in mind ifyou’re contemplating trading breakouts. Even more important,knowing  the type of  breakout staring you in the face will help you make sense of the happenings on the market. Even more important, the constant change in supply and demand of the currency pair that you’re trading in triggers huge moves resulting in huge opportunities to rack up some valuable pips.

Continuation Breakouts

Continuation breakouts are situations where major players break out of trading ranges after periods of  consolidation. Here traders take a breather after a long protracted battle trying to jockey for trading position. Once they’ve caught their breath, the traders break out of the range – be it uptrend. Let’s see what the consolidation looks like

continuation-consolidation

 

As you can see in this example, sellers have taken a breather after duking it out with the bulls. The tight range within the two channels reflect the period of consolidation. During this time,they’re figuring out what to do next. The next step most likely is the continuation breakout. Let’s see what this show looks like.continuation-breakout

 

As  you can see, the sellers have made up their minds to launch  one final push through the resistance barrier.They’ve agreed to sustain the original trend and that they believe  the sensible  thing to do would be to break the barrier down and head for the hills..

Reversal Breakouts

Just like their brethren in continuation breakouts players also  take a breather after locking horns with each other. However there is a difference. The difference  here is that the prevailing trend loses momentum after the players’ ability to sustain the trend begins to evaporate. consequently  price is pushed in the opposite direction,resulting in a reversal breakout.

And now to the most exciting  part:

How to Trade Breakouts

How do you trade breakouts? Well you can trade breakouts with three tools – trend lines, channels,and  triangles. You don’t need to look in the mirror for these boys.If you’re able to master recognizing breakouts,you should be able to recognize potential trades at the blink of an eye.First of:

Trend Lines

One way of spotting an imminent  breakout is  drawing trend lines. Now how do you draw a trend line? Just pull up a chart and draw a line that aligns with the current trend. When drawing the trend line make sure it connects at least two tops or bottoms – nothing more, nothing less. Even better, the more tops or bottoms you are able to connect, the stronger your trend line. I guess the more the merrier. Let’s see how the trend line looks like.

falling-trendline

The three yellow circles  indicate the tops and the bottoms on the downtrend. Since they satisfy the requirements for drawing a trend line, you just draw a trend line right through them. The one thing you do not want to do is force non-existent tops nor bottoms on a trend line. That will cost you a lot of money.

How Do we Trade?

When the price approaches the trend line, make sure two things happen:

  • Either the price richochets off the trend line and continues on its merry way.
  • Or the price rams through the trend line and forces a reversal.

If you don’t want to strain your eyes just  looking  at the price, you can always call on moving averages or the average trade range to sort things out for you.

Speaking of trading, we can look at it two ways, if the  bulls break upwards, it’s time to go long(buy.) But if the bears force a reversal and go on a slalom, it’s time to go short(sell). Let’s take a look at the bearish reversal

rising-trendline

As you can see, the yellow circle indicates the beginning of the bearish reversal at the resistance level. after the bullish fade away.  And when you have a bearish reversal, it’s time to go short. If you want to know more about trend lines read up on Drawing and Trading Trend Lines

Next up is

Channels

Channels are just another way of spotting breakout trading opportunities.  Trend channels are very similar to trend lines. Except that trend channels  have one extra trend line. This extra trend line helps spot extra trading opportunities, which should make life very rosy for a lot of traders out there. Even better, you can spot breakouts on either side of the trend. Let’s see what the channel scenario looks like.channel

This is what the rising channel.  You have a an extra trend line on the other side, which should create  a bonanza of breakout opportunities. The yellow circles symbolize those opportunities. You will have to be blind not to spot these opportunities.

How Do We Trade Channels?

Well, you use the same approach for the trend lines. Just wait for the  price to hit  one of the channels. Or you can employ the services any of the two indicators we mentioned earlier. And just like the trend lines, if the bulls break out first, go Long. But if the bears force a reversal and break out go short. Let’s take a look at a bearish situation.rising-channel-breakout

The bears have forced a reversal at the resistance level. This of course has triggered a bearish slalom down the slopes.  Such a scenario should signal to you saying “TIME TO GO SHORT!” If you want to add to your channel knowledge, call on We’re Going To Talk Channels

Now that we’re done with trend lines and channels, the next set of breakout patterns we’re going to look at are:

Triangles

Triangles are just as potent as far as spotting breakout opportunities are concerned. Triangles  take shape when price  starts off wobbly and consolidates into a tight range. And if you’ve seen the phrase”consolidates into a tight range” You’d know that the players are taking a breather to regroup. Your job as a trader is to stay on the alert like a greyhound for possible breakout opportunities, when the big players decide to resume their journey.

There are three triangles we’ll be looking at. The first set of triangles are:

Ascending Triangles

Now ascending triangles come about when  a support level spring up causing price to create lower highs. For the bears this is bad news as the bulls are slowly gaining upon them. Let’s see how this scenario plays out.

 

 

ascending-triangle

The resistance barrier forms nicely with the price creating higher lows. Notice how the higher lows channel intersects with the resistance barrier to form the ascending triangle. As you can see the bulls are gaining on the bulls in the manner in which they keep hammering on the resistance. It’s only a matter of time they break out and head for the hills.

Speaking of breakouts in,  here is how they pan out. Whenever price reaches the support level , the beas  these funny ideas about selling at that level. This of, course forces the price to drop. However, on the other side of the divide, you have these bulls who are like “Hold it, we ought to push the price higher.” So as the price drops,the bulls force the press higher  than the previous low. The ultimate result is an almighty tug of war between the bears and the bulls.

Which brings us to:

How Do We Trade The Ascending Triangle?

Since ascending triangles  are bullish signals, look out for a breakout upstairs. Once you see the resistance  level being breached,  that’s your queue to go long(or buy). Let’s take a look at how this setup pans out.ascending-breakout

The yellow circle indicates the bulls breaking through the resistance barrier. Once the bulls break through and head for the hills, it’s time to place your order to go long.

Next up is

Descending Triangles

Descending triangles are pretty much self explanatory. Arent they?. Unlike the ascending triangles which are dominated by the bulls, the bears run the show. Their attitude is”We’re going to set the price ourselves.” As a result, they steal the thunder from the bulls, which puts a lot of pressure on the bulls. Consequently,this creates  lower highs along the higher side of  the triange(or resistance level)which are met head on by a stiff support level. Let’s see how this scenario plays out.descending

Notice how the bears have created lower highs, triggered by the  pressure they put on the bulls. However, the bears are met by a strong support barrier.

How Do We Trade Descending Triangles?

Well we know descending triangles are bearish signals. Right? So should the bears break through the support level and go on their slalom run, that’s your queue to place your order to go short(buy.)  Here is how the trade plays outdescend-breakout

Symmetrical Triangle

The symmetrical triangle is an interesting beast. Why? Because there is not even a whiff of a support or resistance  level in this set up. However, both bears and bulls create highs and lows simultaneously, resulting in a weird-looking apex in the process. Let’s take a look at how the symmetrical triangle looks like.symmetrical-triangle

 

As you can see, the bulls and the bears are trying to outdo each other with higher lows and lower highs respectively. It’s almost as if they’ve been caught in a trap and are struggling to burst out of it.The question is  how do they break out of this  trap?

Which brings us to:

How Do We Trade Symmetrical Triangles?

As you’re well aware symmetrical triangles  are not equipped with support and resistance levels. So you have a simple option! Just get ready for a jail break on either side of the divide.  Let’s see how the jail break preparation looks likEsymmetrical-breakout

As illustrated clearly,the bulls and the bears  are getting ready to break out of their respective jail cells. The green represents bulls about to head for the hills, while the red arrow points to the bears about to do their regular slalom down the slopes. Whoever  breaks out first you have to capitalize on their trail.

Now let’s see where to place our entries when the bears and the bulls eventually break out of jailtriangle-entry

We see that bulls  are the first to break out of jail. So when the jail breakout starts you place your long entry just above the triangle To protect your position from a possible 360  U-turn by the market, gently place a short entry below the triangle. You can’t wrong with that.

Now let’s see where to place our orders in  the bearish slalom(downward breakout).triangle-bearishbreakout

As you can see the bears don’t want to be left out  of the fun either. They’ve also initiated their own jailbreak, as indicated by the green shade.So when the jail break is on, gently place your short(sell) order above the triangle. To protect your position,in case the market starts sneezing, place your  stop loss below the triangle.

If you want to know more about trading triangles and other chart patterns, read up on Trading Forex Chart Patterns Part I and Trading Forex Chart Patterns Part II .

 

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 “Break Out Trading Breakouts. ”  Trading breakouts can be  tons of fun. You get to pick up lots of pips along the trail, if you can recognize the opportunities quickly enough.  Til next time, take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and Get a free eBook- The Beginners Guide to Forex Trading

 

 

 

 

 

 

 

Playing With Pivots

This week we’re  playing with pivots. No, we’re  not talking fancy gadgets here.. We’re going to  learn how to make use of  technical indicators called  pivots when making our trades. Pivots  play a crucial role as far as identifying support and resistance levels on the charts. They’re more like robots with the mentality of sniffer dogs  as their job is to ascertain the overall trend direction of the market.

So we’re going to breakdown the pivots three way.We’ll explain what pivots are.Then we’ll learn how to caculate the pivots, and finally we’ll learn how to trade the pivots.

First off:

What really are Pivots?

Well,pivots are these indicators that help the trader determine the overall trend in a market over different time frames. The pivot points simply average the points from the previous trading day. These pivot points are absolutely immense.Why? because they’re the means by which forex traders support and resistance areas. In plain English,  the pivot points  and their surronding support/resistance levels are most likely to experience change in the direction of price movement.

This then begs the question.

Why are forex traders so crazy about pivots?

Well, it’s very simple. They tell things as they are on the charts.You don’t get any pussy footing or any discretionary moves from pivots.They just give it to you straight as far as the happenings on the charts are concerned. Because so many people have their eagle eyes set  on these support/resistance levels, these zones confirm the traders worst suspicions. However,  pivots  can be a bit subjective as far as spotting the highs and lows are concerned.

Pivot points are also valuable to short term traders.Why? Because they create opportunities to cash in on price movements. Also, forex traders have the luxury  of choosing to trade the bounce or break like  normal support and resistance levels. Those who trade range-bound markets use reversals.They see zones as great opportunities to place their orders. While breakout traders use pivot points to detect key levels that must be broken or penetrated.pivotex

This is a beautiful illustration of pivots at work. Notice how the support and resistance levels and pivot point are nicely labelled  on the chart. Doesnt  get any better than this. Now before I continue let me give you a run down on  the meaning  behind those acronyms on the charts. Not to worry!They’re not CB radio signals.

PP = Pivot Point

S = Support

R = Resistance.

Which brings us to:

How to Calculate Pivot Points

Boys and girls grab your calculators because we’re going to do a little Math. We ‘are going to learn how to calculate pivot points. But before I  get started, let me say this: If you have a phobia, about algebra,or you hate algebra with a passion, not to worry! In most cases, the software behind the charts does the calculations. You don’t need to crack your brains too much.  But for you Math nuts, let’s get cracking.

Basically, we are calculating the pivot point and the surrounding support and resistance levels. And do to accomplish this task, we make use of the previous trading session’s open, high, low and closing prices.

To calculate the pivot point the formula goes like this:

Pivot Point (PP) = (High + Low + Close) / 3

You then calculate the support and resistance levels off the pivot point in this direction:

First level support and resistance:

First Resistance (R1) = (2 x PP) – Low

First Support (S1) = (2 x PP) – High

Second level of support and resistance:

Second Resistance (R2) = PP + (High – Low)

Second Support (S2) = PP – (High – Low)

Third level of support and resistance:

Third Resistance (R3) = High + 2(PP – Low)

Third Support (S3) = Low – 2(High – PP)

Quick alert!Some price chart software plot intermediate levels, or what we call midpoint levels. Here is how they look like on the chartspivot-midpoint

As you can see all the levels are nicely labelled for you comfort, thanks to the backend workings of  the software. Most forex charts software  automatically calculate these points like clock work for you. The only thing you have to do is just configure your settings  for the software to deliver to you the closing time and price. See how stressless this is?

You may also want to arm yourself with pivot calculator . You will definitely need it especially when it comes to backtesting to check prices reaction to pivot points. You’ll be amazed at how honest the pivot points are. They just tell you exactly how the prices  react to their presence on the charts. Getting a pivot calculator is not that difficult. I believe most brokers provide you with one. Or if you prefer,you can download it online. Just  Google pivot calculator and Google’s search spiders will be only too glad to oblige.

Now that we’ve gotten the math out of the way, let’s get to the most exciting part – THE TRADING!

We’re  going to cover three parts . The first part is

How Do I  Use Pivots to Trade Ranges?

Well the easiest way to use pivots as part of your forex trades is to treat them like typical support and resistance levels.  And if you know prices as well as I do, when they see support and resistance levels, they hit them repeatedly in their attempt to break through and head for the hills. And if these levels are able to  withstand  a currency pair’s constant barrage,then it means these levels have a strong backbone. So applying the description of the support/resistance levels to the pivot point, your pivot level is able to withstand the currency pair’s onslaught this creates great opportunities for you. And these opportunities could come in the following waves:

  • If a price is closing in on the resistance level, sell the pair and put a stop loss just above the resistance
  • If you see the price inches ever closer to the  to the support level, buy the pair and put a stop just below the support level.

Nothing to it at all. Let’s  see the actual representation of this range tradepivotrange

As you may have noticed, price is testing the resolve of S1(Support Level 1). If you believe in your heart of hearts that S1 can repulse the price, put in your buy order just  above S1. Of course  you want to safeguard your trading position,  so you put in a stop loss past the next support level.

If you want to play it safe,  you can set a wide stop just below S2. However,if price  breaches the barriers of S2,the probability of i turning around and going uphill is unlikely as both SI and S2 would have converted from support to resistance levels. But if you want to be bold, and you are 100 percent certain  S1 will hold its ground, just place your wide stop loss just below S2.

Some of you are wondering”Where do we place our take profits?” Well, you could place your profit targets , you could aim at PP or R1. Then again these two levels could put up some resistance. So watch out for that. Anyways let’s see how the market looks when you place your buy order.PPR1

Voila! S1 survived the onslaught! And if your “Take Profit” is PP it means “Take the money to the bank” However, a  little news flash! It’s not always that straight forward. You shoudn’t always put all your pivot point eggs in one basket. Make sure  your pivot  point levels are parallel with the previous support and resistance levels. To  help you get confirmation of a trade, just fall back on your candlestick analysis. And if you’re not sure about your candlestick knowledge read up on You Need To Know Ten of These Candlestick Patterns.

Last but not least:

How Do I trade Breakout with Pivots?

First you need to support the support and resistance levels. As  I’m sure you know by now, support/resistance  levels can’t sustain a rearguard action forever. At some point, they’re bound to cave in. And when that happens, you get to work with your trades. As we found out earlier, you can trade it safe, or you can go aggressive. However,for those who like to play it play it safe,you ;d be better off taking advantage of the initial breakout.  Why? because if you’re waiting for a retest of the support/resistance barriers, you may end up missing out   on huge trading opportunities. Let’s see how pivots points scout potential trades in this graphicpivot-breakout

We see price surge above PP before cooling down at R1. Eventually the resistance barrier at R2 caveS  in, giving the bulls free passage to surge  by a further 50  pips. This shows the dividends of trading the aggressive way if your eyes are sharp enough to catch the initial price action. However, if you’re sitting there waiting for price to  take a second bite at the cherry(or retest), you’d be waiting in vain. As you can see,price chose not to come back. It continued on upwards.

See how the bulls try to attack the resistance barrier at R3.   You do not want to adopt the same aggressive posture here like you did at PP. Why?because this is false break territory. Failure to take heed could result in a huge loss for your trading position, not to mention,spike your blood pressure.   And if your stop loss is too close for comfort, you’d most certainly get swamped. So your best option would be to take the safe option.

If you want to learn how the false break strategy works read up on Trade The False Break

Notice how  the bulls break out after the initial resistance by the bears. Also pay attention to how  the bulls make a U-turn and break down past R3. You could go short(or put in a sell entry) at the retest of the broken line.

Last but not least:

Where Do I place Stop Losses And Profit Targets In Breakouts

Hmmm……placing stop losses and profit targets in breakouts is not an exact science. Why?because unlike range trades where your focus is on breaks of support and resistance, you are looking  for strong fast Usain Bolt-like surges in the breakout. It’s like keeping up with the speed of light. If you choose to go long(buy) and price fizzles out at R1, you could place a stop below R1. Let’s take a look at the previous graph again.pivot-breakout

As you can see price slightly cooled at R1. In this scenario,you place your stop loss at R1.  Better safe than sorry if you ask me.

Speaking of setting targets, here is what you do. Aim for the next pivot point support or resistance level.By the way if you’re expecting price to break through at all levels, DREAM ON! The  only time  this miracle happens is when a major economic event or surprise news occurs. Whether this news is good news,your guess is as good as mine. Let’s take a look at the previous graphic and see where the stops are placed.pivot-stops

As you can see, the bulls break through at R1. In that case you place your stop just below R1 to protect your position from nasty unexpected U-turn. Keep vigil over your position and move your stop to see if the pattern continues.

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 “Playing With Pivots ” Pivots can be trade with. They help catch  profitable trades that the naked eye misses.   If you place them properly on your chart, you could have yourself a major harvest.

Til next time,take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and get a free ebook- The Beginners Guide to Forex Trading

 

 

Price Confirmation Signals: How To Weed the Chaff From The Good

signals-confluenceToday we’re going to look at confirmation signals and how to weed the chaff from the good using price action analysis. Confirmation signals are  the alerts of price action analysis. They gives you the thumbs up when your trading edge is present. You know, searching for confirmation signals can be an almighty struggle, especially when you’re trading for the first time. You’re so scared  of going for the bull’s eye because you’re not sure whether the signal is a good one or a bad one. Well,  newsflash!If you want to perfect the art of catching confirmation signals,  you need to be clear in your mind what you’re looking for and what the signals look like. If you can get these two figured out, it’s 80% of the job done.

So  here is what we’re going to do.We ‘re going to define what price confirmation signals and then decide how to filter them.

What are Price Confirmation Signals?

Well,like I said earlier, price confirmation signals reflect the  presence of a price action setup on the forex chart. They’re also known as  price action signals,  so when you hear of price confirmation signals, think of price action signals.  To put it mildly price confirmation signals are simply obvious price setups that form in the forex market.  You can find these signals along the level of support or resistance or in the trends. In other words, price confirmation signals can also be described as a perfect alignment of factors on the charts. In other words, there must be a confluence of  events on the charts for your trading edge,or strategy to unfold. If you want to understand the workings of confluence, Go to Something Called Confluence

Let’s get on thing perfectly clear here.  You are not going to get two trading situations looking the same on the market. Why is that so? Because each trade and each chart representation is different. They have their own weirdness points. So what you have to do is to approach your trades based on your own discretion and your perception of the chart. Just make sure your perception matches with the market’s perception or else your forex account will shedding a lot of tears.

Let’s take a look at some confirmation signals on an EUR/USD chart

confirmation - eurusd

 

See the first hammer confirmation at the  bottom of the uptrend. That’s a good sign. The bullish candlestick triggers the beginning of the u trend. Once you  get confirmation of a second bullish candle with a bigger and fuller body,then you make you trade. Don’t make the mistake of jumping in the moment you spot a bullish candlestick. Get confirmation from the candlestick with a bigger fuller body and then make your entry.  You use the same strategy when trading support/resistance.  Just hang on for the confirmation candle to announce itself  after the breakout and then make your entry.

 

Let’s take another look at confirmation signals at work  at support/resistance levels.confirmation-supportresistance

 

Right in front of us are confirmation signals along the lines of support and resistance. We two confirmation opportunities along the lines of support. Those are engulfed candles with the bearish candle eclipsing the bullish candles. The bigger bearish candles act as confirmation candles by way of their fuller bodies that I talked about earlier. Up top at the line of resistance is another engulfed  situation kicking of the bearish trend.That setup also signals the possibility of a decent trade.but  it took the appearance of a third candle that is bigger and fuller to confirm the existence of a trading opportunity.

So the moral of the story is this. Get confirmation from a second, and in some cases  third candle before you make trade entry. Jumping into the fray at the sight of just one candle may cause you a lot of grief later..

Now that we’ve gotten the  introduction out of the way the next question  we should be concerning ourselves with is:

How Do We Weed The Chaff From The Good?

Before we get started , I just want you to know that the tips I’m about to dish out can be utilized on any trade set up.  But for purposes  of illustration, we’re going to use the Inside Bar Pattern. So off we go.

Look For A Signal Whose Protruding Tail Creates A False Break.

Assuming you’re looking for an inside bar, make sure   the tail juts out from a key level in the market. And when we say key level,you should know that  we’re referring to support and resistance levels. When an Inside Bar puts on its protruding disposition it can only mean one thing –FALSE  BREAK.  A false break adds more credibility to a confirmation signal in that it illustrates the market’s inability to maintain its momentum.  consequentially the possibility of a sharp reversal becomes ever so real.

confirmation-falsebreak

Right in front of us is the inside bar false  breakout at the support level. Labelled in pink and turquoise  with the protruding tails are the small bullish and bearish inside bars.Their  little prank in misdirecting  anxious traders expecting a bearish trend seems to have worked. Now what we have here is a bearish dive for the hills.So in case you get the urge to get in on the prank,  make sure your inside bar’s tailis jutting out of the level of support

Now let’s take another look at another inside bar false break at the level of resistance.confirmation-falsebreak2

Up top is the inside bar false break. Just like the false break at the  Just like the false break at the support level,  anxious traders have been tricked into believing the uptrend was going to sustain itself only to be sucked into a sharp bearish inside bar false break. Notice the tail of the bullish and the bearish inside bars jut out. When you see this set up,it means the false break for the valley is on. If you don’t understand how the false break works, read up on Trade The False Break

Wait For Confirmation

Instead of hedging your bets on a breakout wait for confirmation instead. The last thing you want is to put all your eggs in a breakout basket only for the market to do a 360 U-Turn and go on the dreaded false break. Sure, it hard to tell a genuine breakout from a fakeout. However, you’ll be committing suicide if you trade straight into  a support  or resistance level. You risk losing a ton of money that way.  Imagine driving straight into a huge hurricane. That’s exactly how it will feel like when you trade into the path of a key level. So how do you avoid such a calamity? Wait for the  price to close above or below the key level(support or resistance). Then once the price breaks out of either of the key levels, you then make your trade entry. Let’s take a look at an illustration of this scenarioinsidebar-breakout

As you can see,the resistance line has been breached by the bulls, triggering a false break for the hills. Like I said,earlier, don’t trade on a whim before the breakout happens. Wait for the breakout to take shape. Just wait for the price to get close or above the key level before you make your move.

Look For Continuation Signals After Pull Backs

One effective filter you could use is to look forcontinuation signals after  pull backs in support or resistance levels in trending markets. There are times when the pull back is pretty small,but the trend is on the up with the inside bar in confluence with a key level  at the market. In the downtrend, the pull backs are more  elaborate with the key resistance facing strong opposition. This can also present great trading opportunities. Let’s take a look at both scenarios

 

Inside-Pullback

Here is the inside bar pull back at  the resistance level. Notice the slight pullback just before the resistance level.  And the inside bar signal along the resistance level  has buy written all over it.

Now let’s look at the downtrend continuation setup.

Insidebar-downtrend

 

As you can see up top, there are major pull backs around the line of resistance. Notice the huge rejections along the line of resistance just before the continuation. Of course, the major players are taking a breather through the period of consolidation before they continue with their journey.

Don’t Trade in Choppy Waters

Don’t ever trade in choppy waters or you’ll drown. Put it simply,you are not going to  find any  In case some of you have forgotten, choppy waters is my apt description of range-bound markets. Just because you see long periods of consolidation, then all of a sudden, you spot a trading signal in the midst of the confusion does not make  the signal valid. You need to have at least three confirmations in order to make the signal valid. Besides, confirmation signals rarely reveal themselves in choppy waters due to the heavy contraction in range bound markets.  Let’s see what range-bound markets look like

range

The choppy waters are within the two dark lines as labelled. As you can see there is so much confusion in these waters such that you’d  be crazy to risk your money in this situation. Wait for an upward trend to breakout of this confusion, and then you make your trade. If you want to understand the personality of choppy waters, check out Forex Market Goes Sideways.

 

Look For Signals with  Confluence  Levels

If you’re counting for areas with great trading possibilities ,look for signals with confluence levels. In case, some of you have forgotten, confluence levels are levels with supporting factors behind them. These factors could be a simple support or resistance level with a dynamic EMA level(Exponential Moving Average) or a 50% retrace(pull back).signals-confluence

This confluence in action along the support/resistance zone which is labelled green.. At the far left corner  the 200 EMA (Exponential Moving Strategy) manages to catch  bulls breaking through the resistance level. This,on my opinion, is a hot trading opportunity. And in case you’ve forgotten,  the EMA averages prices of the recent trading period. In fact  the EMA carries more weight since it measures the most  recent prices. If you ‘re sure about moving averages,check out We’re Moving Averages Part I and We’re Moving Averages Part II.

If you’re not sure about your moving averages knowledge visit my posts, We’re Moving Averages Part I and We’re Moving Averages Part II. Even better, to understand how confluence works, read up on Something Called Confluence

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 “Price Confirmation Signals: How To Weed the Chaff From The Good.”  Hopefully you would have deciphered how to tell a a great price confirmation signal from a lousy one. I know it can be scary sometimestrying to tell the difference.But once you get the hang of it, it’s a breeze.

Til next time,take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and get a free handbook – The Beginners Guide to Forex Trading

 

 

 

Trading The Pull Back

Today we’re trading the full back. No, we’re not talking tug of war. We’re talking about a very popular trading strategy called the pull back. It is also known as the retracement strategy although both terms are used  interchangeably.   Trading the pull back is a very popular strategy among traders. They help keep  you from going gung-ho with your trades. And  if you’re the type who trades like a gambler you most certainly need to learn how to trade the pull back.

So  first things first: We’ll find what the pull back is really is. Of course we’ll looking into a few examples,and to put the icing on the cake we’ll find out how to trade the pull back.

So  first things first:

What is the Pull Back Trading Strategy?

Well the pull back strategy is a temporary turnaround or reversal of the prevailing trend-regardless of whether they’re heading for the hills(up) nosediving to the valley(going down).  when trading the uptrend watch the price  head on up at first. But later on it swings up and down, and then goes past its previous high.   The  same posture occurs in the downtrend, except the complete opposite happens.  Price first drops  bu then swings up and down and gets lower than its previous lower low

You’ll probably be wondering “Are we playing Jekyll and Hyde or what?” You need to understand that it will not be in your bestin to jump straight into the pond just like that,Why? because the market is like a wave.It’s still trying to find its level.So all you gotta do is watch while it finds its level. Let’s take a look at what a pull back pattern looks like, starting with the uptrend pullback

uptrend-pullback1.png

This is an example of an uptrend full back inaction. Notice the zig zig motion of the uptrend pattern.This represents the temporary retracement before getting back to its normal self.Like I said earlier,don’t jump in just yet as the market is trying to find its level.Once the uptrend gets its act together, now will be the perfect time to make your trade entry.

Next up is the pull back in the downtrend.

As you can seedowntrend-pullback

Just like the uptrend, the zig zag motion is in effect here. And just like I said in the uptrend, don’t  jump into the pond just yet.It’s still trying to find its level. So once the bears find their bearings, then you can put in your sell order(or go short as they say.

Now that we’ve gotten the explanations out of the way, let’s get find out how to trade the pull backs .The first thing you need to do is

Identify Trends Then Scan For Pull backs

First look for established trends and then look for pull backs within these trends. The whole idea behind this exercise is to identify the chart’s momentum. You want to know whether the chart is moving left or swerving right. Make that your path of least resistance – a path the market is most likely to tread for some time to come.

There is something to you need to keep in mind.  Markets do not stay permanent. Just because you see a very hot trend doesn’t mean it’s going to stay that way forever. To the average trader, who wants to make instant cash, a downward pull of a few days may seem very huge.But the savvy trader looking at the big picture doesn’t see it that way.  He sees those  few days as a little drop in the ocean that could cost him moolah(cash).So  you need to take this scenario into account when contemplating the direction of your trading strategy. Let’s take a look at an illustration of pull backs  in the uptrend.pullback- uptrend

This is  a classic example of a pull back trade at work here.  Notice the brief reversal at the line of support. When that happens , just put in your entry trade along  the line of resistance. To protect your trading position, place your stop loss just above the pull back.

Now let’s see the pull back in down trend  trade in action

pullback-downtrend

See the downtrend pull back setup in action. Even more important pay attention to the pull back a the line support at the line of support. Why? because you’ll place your entry order just below the line of support. And to protect your trading position against any unexpected surprises,place your stop loss just above the pull back.

 

Trade Pull Backs on Moving Averages

You can also hunt for pull backs on moving averages. However moving averages only if the trend is so obvious that you can’t miss it.Look out for smaller pull backs, especially  on exponential moving averages( ema for short).Once you’ve identified the pull backs, you can join the trend on a price action signal. But you may not need to that extent,so long as the trend strong and too obvious no to miss, Let’s take a look at a moving average setup

 

movingaverage-pullback

This definitely a classic moving average pullback setup in a downtrend. The trend is so obvious it’s ridiculous. I mean,it’s screaming ‘SELL’i n your face. You can’t miss it.

If you’re not sure about your moving averages knowledge visit my posts, We’re Moving Averages Part I and We’re Moving Averages Part II.

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 “Trading The Pull Back”.  Trading the pull back can give you great dividends. Just stay patient and wait for the right opportunities and your forex account will be forever grateful to you.

Til next time,take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and Get Free eBook – The Beginners Guide to Forex Trading