London Breakout

This week we’re going on a London Breakout. And it’s not because the iconic London Bridge is falling down(as the famous nursery rhyme suggests). We’re going to learn how to trade the London Breakout Strategy.  The London Breakout strategy is traded during the first three hours of the London trading session. According to forex folklore, that’s where all the action and the money is. The only pair you need to trade is the GBP/USD pair.It’s perfect for rookies looking to make a quick 50 -100 pips. Just make sure you don’t turn into a gambler. When hit your target, just bow out gracefully.

If you live in a weird timezone I really feel for you. You may have to forgo much valued sleep if you want to experience the excitement of the London Breakout.  For some of you, I guess sleep is no object where profits are concerned. Solong as you allow your body to get some much needed rest.

I guess the first question some of you are asking is:

Why In the World Should I Trade the London Breakout?

Very simple. The London breakout is the forex market’s biggest mover. And, not only does most of the trading takes place in the London breakout, but it also carries the most volume as far as currency trading is concerned.  The voluminous nature of the London breakout creates huge trading opportunities for both veteran and rookie traders alike.  No wonder, traders around the world deny themselve beauty sleep at night just to get a piece of the London action

So what does all this volume mean? It means the trend direction of the GBP/USD pair during the first three hours will determine  the overall trend direction for the remainder of the London trading session. Besides the name of the game is catching the upside or downside moves during this 3 hour window. Now let me show you a glimpse of what the London Break Out looks like.

Image result for london breakout strategy

This is a classic illustration of the London Breakout Strategy. We have the bulls breaking out of the level of the resistance and heading for the hills.And with such a strong breakout,this is the perfect opportunity to pick up  a quick 50-100 pips..  And like I said earlier, if you are a rookie looking for a head start, you’d be crazy not to take advantage of this opportunity.

I guess the obvious question to ask is

Where and How Do Place Break Out Trade Orders?

Let me break the process down nice and easy so you understand better.

  • First draw a support and resistance line around the last three candlesticks formed during the Asian Session
  • Place a buy order 2-5 pips above the resistance zone
  • Next place a sell order also 2-5 pips below the resistance zone.
  • Once an order is activated,you immediately cancel the previous order.
  • To protect your trading position you gently place a stop order in the location of the previous order.

Now let’s see how this work.

London Breakout Forex Trading Strategy

Now take a look at the Asian swing. The 1 23 labels represent the previous three candlesticks I was talking about. Pay close attention to the red support  drawn underneath  the candlesticks.   Now look at the resistance /suport levels in the London market..Place your  buy/sell  above and below these spots respectively.. Once on order is triggered,  cancel the previous pending order.  If you want  to be safe than sorry, place your stop loss order, place your stop loss in the location of the previous order.

If you’re not sure of  how to draw support/resistance levels, read up on Identify Support and Resistance Levels With Price Action Analysis   

 

Now to the most important question of the day is:

How Do I Manage My Trade?

Again, let me break this down nicely for you to understand.

  • If price moves at twice the amount you risked,move your stop loss to break even point. Let’s say  your stop loss is 30 pips, and price moves up to 60 pips. You immediately move your stop loss to break even point. It’s just like claiming partial profit. And you’ll be preventing your position from being wiped out.
  • The next thing you can do is to use a trailing stop to secure the profits as the trade moves in your direction. You can do it two ways.
  • The first trailing technique you can use is by applying the trailing stop when price moves at the same amount that you risked or if price moves at twice the amount that you apply your trailing stop at half that amount.. So let’s say if price moves by 30 pips you place your trailing stop by the same number of pips.
  • However, if price moves up 60 pips,you move the trailing stop by 30 pips.
  • The second technique and best technique to use is to simply put the stop loss behind the high/low points as price moves in your direction. If you don’t want to risk losing your money and your hair at the same time(That is if you have any) This the best way to go.

If you’re still not sure about trailing stops  and other market orders read up on Forex Trading Basics- Top to Bottom Part II.

Close The Trade

Once the London session ends, close the trade and go take a nap. Even if you made only ten pips,(And I’m  only using this as an example), just shut  up shop and  And if you re thinking of adding to your ten pips during the U.S session, you. could be laughing at the wrong side of your face. The market may not move in your direction. Besides, you’ll live to trade another day. So take your profits for the day and put it away for safe keeping.

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?  .Looking to get a leg up on price action analysis, you need to learn how to Identify Support and Resistance Levels

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 ” London Breakout”. As you can tell,  it’s not about London Bridge falling down. It’s about the London Breakout Strategy where which touches on huge trading opportunities during the first three hours of the London session. Like I touched on earlier, if you’re a rookie looking for a quick head start, the London Breakout session is IT for you.

Till 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

 

 

 

Advertisements

The Three White Soldiers And The Three Black Crows

Now when you hear “The White Soldiers and The Black Crows” What exactly comes to mind? Some of you will probably be like  “”hmmm….. Sounds like the title of an apocalyptic battle between good and evil.”  Or” They could be the names of two heavy metal bands.” Sorry, to disappoint you, but it’s none of the above..    The Three White Soldiers and the Black Crows are the names of two popular trend reversal patterns,both of which we are going to learn how to trade today. Now some of you are probably wondering “Those are weird names for  forex trading strategies.” Well, I guess forex traders have a morbid sense of humor after all.

So here is what we’re going to do.We’re going to individually take a look at both patterns. Next we’ll see how both patterns play out together on the charts. And,to put the icing on the cake, we’ll learn how to trade  both patterns.

But First

What is The Three White Soldiers Pattern

The Three White Soldiers pattern is a bullish reversal trend,consisting of three bullish candlesticks. This pattern begins at the end of the downward or bearish trend. In other once, the bears run out of steam,the bulls take over the show.  Now how would you know that the Three White Soldiers Pattern is forming? When you have three bulls forming consecutively?And they must open within the body of the previous candlestick.

Also, each bullish candlestick closes higher than the previous candlestick.  This suggests that more traders are jumping on the Three White Soldiers bandwagon. Even better, more traders are also from this trend You definitely want to keep your eagle eyes open for this trend.

Now let’s take a look at how the Three White Soldiers look like by themselves.

Three White Soldiers.svg

This is what the Three White Soldiers pattern looks like. You have three long candles climbing to the heavens with each one unfolding at the same time. And each oneupens within body of the previous candlestick. When you see such a scenario, nobody has to tell you it’s an uptrend and that you need to put in your buy order.

Now let’s see how the Three White Soldiers Look like on the price  chart

THREE WHITE SOLDIERS CHART PATTERN

 

As you will have noticed, the Three White Soldiers take shape at the end of the downward trend. It’s for all intent and purposes a reversal pattern.  as the bears  start to run out of breath at the end of the downward trend the three white soldiers start their upward surge. As I indicated, previously,each candlestick unfurls(or unfolds) in front of  the previous candle.  So as the soldiers keep climbing higher,the opportunity to make huge profits become more apparent.

Next up is:

What Is  The Three Black Crows Pattern?

Well,  just like The Three Black Crows pattern is also a reversal pattern. Except that,  it unfurls on the downtrend. When the bullish White Soldiers eventually run out of stamina, the Three Black Crows take over and begin their downward surge. In this scenario, you have three long candle sticks  trending downwards like a staircase. Each candlestick unfurls  within the body of the previous candlestick. And each candlestick closes lower than the previous candlestick.

So whenever you see the Black Crows taken over from the White Soldiers , just remember that the downward slalom is about to start. Now let’s take a close look at what the Three Black Crows look like  in portrait form

Three Black Crows.svg

This is what The Three Black Crows look like. They are three long candlesticks trending downwards like a staircase.  And just like the White Angels,  each candlestick forms  within the body of the previous candlestick. Consequently the value of each Black Crow  drops. And when that happens,it’s time to put in your sell order.

Now let’s take a look at the Three Black Crows in action on the price chartsTHREE BLACK CROWS CHART PATTERN

The Black Crows have taken over from the White Soldiers as they’ve run out of steam at the uptrend. So their downward slalom begins.Each candlestick unfolds within the body of the previous candlestick. And each candlestick closes lower than the previous stick. And when this scenario unfolds, it can only mean one thin “SELL!”

And last but not the least,

How Do I Trade Three  White Soldiers/Three Black Crows Pattern?

You’d be better off trading the Three White Angels/Three Black Crows patterns in higher times.(If you are not sure about time frame analysis, look up Looking At The Big Picture Using Multiple Time Frame Analysis) .  Let me break down the rules so you understand the process better.

1.If you see the White Soldiers taken shape, place your buy order 3-5 pips above the high of the third candlestick.

2. However,if the Black Crows show up, place your stop loss 3-5 pips below the low of the third candlestick.

3. You may take target your take profits at previous highs at previous highs/lows(or peaks/bottoms).

4. You then move your stop loss order to  breakeven when price hits the amount that you risked or when price has made a high or low.

5. You can also decide  take some of your profits  when price is halfway towards your profit target.

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?  .Looking to get a leg up on price action analysis, you need to learn how to Identify Support and Resistance Levels

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 ” The Three White Soldiers And The Three Black Crows. As you can tell, The Three White Angels and Three Black Crows are neither a battle between bad and evil nor are they names of rock bands. The White Angelsand Black Crows are tow popular reversal patterns known to forex traders. So if you hear their names being mentioned anywhere, make sure your minds don’t stray into the gutter for too long.

Till 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

 

 

 

 

Trade 123 Strategy – Simple as 123

Don’t let the title fool you.We’re not doing a countdown here. We’re going to learn how to trade a very popular and simple trading strategy called 123. It’s as simple  as 123 if you ask me.  The 123 pattern is a pattern that help s you exploit the prevailing trend.  It’s a pattern comprising of three trade setups which occurs in both the uptrend and downtrend,However,the 123 pattern can also alert you of potential price congestion(consolidation) or trend reversal,depending on the  forex pair you’re trading of course.

So what’re we going to do?We’re going to do s do. what we alway.We’ll first find out what the 123 strategy is all about, we’ll then break down  the pattern for easy understanding, and,to put the icing on the cake, we’ll delve in to how to trade 123 strategy.

But first things first:

What On Earth is the 123 Strategy?

Well the 123 strategy is a very popular reversal formation traded by most forex traders.123’s usually take shape. at the end of trends and they also signal the end of a prevailing trend. You can also catch a a 123 in a ranging market or sideways market. Let’s take a look at a 123 pattern  in an uptrend.

As you can see the candlesticks are conveniently  labeled 123 to reflect the up and down  nature of the pattern. Point 1 is the lowest point and acts as the support. Why?because the uptrend  starts from the bottom. Point 2  is the highest peak of the trend and forms a resistance level to any bullish onslaught. Point 3 represents another support level or the second low point.  The breakout point above point 2 represents the continuation of the bulls upward surge.

If you’re not sure about support.resistance levelsand breakouts, read up on Identify Support and Resistance Levels With Price Action Analysis  and  Break Out Trading Breakouts.

 

Now let’s look at how 123 shapes up in the downtrend

 

As you can see the 123’s behave differently in the downtrend. Point 1 is the highest peak when price runs into a brick wall called resistance  and the bears take over the show.  Point 2  is the low point or forms a support level. Point three takes shape when price moves up and puts up a resistance barrier.Take a close look at the price break out below point 2. When the breakout happens, it means the bears will continue their slalom run.

Now that we’ve broken down the formation,  Let’s take a look at the:

Trading Plan

123 Trading Plan

We’re going to take a look at a conservative trading plan for the 123 strategy for some of us who need a little extra confirmation in our trades. However, we do not want to take too long  enter our trades,  since we may end up having to make up for a huge loss.  And by the way,all thorizontal lines that you see on the screen represent the lines of support and resistance in all three trade setups. So here we go:

Trade Setup 1123 Trading Plan

 

I hope your vision is as sharp as mine.Because if it is, you’d notice that price surged from point 3, but run into the brick wall popularly called resistance at point 2 and pulled back or retraced.As a consequence of this pullback, a double bottom pattern is formed. This suggests the bulls are losing stamina. To be certain it’s a double pattern you’re looking at, make sure  price has broken through the point 2 resistance level like it’s nobody’s business. Jump in prematurely, and your trading account will blow up in smithereens.If you want to know what a double bottom pattern is all about and other price action patterns, look up Trading Forex Chart Patterns Part I  and Trading Forex Chart Patterns Part II.

How Do I Trade?

Get your trade in once price breaks out  Point 2. Next   place your entry at the close of the daily candle to confirm a solid breakout. You can also put in a buy order just above the candlestick that broke through Point 2.  To protect your account from any unpleasant surprises place an Average Truth Range Stop(ATR) at the candlestick just before the breakout candlestick. Wanna know what the Average Truth Range is? Look it up on my  post Break Out Trading Breakouts. 

Let’s now take a look at:

Trade Set Up 2123 Trading Plan

 

Notice how the bulls go on a tear at point one and the bears take over at the support level  at Point 2. This of course creates a strong reversal , causing price to retrace or pull back inside the previous sideways pattern or consolidation from Point 1. And as  you ca nsee, price representedbythe bulls has picked up strength at Point 2.

How Do I Trade?

Makeyour entry once the price, represented by the bulls break through Point 2. Ma your entry at the close of the candlesitck, NExt put an ATR stop in the middle of the candlestick just before the breakout candlestick.  If you get it right,you should see the cash flowing nicely.

 

Which finally brings us to :

Trade Setup 3

One to One Targets

Now this setup goes against the grain of a typical 123 pattern. Instead of a defined trend, you have a nasty looking consolidated market or sideways market at Point 3. You can see the bulls have started losing steam after a period of domination. Consequently, it has resulted in a stalemate with neither the bulls nor the bears establishing a clear advantage. Notice the way the bulls break through the support at Point 2 but then fall into the consolidation trap. This exemplifies the loss of steam that I was referring to.

Oddly enough, this current stalemate creates trading opportunities. Make sure the coast is absolutely clear before you make your entries or else your account could suffer a Deontay Wilder-style knockout.

Which finally  brings us to:

How Do I Trade?

To make your entry, you can do that a few ways.You can use a multiple time frame approach and settle on a lower time frame . Or  you  can  get comfortable at highs and lows of breakout candlesticks. By that I mean, breaks of support levels and resistance levels.

Now some of you are wondering out loud”Where Do I Take The Profits?” Well, you can do it two  ways. You can add specific targets in support or resistance levels , depending on the trend prevailing at the time. Or you can use  your trailing stop as means of raking up as much profits as they are available on the market. You should besmiling all the way to the bank with this one.

If you wanna know what a trailing stop is and other market orders, Read up on Forex Trading Basics – Top to Bottom 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  “Trade 123 Strategy – Simple as 123”.  The 123 strategy is a very powerful continuation   price action strategy  for making profits.  All  you’re doing is taking advantage of the prevailing trend at the time. It can also alert you of incoming price consolidation also depending on the currency pair you are trading. So 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

 

 

 

 

 

Looking At the Big Picture Using Multiple Time Frame Analysis

Hello

Today we’re going to talk trading time frames.And please we’re not going to watch a movie called “The Big Picture.”  We’re going to be looking at the big picture  using multiple time frame analysis. We are looking at the big picture so as to gain better perspective on the direction of the trend.  N sHave any of you seen 1 min 5 min, 30 min 1 hr 4 hr,  time f on your MT4  platform? These are the different time frames that currency pairs are traded in.Think of these time frames as different time zones.

Image result for images of  mt4 platform- forex

Take a close  look at the time frame labels right on top of and  underneath graphic. They’re the time frames that I’m refering to. Each time frame shows the same data but in a different trend. All time starting with H represent hours, and all time frames starting with M represent Maths. However, there are other time frame frame categories for daily, weekly,  and 8 hour time frames.

 

Now why do we want to gain better perspective on the the direction of the trend? because the direction of the trend is different in each time frame.I’s absolute suicide to trade in just one time frame.  WhyYou could have the GBP/USD pair in an uptrend on the 1 hr chart but then reverse to a   downtrend on the 4 hr chart. Even more important it saves you the headache of losing trades on a regular basis.Now that’s one massive headache we want to avoid.Don’twe?

 

So we we’ll do the following. We”ll define what multiple frame analysis is,Why we need to see the bigger picture using Multiple Frames, and how we trade using multiple time frames?

I guess the question of the day is:

What exactly is Multiple Time Frame Analysis?

Well basically, multiple time frame analysis  is the process of looking at the same currency pair and the same price but at different time frames. The currency pair exists on time frames ranging from the 1 minute time frame to the monthly time frame.  It’s like looking at two things with different sets of lenses. The strange thing about multiple time frame analysis is that two traders may have a  difference of   opinion  on a currency pair  as wide as the Grand Canon,and yet they may be spot on about the pair. For instance one trader sees the GBP/USD pair on the downtrend on the 4 hr trade. While another may see the same pair  ranging up and down on the 5 minute chart

However, this poses a major problem. When a trader sees a  signal to sell at the 4 hr time frame, but then  takes a peek at 1 hr time frame only  to see the bulls gradually climb the hill, he immediately develops this puzzled look on his face like, “What the heck is going on here?” Then he asks himself”Do  I go with the 4hr frame, and run with the sell signal? Or do I play Heads or Tails and decide whether to buy or sell”?  Unfortunately both options are recipes for disaster.

Which bring us to the next question?

Which Time Frame Fits My Personality?

One major reason why a lot of traders flop is they fail to ask themselves “Which Time Frame Fits My Personality?” Some trade the 1 minute and 5 minute time frames,hoping to strike it rich. Unfortunately they incur  huge losses and quickly get frustrated because these two trading time frames do not fit their trading personality.

Some forex traders feel at home trading the 1 hr time frame. Why? Because, in his opinion,  this time frame has balance. It’s long but not too long. And it has fewer  trading not signals, but not too few.  This time frame gives them more time to look for trades and not feel like they have to rush to catch a plane. On the other hand, there are som traders who would never trade the  1 hr time frame if the lives depended on it.  They find this time frame so slow that they’d  probably slip into a coma unawares before spotting a trade. So instead they prefer trading in the  10 minute time frame because it gives them just enough time to implement decisions on his trading plan. Ten minutes may not be enough time,but hey to each his own.

There are also another set of traders who are like”Why would  anyone trade on a 1 hr trade”?It’s too fast.” So they only trade on daily,weekly, and monthly charts  which bring stability and solid profits.  Some of you are probably “ How Will I Know The Time Frame That Fits My Personality?”  Well, I suggest you open a demo account where you use virtual cash  try out all the various time frames until you find the time frames that fit your personality best. Once you discover the time frame that fits your personality, you ‘re now ready to go live on the forex market. In fact while trying out your time frames on your demo account, you can try out your  other trading strategies also. This will make you better prepared before you  decide to go live.

Which brings us to the next burning question.

What is The Best Time Frame to Trade?

At  the risk of sounding like a broken record, it depends on your trading personality. If you like to take things slow like a turtle and deliberate on your trades, then longer time frames like  daily, weekly and monthly charts  could be your cup of tea. If you like everything fast like a  Formula I race car driver, the 5 minute charts will suit your fancy. Just make sure you don’t get burnt. Below is a table,courtesy of babypips.com, which highlights the various time frames and the differences  between each of them.

TIME FRAME DESCIPTION ADVANTAGE DISADVANTAGES
LONG-TERM Long-term traders will usually refer to daily and weekly charts.The weekly charts will establish the longer term perspective and assist in placing entries in the shorter term daily.

Trades usually from a few weeks to many months, sometimes years.

Don’t have to watch the markets intraday.Fewer transactions mean less times to pay the spread.

More time to think through each trade

Large swingsUsually 1 or 2 two goods a year so PATIENCE is required.Bigger account needed to ride longer term swings

Frequent losing months

SHORT-TERM (SWING) Short-term traders use hourly time frames and hold trades for several hours to a week. More opportunities for trades.Less chance of losing months.

Less reliance on one or two trades a year to make money

Transaction costs will be higher (more spreads to pay).Overnight risk becomes a factor
INTRADAY Intraday traders use minute charts such as 1-minute or 15-minute.Trades are held intraday and exited by market close. Lots of trading opportunities.Less chance of losing monthsNo overnight risk Transaction costs will be much higher (more spreads to pay).Mentally more difficult due to the need to change biases frequently.

Profits are limited by needing to exit at the end of the day.

 

 

There are two things you need to get out of this tabular explanation.First is that smaller time frames give you the freedom to make better use of your margin and put in safer stop losses. Second, larger time frames require huge stops. To be able to put in these huge stops, you need a larger trading account in order to deal with the market swings without  facing a margin call from your broker.

Some of you are wondering “What’s a margin call?” Well A margin call is a broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance marginMargin calls occur when the account value depresses to a value calculated by the broker’s particular formula. In other words, your account is running low,and that you need to top it up.

Just remember that your choice of time frame should fit your trading personality. It’s like a man looking for his rib, or his significant order. If the rib doesn’t fit, it means the woman is not meant for him.  It’s the same thing with choosing a time frame.  If your choice of  time frame does not gel with your trading personality, it’s not meant for you. You need to try all the all these time frames,a nd decide which time frame fits your persona.  Once you’v found the right time frame to fit your trading personality then you can explore your horizons by looking at trading multiple time frames.

I guess some of you are like:

Why should I  Trade Multiple Time Frames?

Because it’s good for  yours soul.  And You need to, you guessed it, LOOK AT THE BIG PICTURE.  You  cant get  stuck on one time frame for the rest of your life. Let me create a  nice little scenario.Let’s  say you are looking at a 10 minute chart of the GBP/USD. You see a 200 SMA(Simple Moving Average ) which appears to b resisting  the bears. With resistance holding and  the bulls turning into doji’s, You’d think “Now is the perfect time to sell” as illustrated below.

 

Multiple Time Frame Analysis: 200 SMA holding as resistance

 

 

Well, “Not so fast” says the GBP/USD pair. The pair do a 360 and charge through the resistance barrier, gaining another 200 pips. And then you are like “What’s going on here?”Multiple Time Frame Analysis: 200 SMA holding as resistance

 

Well let’s open up the 1 hr chart and see what  happened.

If you had been paying attention,you’d have noticed that the pair had started inching up from the bottom of the ascending channel. Also, that doji you thought had formed at the resistance was actually announcing its presence at the level of support! An obvious buy trade signal, if you ask me. Take a look below.

Multiple Time Frame Analysis: GBP/USD at the top of the channel

 

 

 

Open up the 4 hour chart and the ascending channel  become a lot clearer as indicated  in the graphic below.

 

Multiple Time Frame Analysis: 4-hour chart: GBP/USD at the top of the channel

If you had been patient enough to check this 4 hr chart first, you would have saved your money the trouble of going short like you did on the 10 minute chart. And I like stated earlier, all the charts are showing the same data except that the data was shown in different time frames/

So do you now understand the importance of  surveying multiple time frames before trading?

As the saying goes,if something is too good  to be true,don’t fall for it. The same rationale pertains in  forex trading also. I’ve fallen for it several times myself. You see while the price grinds  to a halt on the 10 minute chart it can also massage the support barrier in the 4 hr time frame.  The moral the story is the larger the time frame, the higher  the likelihood of a support or resistance level  holding sway.

Trading multiple frames will most certainly save you  from losing needless trades .These frames also help maintain your trading position a little longer, which of course will do wonders for your trading account.  Also,  by  using multiple time frames you get a better  view of the bigger picture. You are able to gauge your trades better as a trader, as opposed to putting in five average trades within a week. Not to mention the fact that you risk losing valuable cash in these trades.

I guess the moral of the story here is  not to get hooked on one time frame and ignore the others. You risk getting distracted by  flash trends that don’t last, and, at the risk of repeating myself,you miss the big picture.

Now that we’ve identified why we need to utilize multiple time frames in our trading, I guess the appropriate question should be:

How Do I Use Multiple Time Frame Analysis to Find Solid Entry and Exit Points

Take a holistic look at,you guessed it, THE BIG PICTURE.  In other words, take a broad look at what’s happening on the market. But please don’t get too chummy with market. Stay as far away as possible from the market. Why?Because a  longer time frame takes longer to develop meaning that it will take a humongous market shakeup for a currency pair to change routes. Also support and resistance levels take on greater significance in longer time frames than the shorter ones.

With that in mind, start by choosing your favorite time frame to trade. And then move up to a higher time frame.Next,you ask yourself “Do I go long or do I go short”? This depends on whether  the market is ranging or trending. Now go back to your  favorite trading time frame to decide on where to enter and exit your trades. In layman’s language, decide on where to place your stop loss and profit targets. Also, Keep in mind that by trading  using multiple time frames,you get an edge over other traders whose vision is stuck on only one time frame.

Now that I’ve shown you how to find entry and exit points using multiple time frame analysis, I guess the burning question on your anxious minds is:

How Do I Apply Multiple Frames Analysis.

Simple.  I’ll show you a practical example of how it works. After a few months of practicing on your demo account , you come to the realization that the EUR/USD pair makes you feel good. And  that you’d like to trade this pair on your live account. So far so good. You first start off with the 1 hr chart because you believe the 15 minute chart runs too fast like a Ferrari, and the 4 hour chart  crawls like a turtle. You’d rather go for the 1 hr chart because it’s not too fast, not too slow.

So you then check out the 4hr chart to help you ascertain the overall trading picture as far as trend goes.

Multiple Time Frame Analysis: EUR/USD in a clear uptrend

 

Upon further reflection, you say to yourself “Hmmm this pair is clearly on the uptrend. I should be looking to buy.” This makes sense because, as the saying goes, the trend is supposed to be your friend.Right? Besides the last thing you want is get caught in no man’s land by way off trading against the trend. The market won’t forgive you for that.

You then U-turn back to your favorite 1 hr chart, hoping to spot an entry point.

Multiple Time Frame Analysis: EUR/USD testing the ascending trend line

You discover a doji sitting comfortably on  on your trendline. You then say to yourself with a thick frown on your face,”Hmmm! Should I go for this?”You’re asking yourself this question because you do not want to make a false move that will bite you later. So you hurriedly  revert back to the 15 minute chart in the hopes of finding a better entry point that will give you better confirmation. You get back to the 15 minute chart line to discover that the trendline is holding the fort quite strongly. Your gut instinct tells loudly and clearly ”THIS COULD BE A GOOD TIME TO ENTER AND BUY.” You realize your instinct was spot on because the bulls continue to rise, causing the EUR/USD to climb the charts. So you gleefully enter your trade,with the view to keep your position open and pick up about 400 pips along the way – not bad for a couple of weeks work.

Keep in mind that you can only do so much with too many time frames. The last thing you want is a slew of charts spread across your PC screen, and  giving you different readings. This is enough to give you  a humongous head ache, not to mention pull youhair out also(If you have any at all).

What’s the moral of the story?Look at no more than two time frames- maybe three. Anything more than that will  send you straight into analysis paralysis followed closely by insanity.

Now is this a better way to do multiple frame analysis or what? Basically you just have to find what strategy works out best for you.  And make sure you keep the big picture in mind.

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 “Looking At the Big Picture Using Multiple Time Frame Analysis . ” It really pays to look at multiple time frames before entering your trades. You get the big picture as to where a trend gets started. And you spare yourself the heartache of of missing out on a trade simply because you failed to do proper diligence without scanning all the time frames. Till 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

 

 

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?

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

 

 

 

 

 

 

 

 

 

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