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

 

 

 

 

 

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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?

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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?

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We’re Trading Pin Bar/Inside Bar Combination

Today we’re trading the pin bar/inside bar combination. No,  this is not a tutorial on preparing a subway sandwich. I’m talking about trading two popular trading setups, the pin bar and inside bar,all at the same time.  We’ve discussed these two patterns separately, so they shoudn’t sound like  gibrish to you at all.

The pin bar and inside bar combination patterns represent some of the most powerful price signals you can ever imagine. These two patterns can send you  to prosperity heaven, if you identify and trade them properly of course.There are two sets of combinations that we’ll be looking at – namely, the pin bar/inside bar combo and the inside bar/pin bar combo. We’ll then do what we’ve always done: We’ll define what these two combinations are, take a look at a few examples,and then figure out how to trade these two combination setups.

 

In case, some of you have forgotten what these two trade setups are about, let me give you a little reminder.  the pin bar is a price action strategy that exhibits rejection and lets everybody know that  a sharp U-Turn or reversal is around the corner.(If you want to know more about  Pin Bar Trading  Strategy, read up on my post, Pin Bar Strategy – How To Trade It ). The inside bar, on the other hand, shows consolidation. This lets everybody know that a breakout is on the horizon. And if you want to know more about the Inside Bar, take a look at my post, Trading The Inside Bar.

 

I guess the first thing on the list is:

What is the Pin Bar/Inside Bar Combination?

The pin bar/inside bar combination forms when the pin bar is immediately followed by  the insidebar.This phenomena occurs towards the nose of the pin, or the pin bar’s real body. At first glance, you’d think the pin bar is feasting on the inside bar in the manner it just towers over the inside bar. It’s not humongous big;  it’s just that the tail(or wick)makes it look that way. It’s almost as if it’s walking on stilts.

Now let’s find out

What The Inside Bar/Pin Bar Combination Is All About?

the inside bar/pin bar combination is just simply an inside bar followed by a pin bar. In this set up, the pin bar is within range of the of the outside bar affectionately known as the other bar..  The inside bar gets it motherly name from its fuller size compared to the smaller thinner pin bar. You could be forgiven for envisaging a mother hen looking after its newborn chick.

Let’s take a look at illustrations of  these two candlestick combinations

combopatterns

The first set up to the left is the pin bar/inside bar combination pattern. As you can see,the bearish pin bar towers over the bullish  inside bar – thanks to its long tail. We see the reverse in the inside bar/pin bar setup.  Here we have the pin bar inside an inside bar.  Plus this setup is forming in a bullish trend,and it can only mean one thing – GO LONG.

Now that we know what the formalities out of the way:

How Do We Trade Pin Bar/Inside Bar Combination?

First,look out for the pin bar. Your point of reference is a candle with a long skinny wick pointing  upwards. The pin bar must take shape near the nose of the inside bar. Once you identify the pin bar,  you then look out for a smallish  inside bar. If you’re able to identify these two candles, you’ve got yourself a pin bar/inside bar combination set up. And when this setup takes shape, it’s time to make your entry  trade. Just make sure you  make your entry trade along the support level. You then put your stop loss preferably below the pin bar.

Let’s look at a couple of examples starting with:

Pin Bar/Inside Bar At Support Levelpinbarinsidebarcombo1

The GBP/USD graphic shows in living color the formation of the pin bar/inside bar pattern at the line of support. Seethe way the market pulls back before the combination unfolds.  Also the multiple inside bars also signals the possibility of a decent profit. We can put in an entry trade below the pin bar and the stop loss along the line of support.

Last but not least is  Pin Bar/Inside Bar as Reversalpinbarinsidebar-resistance

This is the pinbar – inside bar combination in reversal mode at the line of resistance. The red box attests to that fact. It starts with a false break and then heads for the valley. (Oh boy!Those who jumped into the fray without thinking  fooling must be gnashing their teeth now). You can get a tight entry  once the inside bar retraces up the inside bar’s tail.  You can also protect you trading position by placing your stop loss just above the level or resistance or near the pin bar’s high. If you want freshen up on your false break knowledge, get in touch with my post, Trade The False Break

Last but not least:

How do we Trade The Inside Bar/Pin Bar Combination?

You’d be better off trading this combination during the daytime. If it’s an uptrend,  Wait for the bulls to break  through the level of support and then place your entry trade above the high of the inside bar, mother bar. If you’re trading in a bearish situation, just place your sell order once price breaks down just below inside-pin bar’s mother bar. Let’s look at a  few illustrations starting with:

Inside Bar/Pin  Bar at Uptrend

insidepinbar1

Here,in front of us is the breakout above the high of the mother bar. Price breaks out above the mother bar, creating the perfect opportunity to enter a trade. Just place your buy entry just above the mother bar. Then place your your stop loss at the point of consolidation – Just behind the price breakout.

Next up is

Inside Bar – Pin Bar at Down Trend

insidepinbar - downtrend

This is the inside bar/pin bar combination in bearish mode. The inside bar –  pin bar combo is nicely cased in the red box, triggering a huge bear continuation after a brief period of consolidation.  This will be the perfect time to place your entry just around the point of retrace. You’ll get a better risk:reward ratio entering  this way. Just to be on the safe side, you place your stop loss below the tail of the pin.

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

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

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

 

That’s  a wrap for “We’re Trading Pin Bar/Inside Bar Combination”.  This strategy can  make you some decent profits if you recognize the right combinations. For the pin bar/inside bar look out for a tall  pin bar eclipsing   a smaller inside bar. Conversely, for the inside bar/pin bar pattern look out for a pin bar within the range of a  bigger, protective mother bar. If you’re able to recognize these  characteristics, your trading account will be singing glee.

Til next time,take care.

Looking to open a forex trading account?

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We’re Going to Engulf Some Candles….

Today, we’re going to engulf some candles.. No, we’re not talking about an all night candle vigil here.  We’re going to learn how to trade one of the most popular high probability trades , the Engulfing Candle Trading Strategy.  NowWhy is the engulfing candle trading strategy popular among traders?Because it’ so easy to spot the with naked eye. In fact, you’ll need your head examined if you  miss this one. Majority of traders prefer trading this strategy during daytime trading, although it can be applied in other trading time frames also.

So here is what we’re going to do. As always, we’ll define what the engulfing candle strategy is, and then show you  how to trade the engulfing candles.

First of:

What are Engulfing Candles?

Well,engulfing candles are candles engulf the previous  candle in the prevailing trend.  It basically overshadows the previous bar to signal the end  one trend and the beginning of the next one. What you need to understand is that the engulfing candle must have a higher high  than the previous candle and a higher low . In other words, the engulfing candle must be bigger and full than the previous  candle for it  to be considered an engulfing candle.Just think of a full glass of water when looking for an engulfing  candle.

Also, when looking for engulfing candles, make sure they satisfy two critical criteria: That they large and obvious, and they form at swing points. Now what do I mean by swing points?swing points are the highs and lows on the chart.(In fact you’ve just reminded me.We’ll touch on trading swing points next session.

Let’s look at two types of engulfing candles. First:

Bullish Engulfing Candle

As the name entails, the bullish engulfing candle  kickstarts the bullish trend. the bullish engulfing candle forms when the bigger part completely envelops the downtrend candle. This development signals the beginning of the uptrend or, surge for the hills,as I like to put it. The bigger part signifies the opening and closing prices of the bar, while the wicks (the two tails at the high and low ends of the bar)mark the high and low.

Next is:

Bearish Candle

The scenario  for the bearing engulfing candle is very similar tot the bullish engulfing pattern.  Again,as the name entails the bearish engulfing candle signifies the end of the uptrend and kickstarts the bearish trend or nosedive to the valley.. The bearish engulfing  candle forms when the bigger part eclipses the smaller  bullish candle.  And, just like the bullish engulfing candle.The difference here is that the bears close at a low.Let’s take a look at two graphical illustrations of both bullish and bearish engulfing

Let’s take a look at both bullish and bearish engulfing patterns.bullish -bearish-engulfing

 

 

Right in front of are illustrations of   the bullish and bearish candle engulfing patterns.   With the bullish pattern, you can see the white bullish engulfing candle eclipsing the small black bearish candle. This signifies the end of the downtrend and the bullish trend.  The full part indicates the opening and closing prices,  while the short wick(or thin upper tail) indicates the high peak.while  And when you see such a setup, don’t think twice about putting in a buy (or long) trade.

It’s the similar situation with the bearish engulfing candle pattern. Except that the bearish engulfing candle signifies the end of the uptrend and the beginning of the downtrend.  We have a  role reversal in that you now have the black bearish engulfing candle towering over the little white bullish candle.  The other difference is that you have two short tails indicating the high and low. When you see this set up, no one should tell you you  have to sell. I’ll show you later howt o place your trades using  both bullish and bearish patterns. So don’t panick.

Which finally brings us to:

How To Trade Engulfing Candle Strategy

Traditional trading wisdom suggests that you wait for the one engulfing candle to fill like like a glass of water before you make your entry trade. One an engulfing candle fills up completely, and the next engulfing candle resumes make your initial trade entry.

The most sensible way to make your entry is to place a pending long order a few pips above  the high of a bullish engulfing candle and a few pips below the low of a bearish engulfing candle.

If you want a safe spot to place your stop loss,do it on the opposite side of the engulfing bar. For a bullish engulfing bar you place  the stop loss a few pips below the low of the bar. While, for a bearish engulfing bar you , you place your stop loss a few pips above the high of the bar. The stop loss serves a very important purpose for two reasons. First,it gives your trade time to breathe in case the market does an unexpected 360 U-turn. It’s not uncommon for the market to  retrace back into the bar and resume on its journey without threatening to crush the entire bar by breaching it at the other end.

Secondly, the stop loss below the bullish engulfing bar serves as a buffer against a sharp U-turn by the market. This sharp U-turn swill definitely  spike your blood pressure a few notches, and we don’t want that. Do we? Let’s look at a few  illustrations of  entry and stop loss placement in both candle patterns – starting with the stop bullish engulfing pattern.

bull-entry.png

As you can see, the blue arrow indicates the  buy entry  a few pips above the high  of the bullish candle. The stop loss is nicely placed below the low of the bar at the support level.. This gives your trading position some leg room in the event of a market retrace.

Now let’s look at the entry and  stop loss situation on the bearish engulfing candlebearish-stop.png

As you can see,the initial entry is placed below the low  of the engulfing  bar.  The stop loss is  placed a few pips above the high of the bar.Also take a look at the way the bar following the bearish engulfing bar pulled back slightly. This is why it’s important to give your trade some leg room in case of any unexpected U-turn by the market.

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

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

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

 

That’s  a wrap for “We’re Going To Engulf Some Candles.”The Engulfing Candle Trading Strategy is highly profitable among forex traders. If you are able to recognize the big bars eclipsing the smaller bars at the end of the prevailing trends, you’re good to go. Next time we’ll touch on how to trade swing points. Till next time take care.

Looking to open a forex trading account?

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Let’s Trade Flags

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

First up is:

What are Flags?

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

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

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

bullishflag-bearishflag

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

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

First:

Flag  Pole

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

flag-pole

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

Flag

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

flag2

 

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

Last but not least:

The Continuation 

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

continuation

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

Now to  the burning question of the day

How Do We Trade Flag Pattern?

Well,

Trading Signal

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

Stop Loss

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

Take Profits

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

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

Technical-Analysis-Using-Flag-Patterns

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

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

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

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

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

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

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