For the years traders and market technicians often used some of the common and basic technical tools to analyze the market. These are some basic indicators, some common formations such as pennants, double bottoms, double top, flags are often used in the currency market. Some advanced traders use different ways to analyze the market, they […]
For the years traders and market technicians often used some of the common and basic technical tools to analyze the market. These are some basic indicators, some common formations such as pennants, double bottoms, double top, flags are often used in the currency market. Some advanced traders use different ways to analyze the market, they […]
For the years traders and market technicians often used some of the common and basic technical tools to analyze the market. These are some basic indicators, some common formations such as pennants, double bottoms, double top, flags are often used in the currency market. Some advanced traders use different ways to analyze the market, they focus on price action, Elliott waves, and the Diamond pattern which is not widely used by retailers, but is a quite popular and secret tool in the professional trader world.
In this article, we will show you everything you need to know about the diamond pattern to capitalize on the various trading opportunities. There is two types of diamond pattern the Bullish and Bearish Diamond pattern. The bullish diamond occurs at the end of the downtrend which indicates the buying trade and the bearish diamond pattern occurs at the top of the uptrend which gives the buying opportunities. By reading the previous line you understood that diamond is the reversal pattern and it never offers the trend continuation trades, so always use this pattern to trade the reversals.
The forex market has higher liquidity as compared to the stock market, so it is easier for the traders to identify this pattern than in the stock market where gaps in price action frequently occur. The Diamond pattern occurs on every timeframe and it offers plenty of trading opportunities to every type of trader or investor.
Identifying The Diamond Pattern On The Price Charts
First of all, identify an off-shoulder head and shoulders formation on any asset chart. Next, we draw the resistance trend line from the left shoulder to the most recent higher high of the price action {line A}. Then from the higher high {head} to the right shoulder {line B} The price action should not break above the right shoulder trend line, if it is, then the pattern is invalid. To draw the lower trend line which is {line C} find out the most recent bottom tail and connect it to the left shoulder. Connect the right side support trend line from the bottom tail to the right shoulder line {line D.} Trading the diamond top pattern isn’t much harder than the other trading formations; here you only wait for the breakout to happen to take a trade. When price action breaks the pattern it indicates the buyers finally lost their control and sellers take over the whole show and they are ready to print the brand new lower low or higher high {according to the circumstances}.
Diamond Pattern Trading Strategies
Trading The Bearish Diamond Pattern
The image below represents the Diamond pattern on the EURUSD daily chart.
The image below shows our entry and exit in the EURUSD forex chart. As you can see in the image below, when price action followed all the rules of the bearish diamond pattern, we took the sell entry in this pair. Price action blasts after the breakout and it prints the brand new lower low. The Diamond pattern is quite a powerful pattern in the market, and it holds the ability to completely reverse the direction of the trend, so don’t take this pattern lightly, follow all the rules and go for the bigger targets. Initially, we set the smaller take profit in this pair, but the stronger seller move, convince me to go for the bigger targets in this pair. When the market gives you the opportunity milk the market as much as you can and go big.
Trading The Bullish Diamond Pattern
The image below represents the bullish diamond pattern on the EURUSD daily chart.
Before printing the diamond pattern, price action was in a strong downtrend, which is a good sign for us. What most of the traders do is they don’t like to follow all the rules and they sometimes trade the bullish diamond pattern in an uptrend and they end up losing in the trade. It’s not about the pattern only, the key to successfully trade all the pattern is to find out the pattern at the location where it makes the sense to trade.
As you can see in the below image when the diamond pattern appears and it fulfilled all our rules we took the buy entry in this pair. After our entry price action prints the brand new higher high but we choose to close our position at the major resistance zone. The stop-loss order was just below line D, because line D is a breakout line and it acts as a major support to price action.
Conclusion
The diamond patterns are very rare to find out on the price chart, but when this pattern appears it often gives a good risk to reward ratios trades. If you are a beginner at this pattern, then first of all train your eyes to find this pattern on the price chart. As you gain experience you will automatically start spotting this pattern on the price chart. First of all, form the top resistance line by connecting the left shoulder to the higher high of the price action {line A}. Then connect the higher high to the right shoulder {line B}. Next draw the support trend line from the left shoulder to the tail {line C} and the tail to the right shoulder {line D}. Wait for the price action to break below or above the pattern {according to the market circumstances} to take the trade. For identifying the better and more opportunities, it is suggestible to find out this pattern in a highly liquid pair. It doesn’t matter which timeframe you trade this pattern appears everywhere and in every market, just simply take the advantage of the pattern by following the rules.
The double Bottom is a technical chart pattern, which helps to identify the change in the direction of the selling trend. The pattern looks like W in shape and it is quite a popular pattern among technical traders. In other words, double Bottom is a bullish reversal pattern. Most of the time double bottom reversals […]
The double Bottom is a technical chart pattern, which helps to identify the change in the direction of the selling trend. The pattern looks like W in shape and it is quite a popular pattern among technical traders. In other words, double Bottom is a bullish reversal pattern. Most of the time double bottom reversals […]
The double Bottom is a technical chart pattern, which helps to identify the change in the direction of the selling trend. The pattern looks like W in shape and it is quite a popular pattern among technical traders. In other words, double Bottom is a bullish reversal pattern. Most of the time double bottom reversals usually mark the long-term trend change in an instrument. In an ongoing downtrend, the price action drops to a floor, a significant support level before beginning the new uptrend. The pattern forms by two consecutive rounding bottoms with approx. Same heights. Most of the time, the momentum of the second Bottom is quite weak, which indicates that the weak selling momentum. Both of the round bottoms retrace until it finds the major resistance area that we call the Neckline. Overall, the pattern indicates that the professional traders, market movers booking the profits, and now the market are ready to print brand new higher high.
The image above represents the Double Bottom Chart Pattern on Price Chart.
Psychology Behind This Pattern
As by now you know that the double Bottom pattern occurs at the major support area, the pattern suggests that when the price action reaches the major support area, it means that the sellers are now afraid of the major support zone so they are booking their profits and as a result, the momentum of the market keeps dying. When price action prints the first Bottom, it indicates that some buyers try to buy; as a result, price action approaches the Neckline, and now at the Neckline, some sellers again try to hit the sell in order to print a brand new lower low. When price action reaches the major support area again, they failed to print a new lower low, and as a result, they booked the profit. Now the markets are entirely under the control of the buyers, and they are ready to print the brand new higher high.
There are several bullish candlestick patterns that are widely used by technical traders in the market. You can use any bullish candlestick pattern to trade the market, some of the popular bullish candlestick patterns are Bullish Engulfing, Morning star, Gravestone Doji, Dragonfly Doji, Three white soldiers. These are widely used, and the most common candlestick patterns exist in the market.
The idea is to find out any bullish candlestick pattern at the second Bottom, when you find out any bullish pattern at the bottom area go long, put the stop loss below the support line, and the first take profit must be at the Neckline, second one should be double than the size of the pattern.
The below Image represents the double bottom pattern on the NZDUSD Forex pair.
As you can see in the below Image, the market prints the Double Bottom chart pattern, which indicates that the buying trade in this pair. Initially, when the price action approached the support area, at that time, the momentum of the downtrend was really weak, but after the first retracement to the Neckline, the sellers try hard to print brand new lower, but they failed to do it. When price action hits the Bottom second time, the market prints the bullish engulfing pattern, which indicates the buying trade in this pair.
The below Image represents our entry and exits in this forex pair. We took long when the market prints the bullish engulfing pattern, and the take profit was below the second Bottom, the major support line below acts as dynamic support to the price action. You can even go with a smaller stop loss because the line below is so strong that it stops the strong selling trend and even reverse it completely. So you can imagine how strong this line is. The take profit was at the Neckline, you can close your position at the Neckline, or you can hold it for the further target. It is advisable to book half of the profit at the Neckline.
In this strategy, we paired the Double Bottom pattern with the stochastic indicator to identify the trading signals. Stochastic is a quite popular oscillator that is developed by George C. Lane in the 1950s. Most of the traders think that just like other indicators, stochastic also follow the price and volume, but it is not true. In fact, stochastic follows the momentum and speed of price action. The stochastic indicator is used to identify the oversold and overbought buying conditions, and traders use overbought/oversold conditions to trade the market. The indicator also identifies the divergence, which helps the traders to identify the major market reversals.
The below Image represents the Double Bottom chart pattern on the Daily chart of the CADJPY forex pair.
The below Image represents our entry in this pair by using the stochastic indicator and double Bottom chart pattern. As you can see that we took a long position when prices failed to go below the major support line. Most of the traders what they do is activate the buy trades when the price action hits the support line the second time. This is the wrong approach. Instead, let the price action holds and then activate your trade. As you can see, when prices hit the second Bottom at that time, crossover happened on the stochastic indicator, which indicates that the market is oversold and it is time to go long.
The below Image represents our entry and exits in this pair. We took long when the price action hits the second Bottom, also when the crossover happened on the stochastic indicator. Stop below the recent low, and the take profit was at the higher timeframe major resistance area.
Conclusion
The double Bottom is an extremely powerful chart pattern when it is interpreted correctly. If you interpret it incorrectly then it can damage your trading account. You can activate your trades when price action hits the second Bottom, or you can activate trades when price action crosses the Neckline and retests as support. It doesn’t matter where you activate your trade; both of the locations provide a good risk to reward ratio.
Pivot points are the significant levels used by the market technician to determine the future movement and the major support/resistance levels on the price chart. Pivot point takes the prior period high, low, and close to estimate the future support and resistance levels. Pivot points are the leading indicator, and once they are set on […]
Pivot points are the significant levels used by the market technician to determine the future movement and the major support/resistance levels on the price chart. Pivot point takes the prior period high, low, and close to estimate the future support and resistance levels. Pivot points are the leading indicator, and once they are set on […]
Pivot points are the significant levels used by the market technician to determine the future movement and the major support/resistance levels on the price chart. Pivot point takes the prior period high, low, and close to estimate the future support and resistance levels. Pivot points are the leading indicator, and once they are set on a price chart, it will remain the same throughout the day.
Timeframes
The pivot point of the 1, 5, 10, and 15-minute chart use the prior day high, low, and close. Whereas the pivot points for the 30, 60, and 240-minute chart use the last week high, low, and close to calculate the pivot points. Once the new week starts, the pivot point appears on the price chart until the end of the week.
The pivot point for the daily and chart use the prior month data, and the pivot point for the weekly and the monthly chart use the last year’s data. The new pivot point for the year ahead will be calculated on the 1st of January. These would be based on the high, low, and close of the last year’s pivot points.
There is a total of seven basics pivot levels on the price chart.
Basic pivot level – It is the middle of the center pivot line.
Resistance 1 (R1) It is the first pivot point above the centerline.
Resistance 2 (R2) It is the second pivot level above resistance 1.
Resistance 3 (R3) It is the third pivot level above resistance 2.
Support 1 (S1) It is the first pivot level below the middle pivot line.
Support 2 (S2) It is the second pivot level below support 1.
Support 3 (S3) It is the third pivot level below support 2.
Trading Strategies Using Pivot Points
There are various pivot point trading strategies in the market; this one is especially we created for our fellow traders, our strategy is backtested on demo and even on trading simulation, so you no need to put the work required to find out the probability of this strategy—all we suggest you follow this strategy very well to make consistent money from the market.
Pivot points most often work very well in trending market conditions; some traders even use pivot points on lower timeframes to scalp the markets. The strategy is to find out the uptrend in any instrument and wait for the pivot point to go above the Pivot point centerline, and then wait for the pullback back to the pivot line to take buy entry. You can close your position at resistance one if the market momentum is choppy, and even in a strong trending market, you can also book the profit at resistance two or three.
The image below represents the uptrend in the GBPAUD forex pair.
The image below represents our buying entry in this pair. Notice that the day before our entry price action breaks the pivot line and the very next price action pullback to the pivot line. Keep in mind that the pullback must hold at the pivot line then only it confirms the buy trade, never place the limit order at the pivot line. Let the price action test the support line take entry.
The image below represents our entry, exit, and take profit in the GBPAUD forex pair. When you follow so many steps to take an entry, it means that you are going for the precision in the market, and for the precision entries, always put the stop loss just below the entry price. In the image below, notice that our stop loss was just below the pivot line, and for the take profit, we go to the R1 of the next day, which was R2 for the previous day. Take profit is an art in the market, and when you use the pivot points, it’s even easier to book profit. If the price action immediately approaches the R1, then you can expect the price action to hit the R2 or even R3. If the price action shows you the struggle to hit the R1, then simply do not expect the deeper targets.
Pivot Points + Double Moving Average
Moving average is a widely used indicator in the market which smooths out the price action by filtering out the noise from the random short-term price fluctuations. There are an infinite amount of moving averages in the market, which helps the traders to identify the market trend, entry, and exit also the potential reversals. When the moving average goes above the price action, it means that the trend is down, and when it goes below the price action, it indicates the uptrend in the security. In this strategy, we used the 30 and 15-period average to trade the market.
The trading strategy is, first of all, to find out the downtrend in any pair and wait for the prices to close below the pivot line also check the crossover above the price action on a double moving average to take an entry.
The image below represents the downtrend in an NZDCAD forex pair.
As you can see in the below image of the NZDCAD forex pair, it indicates the selling entry in this pair. In a downtrend, when the price action holds below the pivot line, it shows that the prices respect the resistance area; also, the crossover on the MA indicates the market is ready to print a brand new lower low.
The below image represents our entry, exit, and take profit in this pair. As you can see, the entry was when prices hold below the pivot line, and the stops were just above the pivot line because the holds below show that the buyers hold no power to break above the pivot line. After our entry, price action strongly blasts to the north, which shows that we can expect our trade to travel even longer. Price action holds for some time at the S1, and then it immediately blasts to the S2 and prints the brand new lower low.
Conclusion
Pivot points are the leading indicator in the industry, which provides a glance at potential support and resistance level in the market. These levels are useful for taking an entry, or it can be useful for putting stop loss or for booking profit also. AS the leading indicator, you can use them all alone to trade the market, or you can pair them with some other indicator to trade the market. The critical benefit of pivot points is they work on all the financial markets also on all the trading timeframes. Try not to use this indicator in the ranging conditions and also avoid the use in the highly volatile markets.
The significant advantage of the forex market is it opens 24 hours a day, which provides a couple of trading opportunities to traders around the globe. There are four major trading sessions that exist, the first one of Asia, followed by Frankfurt, London, and New York. All of these are the significant sessions that allow investors to trade even in opening sessions or even in the middle of the night. But not all the trading sessions are equally volatile; for example, London and New York are the biggest sessions where a lot of volume traded, and on the other hand, traders believe that the Frankfurt and Asian sessions are the least traded session in the market.
The significant advantage of the forex market is it opens 24 hours a day, which provides a couple of trading opportunities to traders around the globe. There are four major trading sessions that exist, the first one of Asia, followed by Frankfurt, London, and New York. All of these are the significant sessions that allow investors to trade even in opening sessions or even in the middle of the night. But not all the trading sessions are equally volatile; for example, London and New York are the biggest sessions where a lot of volume traded, and on the other hand, traders believe that the Frankfurt and Asian sessions are the least traded session in the market.
The significant advantage of the forex market is it opens 24 hours a day, which provides a couple of trading opportunities to traders around the globe. There are four major trading sessions that exist, the first one of Asia, followed by Frankfurt, London, and New York. All of these are the significant sessions that allow investors to trade even in opening sessions or even in the middle of the night. But not all the trading sessions are equally volatile; for example, London and New York are the biggest sessions where a lot of volume traded, and on the other hand, traders believe that the Frankfurt and Asian sessions are the least traded session in the market.
So this mentality stops the traders from trading the Asian session. Another reason might be that when the Asian session opens, half of the world slept, that’s why the price action is less volatile in the market. In a less volatile market, simply it is difficult for the traders to seize the more significant gains, and even in less volatile conditions, traders hate to trade the markets, and if you are the one who is always looking to make quick bucks in the volatile conditions. In this article, we will show you the strategy we created, especially to take advantage of the Asian markets.
We believe you know that London is the most significant trading session in the market, which provides where most of the traders around the globe, bankers, and institutions trade the market. In the London market, most of the currencies show a lot of volatility, and you can trade all of it, but it is advisable to give preference to the GBP, CHF, USD, and EUROS.
Trading Strategy
First of all, we suggest you follow the link below and find out when the London session starts according to your country’s time.
After finding out the opening time of the London session according to your local time, the next step is to sit on your desk one hour prior to the London opening and find out which of the currencies performed better in the Asian session and mark the Asian session High and Low. The next step is to wait for the London opening and in London session when the price action breaks the Asian session high or low take trade in that direction. As you know, London is the biggest session, so always expect longer moves. This strategy is specially created for intraday traders, so always trade the Asian high and lows on lower timeframes, such as 5, 15, or 30 minutes.
According to the GMT, the Asian session opens at Midnight and closes at Morning 08:00, and the London session also opened the morning at 8:00 AM, so before the London, opening finds out the Asian high low to take the trade. The image represents the opening, high, and close of the Asian session, the below image clearly represents that the GBPAUD forex pair, didn’t move much in the Asian session and even it turned into a range to give us trades in the London Session.
The major mistake most of the breakout traders made is they don’t wait to confirm the breakout, and sometimes price action came back into the range, and they end up losing side. So it is advisable to confirm the breakout first then only activate your trade. As you can see in the below image, when price action breakout the Asian high and low in the London session, it started holding below the breakout line, which confirms that the breakout is real.
The image below represents our entry, exit, and take profit in this forex pair; we took entry when the price action holds below the breakout line. The stop loss was just above the breakout; the reason for the smaller stops is that the holding below the breakout line confirms the stability of the breakout. Some traders like to trade only the London session, and they exit their positions as the London session closes. It is your personal preference. However, we recommend you hold your positions for the more extended targets because the London session overlaps with the US session, and the US is the biggest session in the industry, where the traders with deep pockets trade the markets. So just like London, if the markets allow you to hold your position for the US session, then go ahead and milk the market. The last green on the below image represents the London closing, but we decided to go for the deeper targets because the trend of the market was quite healthy, which is a sign for us to hold our winning position.
The image below represents the Asian, opening, high, low, and close on the GBPAUD forex pair.
The image below shows that the Asian session failed to make any move in this pair, and it just holds sideways because it was waiting for London to open so that the increased volatility moves the market. When London opens then price action immediately breakout the range, it started holding above the range, which was a confirmation to go long in this pair.
The below image represents our entry, exit, and take profit in this pair; we took entry when price action holds above the breakout line. The stops were just below the breakout, and for the take profit, we decided to lose our position at the major resistance line in the US session.
Conclusion
Asian session high low breakout is an intraday strategy; it helps you to trade all the sessions in the market. You can take data from the Asian session and use it in the London session to take an entry, and the volatility and strength of the US session help you to exit your position at more significant gains. This is the beauty of this strategy, which makes you active in all the sessions. The more you use this strategy, the better your trading will be, and the deeper understanding you will have of all the trading sessions.
In the previous lesson, we covered how you can make money if you knew the direction the market was going to move. In this lesson, we will show you how you can make money if you have no idea about the direction the market is going to move.
When there is high volatility in the market, especially as a result of a news release, it is possible to achieve this. Note that this strategy is different from trading with a directional bias.
Let’s break it down!
Firstly, you have to aware of an upcoming high-impact news release. Unlike trading with a directional bias, you don’t have to familiarise yourself with the direction the news will move the market. All you have to know is that the market will significantly move.
Let’s say, for example, that a news release is scheduled for 8.30 AM. Using the 5-minute timeframe, observe the trend for the past 30 minutes and establish the support and resistance levels. You will use these levels to set a buy stop and sell stop order.
With the buy stop orders, if the price breaks above the resistance level, a long order will be triggered. In the sell stop order, if the price breaks below the support level, a sell order will be triggered. Let’s use the news release of the US unemployment rate on October 2, 2020, at 8.30 AM EST.
Here’s the logic behind the straddle strategy. If the news is significant enough to break through the support level, then it is plausible for the bullish trend to continue in the short term. Conversely, if the news release is significant enough to blow the price past the support level, then the bearish trend might progress in the short-term.
Note that you can pre-set your ‘take profit’ and ‘stop-loss’ levels when using the forex pending order types. Doing this ensures that you get to determine your absolute downside in case a trend doesn’t hold. Furthermore, you can opt for only the ‘trailing stop order’ alongside the stop orders. Your ‘stop-loss’ value is not fixed with the trailing stop, which increases your exposure to the upside.
For instance, if, in the above example, we had set our take profit level at ten pips, we would have only made the ten pips. But, if we used the trailing stop order instead, we would have gained more than the ten pips. Cheers!
Pitchfork is a technical indicator developed by Alan Andrews. This indicator consists of three parallel lines- These three lines help us identify the possible support and resistance levels. They also do help us in recognizing potential breakout and breakdown levels. With this, we can identify possible trading opportunities in the Forex market. Long term investors use this indicator to identify and gauge the overall cycles that affect the activity of the underlying currency pair.
Three lines of Andrew’s pitchfork tool are as follows. The first one is the median trend line in the center, and the two equidistant trend lines on each side. Moving from left to right of the chart, these lines are drawn by selecting the three points, which are usually a reaction of highs and lows. As long as price action holds inside the Andrew pitchfork tool, it indicates that the trend is in place. Reversals occur when the price breaks the pitchfork.
Andrew’s pitchfork indicator can be used on all the timeframes, and it works on every single chart. Note that this indicator works very well on all types of securities, such as stocks, cryptocurrencies, futures, or the Forex market.
Picking The Three Points
The first step to know before using Andrew’s pitchfork tool is to select the three points for drawing the trend lines. The first point that we chose must be either a high or low that occurs on the price chart. Once that point is chosen, we must identify the trough and peak to the right and left sides of this point. This must be a pullback, which is opposite in the direction of the ongoing trend. Once these points have been isolated, the indicator is placed on the price chart. The two prongs formed by the peak and trough serves as a support and resistance of the trend as shown below.
Trading Strategies Using The Andrew Pitchfork Tool
Mini Median Method
This one is the most basic and popular strategy used by the traders to trade the market using the Pitchfork indicator. We must place the Andrew Pitchfork tool in a strong ongoing trend and look for the buy/sell opportunities.
In the below image, we marked a few trading opportunities presented by this indicator. We can see that when the price hits the lower line of the tool, we went long. Likewise, we have activated sell trades when the price action hits the median line. This strategy is basic, but it provides a good risk to reward ratio trades in a strong trending market.
In case of a buy entry, exit your position when the price hits the median line. Conversely, take sell when price reverses at the median line, and we can book our profit at the lower line. Place the stop loss a few pips above your entry and ride the move.
This approach works best for aggressive traders who prefer to pull the trigger when prices reach any significant level. So, if you are an aggressive trader, you can go with this approach. But if you are a conservative/confirmation trader, follow the next strategy.
For Conservative Traders
Most conservative traders do not prefer taking many trades in a single day because they tend to seek extra confirmation before pulling the trigger. This Pitchfork strategy is for them.
When the price action approaches the lower line of the indicator, wait for the price action to hold there to take entry. The holding confirms that the price action respects the dynamic support line, and going long from here will be a good idea.
As you can see in the below price-chart, the USDJPY was in a strong uptrend. We have identified three opportunities to go long, but out of three, only two trades were held at the lower support line to confirm the entry. Both of our trades worked very well, and they went on to make a brand-new higher high.
By using this approach, we can safely trade the market. We must always go for smaller stops because the holding at any significant area confirms the power of buyers.
Breakout Trading
Breakout trading is a popular way to trade the markets. Most of the highly successful traders, market technicians, chartists, banks, hedge fund managers use this approach to trade the Forex market. In this strategy, let’s understand trading the breakouts successfully by using the Andrew Pitchfork tool.
The idea is to find a strong trending market first and wait for the price to pullback. When the price gives enough pullback, place the Andrew pitchfork tool on price action and wait for the breakout in the ongoing trend direction. When the breakout happens, take the trade in the direction of the ongoing trend.
As you can see in the below image, the USDJPY was in an uptrend, giving quite deeper pullbacks. When we got enough pullback, we applied the tool on the price action, and when the breakout happened, we went long. Look for the breakouts only in the direction of the ongoing trend.
The chart below represents our buy entry and risk management in this pair. We went long when the breakout happened, and the stop-loss order was placed just below the breakout line.
There are several ways to book our profits. We can use indicators like RSI and Stochastic to confirm our exits. Here we have used the pitchfork itself to book our profit in the above-discussed trade. When we activate a trade at the breakout, the first thing we must do is to apply the Andrew Pitchfork tool in the direction of our trade and wait for the price action to break the tool to book the profits.
In the below image, we applied the tool when our trade took off, and at around 109.60, the price strongly broke the Andrew pitchfork tool. This is an indication for us to close our whole buying position. Also, you can notice that after our exit, the price action blasted to the south.
Conclusion
Just like other trading tools, Andrew pitchfork is not perfect. We need to have strong knowledge of the money management techniques in place before using this tool on live markets. If you are a novice trader, it is advisable to gain experience by experimenting with this tool on the demo account. Using this tool first hand, we are sure that you will discover various ways of using this tool. This will enhance your ability to understand the market better. Cheers!
In the previous lesson, we covered how to trade multiple timeframes in the forex market. So, what timeframe should you choose to trade?
The timeframe you chose to trade will be entirely determined by the type of forex trader you are. Therefore, in this lesson, we will cover the timeframe to trade depending on the type of forex trader you are, i.e., position trader, swing trader, day trader, or a forex scalper. It is worth noting that you should consider trading three timeframes in Forex.
Timeframes for a Forex Position Trader
If you are a forex position trader, it means you intend to have your trading position open for several months to years. Therefore, you should trade the monthly and weekly timeframes. These frames give you a long-term perspective of the market trend while filtering out the hourly and daily “noises” of the price spikes.
Timeframes for Forex Swing Trader
For a forex swing trader, your goal is to have your positions open overnight to just a few weeks. With such a strategy, while performing your multiple timeframe analysis, you should start with the daily timeframe to establish your selected currency pair’s dominant trend.
On the chart, the daily timeframe will cover several weeks, which will help you establish the support and resistance levels over this period. With this perspective, you will quickly identify the high and low extremes. Narrow down to a 12-hour timeframe to see if this timeframe lines up with the observed trend, then finally use the 4-hour timeframe to find the entry point for your trade.
Timeframes for Forex Day Traders
If you are a forex day trader, that means you enter and exit all your trades within 24 hours. In this case, you should trade the 4-hour, 1-hour, and 15-minute timeframes. With the 4-hour timeframe, you will be able to establish the support and resistance levels for the past few days for your selected currency pair. The 1-hour timeframe will help you identify if the intra-day price trend aligns with the observed dominant trend. Finally, the 15-minute timeframe will enable you to narrow down the best entry and exit points for your trades, depending on the current price trend.
Timeframes for Forex Scalpers
For the forex scalpers, the smallest minute-by-minute price spikes count. Therefore, you should trade the 30-minute, 15-minute, and 5-minute timeframes. With the 30-minute timeframe, you get to identify the prevailing short-term trend with the selected currency pair. The 5-minute timeframe narrows down the tend to show how the most current price spikes build-up to the short-term trend. This timeframe also serves as your trigger timeframe for entry and exit.
You may feel that you have explored every possible source on indicators, learned about the best ways to combine them, and actually even started trading real money. However, you can always explore some new and innovative approaches to trading that may seem like an entirely new dimension despite having experienced success in the past. Whether […]
You may feel that you have explored every possible source on indicators, learned about the best ways to combine them, and actually even started trading real money. However, you can always explore some new and innovative approaches to trading that may seem like an entirely new dimension despite having experienced success in the past. Whether […]
You may feel that you have explored every possible source on indicators, learned about the best ways to combine them, and actually even started trading real money. However, you can always explore some new and innovative approaches to trading that may seem like an entirely new dimension despite having experienced success in the past. Whether they are beginners or whether they have already accumulated some experience, traders may still find some intriguing, refreshing, and stimulating facts and tips that can help them to collect more pips and considerably save time.
Lack of knowledge on some of these areas can even be held responsible for your previous losses or the fact that you might not have progressed as fast as you had hoped. Primarily, what we are going to be focusing on in this article is the proper way to read charts and manage the trades you are already in. As the title suggests, today’s advice will heavily rely on indicators, as the right use, aside from proper selection, directly influences a trader’s success and prosperity levels.
We will first start with the general algorithm structure, which some traders are already aware of as it contains various measured trading categories. It is just an example you can follow right now for swing trading. Such an algorithm consists of six different indicators: the ATR is taking the first spot and the confirmation indicator holding the third one, while the exit indicator is positioned last. As this is an unfinished list, you should, upon extensive research and testing, make your own selection of indicators that can take the available places and complete the algorithm, as this article will not focus on it. What is more, you can keep searching for better options to adjust your current list, but make sure that you are confident regarding each tool’s purpose.
The ATR indicator is the very foundation of every trade that you will ever enter and since there is an extensive body of research on this particular tool, you should definitely put effort into learning as much as possible. It covers the volatility category and therefore also solidifies our position management. Next, the confirmation indicator’s job is to provide a signal so that you would know whether to go short, go long, or simply stay put and do nothing. The last one, the exit indicator, allows for you to exit trades before it knocks off any of your stops. However, even with this knowledge and after extensive research and use, traders can make fundamental mistakes that can outweigh the potential of the algorithm they have worked towards completing.
The ATR Indicator
The first step is to understand what the correct way of reading the chart is. We will first analyze the ATR indicator and pay special attention to where we want to focus on the chart to obtain the most accurate items of information. The image below is the example of the GBP/CAD daily chart, which can be considered as one of the more volatile currency pairs there are. The previous candle closed approximately an hour ago and this fact is the one piece of information you will always want to record and rely on in your trades. Some professional traders start analyzing the chart a little before the close of the daily candle as they can still discover information that will hardly change at that point, although the approach we are suggesting today is also equally important for everyone looking to enter a trade one hour after. Whether you choose to start assessing your options right before or slightly after the daily candle closes, what you should truly concentrate on is the candle that gives you data that you will be using in your next trade.
GBP/CAD Daily Chart: The Penultimate Candle
As the chart above reflects how one trading day ends and a new one begins, the place where we need to look is the penultimate candle in this chart or the candle which was last complete. Since the last candle that closed is not the last candle in this chart, make sure that you do not get confused as to where your focus of attention should be. We should not be then interested in the tiny candle indicating a day that has not ended yet (compare the last two candles marked by the yellow circle pointer), as it has only been one hour upon closing of the daily candle. The differences between the two will be valuable for your trading analysis and will still be relevant for other indicators as well.
The ATR of the currency pair in question equals 158 pips according to the indicator information provided on the left side of the chart below the white line. Nevertheless, forex experts insist that this is not the most relevant information, as the ATR value can be much higher. The reason for this lies in the data that is factored in the calculation of this value, so we need to pay attention to which 14 periods (ATR default setting) we are actually including in the average. Therefore, we should not make this ATR value on the left our focal point, but the value we get from the last candle that closed, which is the penultimate candle we marked yellow in the previous image. Since the trading day has just begun an hour ago, the last candle will never sufficiently add to the 14-candle average, throwing it off lower than should truly be. To obtain the information we need, we need only move the cursor over to the last closed candle for the white text box to appear, showing in this case the expected higher value of 162 pips. Therefore, this is the number we need to take into consideration to be best prepared to enter a trade.
This approach is how every trader can read the ATR properly regardless of whether they started trading slightly before or after the close of the daily candle. Some professional traders prefer to enter trades approximately 20 minutes before the candle closes due to the fact that they feel certain about having all the information they need at that point. Even if some changes occur, these experts point out that differences in terms of numbers would not be greater than one or two ATR pips maximum. Also, in the hour following the daily close spreads turn out to be changing drastically, so experts choose to start trading prior to these circumstances. This is an excellent perspective because it allows traders not to have to constantly worry about incorrect data or go back to find accurate information. This way you can access all relevant data and see it for what it truly is.
In case you are ever unable to start trading at the time around the close of the daily candle, you can always rely on the ATR value shown on the left side of the chart. This data is far from incorrect because it is very close to the penultimate candle’s value. Therefore, you should not feel stressed about timing if your job-related duties or place of living, among other factors, do not allow you to be present at the time when you should factor in the data we discussed above.
Other Indicators
What you should definitely pay attention to is the correct interpretation of other indicators, which involves several steps you need to understand properly. Many professionals lay emphasis on waiting for the candle to close in order to be fully able to read any indicator. If you allow yourself to be drawn up and down across the chart before a candle closes, your data will vary quite significantly. Some indicators may provide too many signals telling you to buy or sell several times in one day while the candle is forming. However, the only data you should be concerned with is the data you can access once this formation process is over, on the candle close. You can still choose to look at the numbers slightly before the close, but strive to be fully focused so as to be looking at the right candle and the right data.
The EUR/USD daily chart added below uses the Stochastics indicator, which is not a general recommendation but only a useful tool for a case study. If you focus on the blue and red lines in the following chart, you will see the yellow circle over the point where the blue line crosses downward the red one. When this phenomenon occurs, Stochastics is giving a trader an official signal to go short. Here, however, you may be surprised if you looked for the proof of the signal upon the close of the candle – the lines are close, but not actually crossing just yet. This is a clear indication that you should not be entering a trade at this point and you need to be very careful with how you interpret the chart. You will also not be including the last unfinished candle because, again, it would affect the 14-period average. The line connecting the candle with the red and blue lines of the Stochastics indicator below cannot be drawn perfectly straight, but it is a crucial point for traders to see how they, in fact, never received a real signal.
The catch here is always to wait for the candle to close first because you need every piece of information pertaining to the candle and we can only obtain it upon candle close. From the perspective of now, we cannot know exactly what would happen with the price the following day – it might even go up really fast. Nonetheless, without having both conditions met – the signal and the candle close – you need to sit out and wait, refraining from taking any action at that point. In this case, as we noticed how the candle above the two-line cross was not a real signal, we would need to wait out for the next candle to close. Therefore, if you look below at the EUR/USD chart, the penultimate candle really does show the blue line crossing down beyond the read on, which is an official signal to go short. This information is only available upon candle closing or, what some professional traders do, trade 20 minutes prior to the close of the daily candle when you can expect little to no changes, and have a real chance of seeing how the lines would move next. Remember that your indicator is not really telling you the truth until a candle closes or is close to this point.
EUR/USD Daily Chart: Signal or No Signal?
How to Read Your Charts Fast
After accumulating knowledge on how to analyze what your charts and indicators are telling you, the very next step is to learn the ways in which you can quickly zoom through your trades. Professional traders, for example, can be trading as many as 28 currency pairs at the same time, but this does not in any way imply that they take more time to do so. Contrary to what one may expect, experts have actually managed to create a routine of trading approximately 15 minutes a day. Some of them claim to only trade 20 minutes before the close of the daily candle and many also trade across different markets too (e.g. forex and metals).
You may be wondering how a quarter of an hour can suffice with such a staggeringly high number of trades and information to read and process. The experts, in fact, manage their trades in a very similar fashion as everyone else with regard to the action they take – they observe the charts to see if they should make any changes, checking whether any trade should be closed out, half of the position taken off, or a stop loss adjusted, etc. Sometimes, your daily trade need not include any action as none is required, and being at peace with this is also a very important skill.
Professional traders also look for the opportunity to enter new trades every day, which can be done easily right after taking care of the trades they are already in. Here they advise traders to ensure that they are using the best possible confirmation indicator and invest time in looking for one should this step still pose as a challenge. The confirmation indicator is perceived as the backbone for almost every step of trading and is vitally important for increasing your efficiency in managing your trades.
If your number one confirmation indicator is telling you not to proceed and enter a trade, any other indicators you are using will not be relevant. Since your main confirmation indicator is not giving you a signal to either buy or sell, you should stay put and accept this information. You should not at this point look elsewhere to find additional confirmation for what has already been confirmed, as it will only deplete your energy and waste your time. Any further clarification will only confuse you especially since this happens extremely rarely that your confirmation indicator does not give out any buy/sell signals.
Should your number one confirmation indicator tell you to enter a trade, you can look at the remaining parts of your structure. Here is where you can actually make use of other indicators to find additional proof that you should proceed and start to trade. If every indicator is telling you to go long or short, it is time for you to enter a trade. The process is, therefore, very simple as long as you follow these steps.
To observe how this approach functions in reality, we will rely on the EUR/USD daily chart below. Here we are using the RSI indicator, which is another tool we do not recommend that you use despite its popularity among forex traders. The relevant information you are looking for when you are using the RSI essentially comes from a price moving into the oversold/overbought territory and returning to the middle area. This is the only signal this indicator will give you so focus on the line coming up/down and then coming back to the middle of the chart. One such example is surely the curve we see below the white pointer. However, should you ever get a signal of a few candles before the end of the chart, you should not pay attention to that. Rather focus your attention on the penultimate candle, which is this chart does not show any signals.
EUR/USD Daily Chart: RSI
You can also experience situations in which you happen to see the line going below the middle, for example, and you can tell that there is a high probability of it crossing back into the middle despite the daily candle being just about an hour old. From this standpoint, we can only predict based on the potential of the line crossing back some time later on that day, but we should never focus our actions based on prediction. If you use the RSI indicator, always wait for the daily candle to close, for it will generate real clues of where the line is going to end up eventually. Always remember that a false signal, despite how strongly we feel about it, is not a signal at all and we should not enter a trade based on impression or emotion but actual, real signal.
The steps provided above comprise the typical daily trading responsibilities of every professional trader. What you should do is simply apply these when going through your charts and there is no need for it to last long. If you start debating whether a signal is truly a signal or not and start giving in to your emotions, your trading experience will neither be fast nor lucrative. Look for the information your main confirmation indicator is offering and decide on your next step according to the signal, or the lack thereof.
By following this approach, your trading should not last more than 10—15 minutes each day. The part where you assess the trades you are already in should approximately last up to two minutes, while the remainder is generally consumed by entering into new trades. Sometimes you will not initiate any new trades at all and just manage the existing ones. This mentality and these practical steps are absolutely the way to save your time and be more efficient in every respect.
To conclude, you should always make sure that you wait until the candle closes or start interpreting the chart just about 20 minutes before it happens in order for you to be able to get the most accurate information. Should you find time to be a precious commodity as well, always lock on your main indicator on each chart you are looking at. Should the number one confirmation indicator endorse you to move forwards, consult with your other tools. This is the easiest and the fastest approach to entering new trades and handling the existing ones, which will take only up to a quarter an hour of your time each day.
Finally, do not give in to your impulses and desires, hoping for something to be a signal when it actually is not. Prevent any future failure with your firm reliance on technical support, clear rules, and discipline and stay away from predicting potential. Forex trading can be exceptionally easy if we leave out self-sabotaging tendencies and apply strict strategies that are supported by a fine selection of tools. Therefore, in order for you to use your indicators the best possible way, you really need to put effort into finding the right ones to complete these elements of the example algorithm, as well as use the facts and advice we shared with you today to propel your trading skills and maximize your rewards as a result. Other indicator categories that should be included in your algorithm is Volatility/Volume, on chart Baseline, and additional confirmation indicator belonging to a different theory. These elements and their function will be covered in another article, but the current basic algorithm example should point you in the right direction already.
Measuring volatility enables traders to accurately identifying the significant trading opportunities in the currency pairs. An increase in the volatility of a currency pair occurs due to any of the major changes in the economy of that country. Market volatility measures the overall price fluctuations over a specific period, and this information is used to identify the potential breakouts.
In the Forex market, the higher the volatility, the riskier is the currency pair to trade. A higher volatility means that the asset value can be spread out over a larger range of values. A lower volatility means that an asset does not fluctuate dramatically and tends to be more steady. A few indicators help us in measuring the volatility of the currency. Using these indicators will show us the accurate representation of the market’s volatility when looking for trading opportunities.
Bollinger Bands
We have discussed a lot about Bollinger Bands in our previous course lessons. This indicator is specially designed to measure the volatility of an asset. In this case, any currency pair in the Forex market. This indicator consists of two lines (bands) plotted above and below the middle line, a moving average. The volatility representation is based on the standard deviation, which changes as an asset’s volatility increases and decreases. Both these bands contract and expand according to market volatility. When the bands’ contract, it tells us that the volatility is low, and when the bands widen, it represents an increase in volatility.
Moving Average
Moving Average is the most common indicator used by traders across the globe. It measures the average amount of market movement over a specific period. If we set the moving average to 30 periods, it shows us the last 30 days’ average movement. In short, any Moving average tells us the average price movement over a specific period. If the MA line is above the actual price, that implies the market is in a downtrend and vice versa.
Average True Range (ATR)
The ATR (Average True Range) is another reliable indicator used to measure market volatility. This indicator takes the currency price range, which is the distance between the high and low in the time frame, and then plots that measurement as a moving average.
If we set the ATR to 40 range, it will tell us the average trading range of the last 40 days. The lower the ATR reading means, the volatility is falling, and we can expect fewer trades. On the other hand, the higher the volatility means the ATR reading is rising. It is an indication that the volatility is on the rise, and by using any directional indicator, we can gauge the potential trading opportunities.
These are the three best tools you need in your arsenal to measure the market’s volatility accurately. Make sure to take the below quiz before you go. Cheers!
Breakout trading is prevalent among all types of traders. Professional traders make a lot of cash by trading these breakouts, while some novice traders fail to effectively trade them. While trading these breakouts, the pretty basic strategy is to pull the trigger when the price breaks above or below any significant level. But many times, the price tends to reverse its direction and cause immediate losses. This is one of the most frustrating experiences breakout traders go through.
Did this ever happen to you, and did you wonder why this happens? The reason is that you have no pre-planned entries. You are just reacting to the price action and chasing the markets purely based on your feelings, but you must accept that the market has no feelings.
How to Trade the fakeouts?
❶ Primarily, find the confluence level on the price chart. This is a place where most of the indicators point towards one direction.
❷ Avoid trading range breakouts as both the parties hold equal power when the market is ranging. In this state of the market, the chance of spikes is very high. So it is always advisable to trade breakouts only in a trending market.
❸ Wait for the price to break above any significant level in an uptrend and break below any major level in a downtrend.
❹ Right after the breakout, wait for the price to test above or below any major level to confirm the breakout’s authenticity.
Trading Strategies
Buy Example
The image below represents a breakout in the EUR/CHF Forex pair.
As you can see in the below chart, we waited for the price action to holds above the breakout line. We have only entered the market after we confirmed the breakout. If the price action fails to hold, it simply means that it was a fakeout, and we can ignore it completely.
In this example, prices held above the breakout, which confirms the validity of the breakout. We took entry at the breakout line and chose to go for a brand new higher high. The exit was purely based on the higher timeframe’s significant resistance area, and the stop loss was just below our entry.
Sell Example
The image below represents a sell breakout in the GBP/NZD forex pair.
In the below image, we can see the price holding below the significant resistance level, which confirms the breakout. Our entry was at the red candle at the significant resistance level. The price sharply rejects to go any higher. Now we can see a brand new lower low forming after our entry.
The stop-loss is placed just above the entry as the seller response was quite aggressive. When the price started to struggle and failed to go down further, we chose to close our trade.
This is one of the best ways to trade the fakeouts in the most conservative way. We hope you got a clear understanding of this concept. Please let us know if you have any questions in the comments below. Cheers!
It is a general perception among Forex traders that the fakeouts are caused by the banks and large institutional players to stop retail traders players from moving the market in their desired directions. Although there is no evidence to prove this theory, we believe it is true. The manipulation is done by the big players. A fakeout is simply a failed breakout, and most of the time, they occur at significant areas like support, resistance, trend lines, Fibonacci retracement levels, and chart patterns, etc.
Typically, fakeouts are the result of a battle between both the parties on the price chart. So if you are witnessing a range and if we see both the parties printing aggressive candles, we can expect more fakeouts. The same applies to the trending markets as well. The aggressive battle between the buyers and sellers for domination leads to frequent fakeouts.
Trading Fakeouts
It is a common perception that it is impossible to trade these fakeouts, but that is not true. We can trade fakeouts, but a lot of market understanding is required to do so.
#1 Strategy
The image below indicates a fakeout followed by an actual breakout in the EUR/GBP Forex pair.
As we can see below, when the price breaks above the breakout line, it started to hold there. If it didn’t hold, it means that the price goes above and came back into the range. So in our case, hold above the breakout line confirms that the price is not going to fake out, and riding the buy trade from here will be a good idea.
#2 Strategy
Buy Example
The image below indicates a false breakout in this Forex pair.
As you can see below, we choose to enter a buy trade after the price action fakes below the major support area. We can see that it is eventually coming back and holding at the support area. This holding support clarifies that the sellers failed to move the market.
Now buyers are coming back and holding the market to go for a brand new higher high. We can see that price action respecting the trendline for a while, but then it breaks above the line, printing a brand new higher high.
Sell Example
The image below indicates the appearance of a faker on the EURGBP sixty-minute chart.
The image below represents our entry, exit, and stop-loss in this Forex pair. The pair was in an uptrend, and as it tries to go above the resistance line, it immediately came back and stated holding below the resistance line. This confirms the faker, and after our entry, prices go back to the most recent lower low.
That’s about identifying Fakeouts and how to trade them. Please be sure to trade these fakeouts only when you are absolutely sure about them. All the best.
In the previous article, we discussed a strategy that was based on three indicators, namely the RSI, Stochastic, and SMA. It was not only a bit complex in nature but involved many rules that had to be fulfilled before we could make a ‘trade.’ Also, the probability of occurrence of the signal was lower as it involved many indicators.
In today’s article, we will discuss a setup that is observed more often in the market and has a higher probability of success. Again, the strategy may not be suitable for day traders as it used a longer time frame for analysis. In this strategy, we will be examining the 4-hour time frame chart of the currency pairs. This is simpler than the previous strategy.
Time Frame
As mentioned in the previous paragraph, the strategy yields the best results when applied on the 4-hour time frame. However, the ‘daily’ is also a suitable time frame for the strategy.
Indicators
We will be using the Relative Strength Index (RSI), with a 14-bar period. The overbought and oversold levels stand at 70 and 30, respectively. We also apply the Bollinger Band indicator with its default settings.
Currency Pairs
This is the best part of the strategy, where we can apply on all currency pairs listed on the broker’s platform, including few minor and exotic pairs.
Strategy Concept
The strategy is based on a simple concept that the RSI is a very powerful indicator of a trend. It can accurately identify the highs and lows that will give rise to a new trend. This is combined with the Bollinger Band indicator to generate exact entry points for the strategy.
The trend becomes especially reliable when the reading of RSI makes a swift jump from an oversold level to a median level (above 50) and vice-versa. The Bollinger Band indicates the formation of a ‘low,’ after which we can execute a ‘long’ trade. Similarly, when Bollinger Band pin-points a ‘high,’ we execute ‘short’ trades in the market. The exact rules of ‘entry’ will be discussed in the next section of the article.
The risk-to-reward (RR) of the trades done using this strategy is highly appealing. This is because it employs a small stop-loss with a much higher take-profit. If the market is in a strong trending state, traders can ride their profits as long as they see signs of reversal.
Trade Setup
In order to explain the strategy, we have considered the 4-hour chart of GBP/JPY, where we will be illustrating a ‘long’ trade. Here are the steps to execute the strategy.
Step 1
The first step is to open the 4-hour timeframe of the desired currency pair and plot Bollinger Band and RSI indicator on it. Just from the appearance and basic knowledge of trends, identify the trend of the market. This means if the market is making higher highs and higher lows, the market is in an uptrend. And if we see lower lows and lower highs on the chart, it is a downtrend. We can also take the assistance of a simple moving average (SMA) to get a clear picture of the trend.
In the case of GBP/JPY, it is evident from the below image that the market is in a strong downtrend.
Step 2
Next, we need to wait for the price to go above the highest point visible on the chart, where we will be analyzing signs of a reversal to the downside. Similarly, we need to wait for the price to go below the lowest point visible on the chart, where we will be analyzing the signs of a reversal to the upside. For example, suppose the price is near its lowest point visible on the chart. In that case, we say that market may be reversing to the upside if a bearish candle closes below the lower band of the Bollinger Band, and the immediate next candle is a bullish candle that closes above the lower band. This has to be accompanied by the RSI moving into the oversold zone (below 30).
In case of a reversal of an uptrend, a bullish candle should close above the upper band of the Bollinger band with a bearish candle that closes below the upper band. At this price, the RSI should indicate an overbought situation of the market (above 70).
Step 3
This is the easiest step of the strategy where we have to only observe the movement of price following the ‘two-candle’ pattern discussed in the previous step. Essentially, we need to see that the price starts moving in the direction of the reversal, i.e., above or below the median line of Bollinger Band. This should again be accompanied by a rising RSI for ‘long’ entry and falling RSI for a ‘short’ entry.
In the below image, we can see how the rise in price above the median line goes with a sudden rise in RSI.
Step 4
In this step, we determine the stop-loss and take-profit for the trade done using this strategy. The stop-loss is placed just below the ‘low’ or above the ‘high’ from where the market reverses. However, there is no fixed take-profit level here. We exit a ‘long’ trade once RSI goes below 50 and start moving lower. While a ‘short’ trade is exited as soon as RSI goes past the level of 50.
As we can see in the image below, the market reversed fully, and the trade turned to be extremely profitable.
Strategy Roundup
When Bollinger Band and RSI are combined to generate trade signals, we can accurately identify the market top and bottom where we take advantage of the reversal. But this can only be done efficiently after practicing well. The above strategy is suitable for swing and part-time traders.
Breakout trading is one of the easiest and most common and smartest ways to trade the market. It doesn’t matter whether you are a scalper, intraday trader, investor, or a swing trader; you can always make money in the market if you master the breakout trading only.
Breakout trading is an attempt to enter in the market when the price action moves outside the significant price range, most of the time it takes an immense amount of power to break the significant areas, and you will always witness the spikes, fake-outs near the breakouts, this is because both of the parties tries to dominate the shows.
What is a Price Channel?
A price channel is a state of the market that connects the swing high and swing higher lows in an uptrend. Conversely, in a downtrend, it connects the swing low and lower low. The upper trend lines act as a resistance to the price action, and the lower trend lines act as a support line on the price chart. The price respects these areas by staying inside the price channel. When the opposite party becomes dominates, then we witness the breakout in a channel.
Trading Channel Breakouts
Buy Trade 1
The price chart below represents a channel breakout in the CAD/JPY forex pair.
As we can see, the sellers are getting weaker in the channel, and as a result, soon after the breakout price action changed its trend. So, around 81.55, the price action broke to the north and printing a brand new higher high.
Buy Trade 2
The image below represents the formation of a price channel in the CAD/JPY forex pair.
As we can see, the below price chart represents our entry-exit and stop loss in this pair. So during the downtrend, both buyers and sellers were holding equal power. Near to the 78.00 area, price action broke to the north, and after the breakout, we took a buy-entry. After our entry, the price made a brand new higher high, but the hold at the most recent higher high convinced us to close our trade at the 88.37 level.
Sell Trade 1
The image below represents the formation of a Price channel in a downward trend.
The image below represents our entry, stop loss, and take profit in this Forex pair. The channel is typically formed when there is no trend, or when the trend is about to end. On a lower timeframe, we can trade inside the Channel, but on this timeframe, the break below the 78.30 level indicates that the sellers stole the show, and are ready for a brand new lower low.
Sell Trade 2
The image below represents a channel breakout in the AUD/JPY Forex pair.
Right after the price action approaches the most recent support area, it just got shot down and broke below the Channel. The strong red breakout candle is an indication for us to go short in this pair and right after our entry, we have witnessed a brand new lower low.
Trading channel breakouts is this simple. But minute details like drawing channel lines accurately is crucial. Let’s learn more breakout trading techniques in the upcoming lessons. For now, don’t forget to take the quiz.
Introduction The daily high low based forex trading strategy is a breakout trading strategy from the high and low prices in the daily timeframe. In forex trading, the daily timeframe is crucial as most of the significant market players use this time table in their trading. As a result, any trading strategy in the daily […]
Introduction The daily high low based forex trading strategy is a breakout trading strategy from the high and low prices in the daily timeframe. In forex trading, the daily timeframe is crucial as most of the significant market players use this time table in their trading. As a result, any trading strategy in the daily […]
Introduction
The daily high low based forex trading strategy is a breakout trading strategy from the high and low prices in the daily timeframe. In forex trading, the daily timeframe is crucial as most of the significant market players use this time table in their trading. As a result, any trading strategy in the daily time frame provides better trading results compared to the lower time frame.
On the other hand, when the price creates a rally by breaking the high and low price of the daily timeframe will indicate a significant market momentum. If you can avoid the range market, the high low based strategy can provide a reliable trading result. If you can implement the trading strategy well as per the rule mentioned below, you can make a decent profit from it in any currency pair.
If the price breaks below the low of yesterday’s candle, it may move further low.
If the price breaks above the high of yesterday’s candle, it may move further high.
It is a standard brief of this trading strategy. Let’s have a look at the image below:
In this image above, the price has made a new higher high once it breaks above the candle high in the market area. However, there is some market condition where price moves to a range and violates the movement above or below the candle high.
If you are trading the breakout of a daily candlestick that is larger than the earlier candlesticks, you might be caught by the mean reversion of the price. In the forex market, it is often difficult to predict how long a trend could stay. Almost 70% of the time, the market moves within a range; therefore, you should find a location of the price where the breakout from a daily candle would be reliable.
The basic concept of making a good profit from the forex market is to buy from low and sell from high. Therefore, any bullish breakout from a significant support level in a daily timeframe would indicate a reliable daily breakout strategy compared to a trade setup from the middle of a trend. Let’s have a look at the image below, how the price moved up once it got a breakout from a daily candle from a significant support level.
Now look at the image below and see how the price violates the daily breakout to the upside once it reached above 50% of the possible trend.
How to Trade the High Low Breakout Strategy?
This trading strategy is simple as you can make most of the trading decision a day before the movement is expected. The main of this trading strategy is to place two pending orders above or below the yesterday candle. Therefore, you can catch any movement either upside or downside from the previous day’s candle.
Timeframe
We should consider the daily timeframe to determine the high and low prices. Later on, move to the lower timeframe (usually H4) to enter the trade. However, for new traders, it is recommended to stick to the daily timeframe.
Currency Pairs
This trading strategy works well in all currency pairs, including EURUSD, GBPUSD, USDJPY, or AUDUSD. However, sticking to the major and minor currency pairs would provide a better trading result. Moreover, you should avoid exotic pairs as there is a risk of the false move by hitting the high or low and reverse back.
Breakout Rules
Identify the currency pair that is moving within a trending environment. You can predict the direction of the price based on the market context or support and resistance.
For example, suppose the price is aggressively creating a higher high or lower low. In that case, the price will likely continue the current momentum until it reaches the next resistance or support level. Moreover, any breakout from a significant key level often creates a fresh move either upside and downside.
When the daily candle of the previous day closes, place a buy stop above the daily high, and a sell stop below the daily low to catch the breakout.
Move your stop loss at 50% of the daily candle.
For the take-profit level, you can consider the average price of the last three days’ movement. For example, if the daily candle of the last three days shows the movement of 100 pips, 50 pips, and 100 pips, the total movement would be 250 pips (100+50+100). Therefore, the average price of the last three days would be 83 pips (250/3).
Example of Daily High Low Based Trading Strategy
The image below represents the graphical view of the daily high low based trading strategy:
In the image above, we can see the price moved up from a significant support level with a daily close above it. A buy Stop is taken once the price had a bullish daily close from the key support level. A similar concept will apply to the bearish market once the price has a daily close from a significant resistance level.
The next day, the buy stop is taken, and the price moved to the take profit level. The take profit level is taken by calculating the average price of the last three candles.
The stop loss is set at 50% of the previous day’s candle. If the stop loss hit, it will indicate that the price will reverse or consolidate more. In that case, we should wait for a further breakout or move to another currency pair.
Identify the currency pair that is moving within a trend or likely to start a new trend.
Set buy stop above the candle if the price is moving up from a support level and put a sell stop if the price is moving down from a resistance level.
Stop-loss should be at 50% of the previous day’s candle.
Take profit will be the average price of the last three days’ movement.
In this trading strategy, the challenge is to avoid correction and choppy market. In that case, you should read the price action to determine the possible movement by measuring the price momentum. Moreover, to get the maximum benefit from this trading strategy, follow strong money management rules.
The exponential moving average (EMA) is a specialized chart indicator that tracks the value of an asset over time. It is a sort of weighted moving average (WMA) that provides more weighting or significance to ongoing valuable information. As like the simple moving average, the exponential moving average is utilized to see value patterns over time, and observing a few EMAs at one time is simple to do with moving normal rebinds.
What Is an Exponential Moving Average (EMA)?
An exponential moving normal (EMA) is a kind of moving average (MA) that puts a more noteworthy weight and sharpness on the latest information points. The exponential moving average is likewise alluded to as the exponentially weighted moving average. An exponentially weighted moving average responds more essentially to ongoing value changes than a straightforward moving average (SMA), which applies an equivalent weight to all observations in the period.
In the below image, you can see a naked chart of EURUSD
Now let’s plot the exponential moving average in the chart to see how it looks like
While there are numerous potential choices for the smoothing factor, the most widely recognised choice is 2
That gives the latest observation exceeding weight. In the event that the smoothing factor is expanded, later observations have more effect on the EMA.
Calculating the EMA
Calculating the EMA needs one more inspection than the SMA. Assume that you need to utilise 34 days as the number of inspections for the EMA. At that point, you should hold up until the 34th day to gain the SMA. On the 35th day, you would then be able to utilise the SMA from the earlier day as the first EMA for yesterday.
The calculation for the SMA is clear. It is essentially the entirety of the stock’s closing prices during a time span, divided by the number of inspections for that period. For instance, a 34-day SMA is only the entirety of the closing value for the previous 34 trading days, parted by 34.
34 EMA with Trendline Breakout Strategy
By combining the exponential moving average indicator with the price action context, the 34 EMA with trend line breakout forex trading strategy has established. In a decent trending market, this forex trading system is an entirely dependable trading strategy that can pull in plenty of pips effectively into your forex trading account.
To demonstrate it, simply proceed to do a little backtest on previous price history, and you will perceive what I’m discussing after you’ve learnt the trading methods and layouts which are additionally clarified underneath.
Timeframes
The 34 exponential moving average trading technique functions admirably in all timeframes from 5 minutes to weekly charts. The higher time frames can give better trading outcomes. However, it is best to stay on the 1 hour to daily chart as it can give high accuracy trades.
Currency Pair
There are no rules to utilise a currency pair. Still, it is good to utilize a forex pair that often remains in the range, for instance, EURUSD. However, all major and minor forex pairs are free to go with this trading technique.
Buy Entry
First, draw a downward trend line and look for an upward breakout.
If the breakout has happened, then the price must be residing above the 34 EMA.
After the downward trend breakout has happened, look at the highs of the bullish candlestick that form.
The signal candle is the candle with a high that is lower than the last candle’s high. So, if the signal candle’s high is broken, at that point, enter a buy trade immediately. On the other hand, you can put in a buy stop order only a couple of pips over the high of that signal candle so if the price breaks signal candle’s high, your order will be placed.
If your buy stop order isn’t executed and the candles keep on making lower highs, move your buy stop order to every lower high candle that structures until the price goes up and executes your trade.
It’s always better to place a stop loss below the downward trend line breakout candle.
Sell Entry
First, draw an upward trend line and look for a downward breakout.
If the breakout has happened, then the price must be residing below the 34 EMA.
After the upward trend breakout has happened, look at the lows of the bearish candlestick that form.
The signal candle is the candle with a low that is higher than the last candle’s low. So, if the signal candle’s low is broken, at that point, enter a sell trade immediately. On the other hand, you can put in a sell stop order only a couple of pips over the low of that signal candle so if the price breaks signal candle’s low, your order will be placed.
If your sell stop order isn’t executed and the candles keep on making higher lows, move your sell stop order to every higher low candle that structures until the price goes down and executes your trade.
It’s always better to place a stop loss above the upward trend line breakout candle.
Limitations of the EMA
It is hazy whether or more emphasis ought to be put on the latest days in the timeframe. Numerous traders accept that new information better mirrors the current pattern of the asset. Simultaneously, others feel that overweighting current dates makes a preference that prompts to more bogus alarms.
Correspondingly, the EMA depends completely on authentic information. Numerous economists suspect that business sectors are proficient, which implies that current market value meanwhile mirrors all accessible data. If the markets are actually proficient, utilising authentic information should disclose to us nothing about the upcoming movement of security prices.
Summary
Let’s summarise the 34 exponential moving average with trendline breakout trading strategy:
You should look for an impulsive trendline breakout.
After the trendline breakout has happened, the price must be above or below the 34 EMA (depending on buy and sell entry).
It’s always better to put the stop loss below or above the trendline breakout candle.
Moreover, you need to practice this trading strategy until your win ratio reaches above 60 per cent, and you must have to control your emotion and psychology for better outcomes.
Bill Williams was the one to first developed the Awesome Oscillator, and it essentially indicates the market momentum. On the other hand, RSI (Relative Strength Index) is a trading indicator that provides an idea of the overbought and oversold zone. In the Awesome Oscillator based trading strategy, we will use the Awesome Oscillator to determine the market direction and use the RSI to increase the probability by eliminating unwanted market movements.
The Awesome Oscillator
Bill Williams has created the Awesome Oscillators to identify the market momentum of a currency pair. Besides the forex market, this trading strategy works well in all financial markets, including the stock, indices, cryptocurrencies, and commodities. The elements of this trading indicator are pointed out in the image below.
The first element of Awesome Oscillator is the 34 period’s simple moving average indicating the median of the last 34 candlesticks.
5-period simple moving averages indicate the median of the last five candlesticks.
Histogram and Zero Line.
Let’s have a look at how these elements represent in a market:
When the Awesome Oscillator is below the zero lines, we should focus on the short term moving average. If the 5 SMA moves below the 34 SMA, it will indicate a downtrend.
If the position of Awesome Oscillator is above the zero lines, we can consider the trend as an uptrend.
If the Awesome Oscillator histogram moves to the green zone, we can consider the candlestick that moved higher than the previous candle.
We will consider the histogram at the red zone that is smaller than the previous candlestick.
The rules mentioned above are not exact buying and selling signals. Instead, it provides a trading opportunity where traders should consider other confirmations.
We can also identify the divergence between the price and the Awesome Oscillator to find a trading opportunity.
If you see the price of a currency pair to make a lower low from the left side to the right side, but the Awesome Oscillator makes the opposite, you can find a potential divergence. In divergence, the Awesome Oscillator should create two peaks above the zero lines considering the market condition.
Awesome Oscillator with RSI Trading Strategy
In this trading strategy, we will combine the Awesome Oscillator to identify the market momentum and the Relative Strength Index to get the overbought or oversold zone. If we can combine these accurately, we can make a trading strategy that can provide a good profit.
This strategy works very well in most of the currency pairs and time frames. Therefore, we can take swing trade, day trade, and even position trade. Besides the technical formation using these two indicators, we will use price action to enter the trade. Moreover, we will use stop loss and take profit as a risk management tool before taking the trading decisions.
Now let’s move to the trading strategy. In the image below, we can see the visual representation of how to trade using the Awesome Oscillator RSI trading strategy. The rules for buying and selling of a currency pair are mentioned below:
Buy Trade Setup
At first, the RSI should be below the 30 levels and point to an upward reversal.
When the RSI moves above the 30 levels, we will consider buying signals only if the Awesome Oscillator shows a green bar.
When the green bar appears, we can place a buy stop about 2- 5 pips above the current candlestick and allow the price to take our trade automatically.
Sometimes RSI might signal 1-2 candlestick later than the Awesome Oscillator. In that case, we can consider trading entry by taking a smaller lot.
Sell Trade Setup
At first, the RSI should be above the 70 levels and point to a downward reversal.
When the RSI moves below the 70 levels, we will consider selling signals only if the Awesome Oscillator shows a red bar.
When the red bar appears, we can place a sell stop about 2- 5 pips below the current candlestick and allow the price to take our trade automatically.
Sometimes RSI might signal 1-2 candlestick later than the Awesome Oscillator. In that case, we can consider trading entry by taking a smaller lot.
In this strategy, we did not consider the histogram crossing zero lines. However, suppose you want to increase the probability of your trading. You can look at the zero line cross as a further trading condition that will indicate the overbought and oversold zone.
Stop Loss And Take Profit Idea
The stop loss and take profit idea is a vital element of any trading strategy. There are many ways to set take profit and stop-loss depending on the market swing low and Sewing high. In a buy trade setup, the stop loss should be below the recent swing low with 10 to 15 pips buffer. Similarly, in a sell trade, the stop loss should be above the recent swing high with 10 to 15 pips buffer.
Another idea of a stop-loss plan is to set it at 1.5X ATR. It will indicate the actual volatility of the currency pair that you are trading. Besides the stop-loss setting, take profits can be set with a multiple-level approach. You can hold your position until the Awesome Oscillator crossed above or below the zero lines. Later on, you can monitor the momentum of the price to identify the next take profit level.
Summary
Let’s summarise the awesome oscillator and RSI trading strategy:
If the RSI is above the 70 levels and points downward movement, we will consider selling setups only, and if the RSI starts to move from the 30 levels, we will consider buying only.
To enter the trade, we can take a pending order above or below the previous candle if other conditions meet.
The stop loss should be below the swing low or swing high with some buffer or at 1.5 X ATR.
For setting take profit, you can hold the trade until the Awesome Oscillator crosses above or below the zero lines. Moreover, if the market conditions allow you to extend the take profit.
In every trading strategy, trade management is an essential tool that a trader should not ignore. In the forex market, we anticipate the price based on our technical and fundamental analysis. As we trade on probabilities, there will be conditions where the market will hit our stop loss. Therefore, strong trade management is the only way to keep your balance steady growth.
Trend trading is a great way to earn money from the forex market. Any retail trading strategy based on a trend continuation pattern works well when it moves within a trend. Therefore, in this trading strategy, we will take trades from minor corrections using the parabolic SAR towards the trend.
Furthermore, we will use a 100-period exponential moving average to determine the trend. If the price is trading above the 100 exponential moving average, we will consider the trend as an uptrend. If the price is trading below the 100-period exponential moving average, it will consider it a downtrend. We will follow a simple logic by considering buying trades when the market moves up and considering sell trades when the market is moving to drown.
However, there are no specific rules about the period of your moving average. Some traders are comfortable with 100 EMA, while some traders are compatible with 20 EMA or SMA. Therefore, if you’re trading in a lower timeframe, you can use any moving average from 20 to 100 periods. However, we will focus on 100 EMA as it provides good profitability based on swing trading ideas.
Why Should We Use Parabolic SAR?
Parabolic SAR is a forex trading indicator that stands for “stand and reverses.” This trading indicator was devised by J Welles, represented by some dots below and above the candlestick. In an uptrend, dots remain below the price and indicates a bullish pressure once the price is rejected from these dots. Similarly, in a downtrend, the dots form above the price, and the price starts to move once it gets rejected from the parabolic SAR.
In the image below, we can see a clear chart of the candlestick pattern.
Let’s plot the parabolic SAR in the price chart and see how it looks like.
It is visible that in an uptrend, Parabolic SAR is below the price, and in a downtrend, the parabolic SAR is above the price. This is why the parabolic SAR is considered as a stop and reverse indicator.
Furthermore, the parabolic SAR has a built-in stop-loss function. Once the price moves up or down with a new candle, the parabolic SAR changes with the price. Therefore, you can move your stop loss once the price creates a new higher or lower low. Furthermore, you can edit the primary parameter of Parabolic SAR from the indicator’s setting, but in this trading strategy, we will use the default format.
Moving Average with Parabolic SAR
If we use a 100-period exponential moving average, we can catch the major trend direction from the minor correction. The forex market Moves Like a zigzag. Therefore, there is a minor correction in a major bullish trend and minor bullish correction in a major downtrend. If we know the major trend, we can quickly enter the trade from a correction to get the maximum reward from the minimum risk.
In the forex market, parabolic SAR usually provides trading signals earlier than expected, which might create a negative impact on your trading result. Overall, any trend following indicator does not provide a good result when the price moves within a range. In most of the cases, markets follow the trend of about 35% of the time. Therefore, it is essential to filter out the conditions where the market is moving within a range.
We can eliminate the unexpected market behavior by using the 100 moving average as it will provide a more significant trend that will prevent over-trading. In the image below, we can see how the parabolic SAR provides false trading signals when the market moves within a range.
In the ranging market, it would be difficult to make a profit using this trading strategy. Therefore, it is better to use the 100 moving average to get the overall direction of the trend.
Moving Average With Parabolic SAR Trading Rules
Every trading strategy has its unique rules. In the moving average with the Parabolic SAR trading strategy, our main aim is to follow the trend towards the direction of 100 EMA.
Overall, we will follow simple rules as Complex trading rules make it challenging to implement it on the chart. You can make good profits with a simple trading strategy if you can utilize it well with appropriate trade management and money management rules.
Timeframe
The moving average with the Parabolic SAR trading strategy works well in all timeframes from 5 minutes to weekly charts. The longer timeframe will provide better trading results. However, it is better to stick to the 1 hour to daily chart as it can cover fresh moves driven by banks and financial institutes.
Currency Pair
There is no obligation to use a currency pair. However, it is better to use a currency pair that does not remain within a range for a long time like EURCHF. Therefore, all major and minor pairs are good to go with this trading strategy.
Buy Entry (Inverse for Sell Entry)
Identify the price above the 100 periods moving average. If the price is choppy at the 100 EMA, Ignore the price chart, and move to another market.
Identify the parabolic SAR to point dots below the candlestick, which will be a buy signal (above the candlestick is a sell signal).
Later on, place a buy stop order above the candlestick high.
Put your stop loss below the printed dot with some buffer.
Example of Parabolic SAR Strategy
At the image below and see how parabolic SAR provided a buy trade setup.
Notice that the price is moving in a range at the 100 EMA area with a violation. The blue horizontal line represents the support and resistance level, where the price is consolidating. In this consolidation, we will not take any trade.
If you look at the price structure, you can see the price is moving within a range from their resistance to support. On the price move above the 100 exponential moving average, you should put a pending order above the range, projecting that it will break out from the resistance level and create an impulsive bullish pressure.
Stop Loss and Take Profit Set
When you put the pending order above the resistance level, you should put a stop loss below red dots that have appeared below the candlestick. While setting the stop-loss, make sure to use some buffer of 10 to 15 pips.
Later on, hold the price until it points red dots above the price. The red dot above the price will indicate that sellers are entering the market, and there is a possibility to create a new lower low. Furthermore, while sitting the stop loss and take profit, you should follow the basic rules of price action, including the breakout and pullback.
Summary
Let’s summarize the moving average with the Parabolic SAR trading strategy:
You should look for a fresh trending movement above or below 100 exponential moving average.
Parabolic dots below the price will provide buy-entry, and parabolic dots above the price will indicate sell-entry.
You should avoid ranging markets where the price might violate parabolic dots.
Moreover, trade management and good trading psychology are mandatory for every trading strategy. You cannot make a decent profit until you know how to minimize the risk to get the maximum benefit from trade.
Head and shoulder is a famous market reversal pattern. Most of the new and experienced traders use this pattern to identify the potential market reversal trade. Traders can use this pattern in every market, including forex, cryptocurrency, stock, indices, and commodities.
In this pattern, there is an indication that the price is trying to make a new higher but cannot do it. In the forex market, it is essential to understand the sentiment of buyers and sellers. In that sense, head and shoulder is a prominent price pattern indicating what buyers and sellers are doing in the market and how buyers got rejected from a potential zone.
What is the Head and Shoulder Pattern?
Head and shoulder is a price pattern that usually appears in an uptrend and indicates a price zone from where buyers are going to lose their momentum. A complete head and shoulder pattern indicates the start of a bearish trend. Therefore, if you want to join the bearish trend as early as possible, you should take trading decisions based on this pattern to have a better risk: reward ratio.
The head and shoulder pattern has three elements, as marked in the below chart.
The left shoulder is the ordinary swing high of a bullish trend. Later on, the head indicates another swing high indicating the continuation of the bullish trend. However, the right shoulder indicates that the price is unable to make another high above the head, which is an indication that buyers are losing their momentum.
On the other hand, the inverse head and shoulder are like the head and shoulder pattern that appears after a bearish trend. It indicates a potential market reversal from a bearish trend to the upside.
In the image below, we can see how an inverse head and shoulder looks like.
How to Identify the Head and Shoulder Pattern?
The head and shoulder pattern is prevalent in the chart that does not require any effort to see. You can easily spot it with the naked eye. Moreover, there are some Expert Advisors (EAs) or trading indicators that automatically show the head and shoulder pattern.
You can draw the head and shoulder pattern using the trendline (without ray) despite the automotive process. Later on, we should focus on the location of the pattern. If the head and shoulder pattern appears near any significant support level, it might not work well due to the lack of space for further price decline.
Overall, the head and shoulder pattern from a significant resistance level or key resistance level can provide a potential market reversal opportunity. Furthermore, head and shoulder patterns with significant economic events often make the level important among traders.
Head and Shoulder Pattern Trading Strategy
If you have read the above section, you would know that it is not difficult to find the price’s head and shoulder pattern. The profitability ratio of this pattern is very high, based on the previous trading result. There are several ways to make trades based on the head and shoulder trading strategy. However, the most reliable way to take the trade is from the neckline breakout.
Timeframe
The head and shoulder price pattern in a daily chart is more reliable than the head and shoulder pattern in a 5 minutes timeframe. The accuracy of this trading strategy increases if you move to a higher timeframe. However, it is often difficult for traders to take trades based on a weekly or monthly timeframe as it requires a lot of time and balance. Based on the retail and institutional traders, any time frame from 1 hour to a daily chart is perfect for this trading strategy.
Currency Pair
The head and shoulder trading strategy works well in all financial markets, including forex, cryptocurrency, stocks, indices, and commodities. Therefore, there is no barrier to use it on specific currency pairs. However, it is recommended to trade in major currency pairs as there is enough liquidity to provide a substantial movement without any unnecessary spike.
Entry
After forming the head and shoulder pattern, it is crucial to measure the price action at the neckline area. The neckline is a support level based on the lowest swing point of two shoulders and one head. In this trading strategy, you should wait for the price to break below the neckline with a big candle breakout. The strength of the breakout will indicate how reliable the upcoming bearish pressure is.
Later on, wait for the price to correct towards the neckline again with a corrective speed and enter the trade as soon as the price rejects the neckline with a bullish reversal candlestick.
Stop Loss
The stop loss will depend on two categories. If you are an aggressive trader, you can put the stop loss above the reversal candlestick with 10-15 pips buffer. In case the market moves above the neckline and hits your stop loss, it would indicate that the price made a false break below the neckline. However, the conservative approach is to put the stop loss above the left shoulder with some buffer. It would save your trading balance from the unusual market noise.
Take Profit
The first take profit level should be based on the 1:1 risk: reward ratio. You can close 50% of the position at the first take profit level and wait for the 100% of neckline to head for the final take profit.
Moreover, you should be more cautious in setting the take profit level by considering the near-term support and resistance levels. In the example below, we can see how the price broke below the neckline and retested it again to create a trading opportunity. Moreover, this image refers to how to set the stop loss and take profit levels.
Conclusion
The forex market is the world’s biggest financial market, which is very uncertain. Therefore, no trading strategy can guarantee a 100% profit. There is some possibility that your trade might hit the stop loss after taking the entry, instead of moving down. In that case, you should take the loss and wait for further trading opportunities.
The best way to keep yourself profitable in the market is to use appropriate money management and trade management rules for trading. Therefore, if you take 1% or 2% risk per trade, any unusual stop loss might not affect the overall balance.
MACD regular divergence is a trading strategy that considers the relationship between Moving Average Convergence Divergence and the price.
MACD, a technical indicator, invented by Gerald Appel in 1979. It is very famous among professional and institutional traders; therefore, it can provide a reliable trading opportunity. On the other hand, divergence is a significant concept in trading that happens between the price and oscillator.
In most of the cases, oscillators like MACD or RSI move with the price. However, there is some condition where MACD does not follow the same direction of the price and creates divergence.
What is the MACD Divergence Strategy?
MACD is a Momentum based indicator that shows the correlation between two moving averages. Traders use this indicator in stocks, bonds, and forex trading as a trend continuation and reversal indicator. If you want to become a successful forex trader, MACD would be the best indicator to follow.
If you use a momentum-based strategy, MACD is the best available technical indicator for you. If you trade using the MACD divergence strategy, it will show you the proper entry and exit points.
There are several types of divergence, but in most cases, investors use the following types of divergences:
Hidden Divergence
It happens when the MACD histogram creates divergence with the price. It indicates a minor market reversal and significant trend continuation.
Regular Divergence
It happens when MACD EMA moves to the opposite direction of the price. Regular divergence from a significant support or resistance level indicates a potential market reversal.
In the example below, we can see a naked chart with a MACD indicator.
If you look at the image, you can see several lower lows, and higher highs in the price and MACD EMA also followed the same direction. However, there is some point where the price and MACD did not follow the same direction as indicated in the image below.
This is how divergence forms in the price. It indicates a potential market reversal if it happens from significant support or resistance levels.
Bullish MACD Regular Divergence Trading Strategy
Bullish MACD regular divergence happens when the price of a currency pair moves to the opposite direction of the MACD histogram from a significant support level. Therefore, bullish MACD divergence strategy is considered as the positive divergence signal.
Timeframe
In this trading strategy, there is no specification of the timeframe. However, this trading strategy works well in H1 and H4 timeframe.
Currency Pair
The MACD divergence trading strategy works well in most major and minor currency pairs, including EURUSD, GBPUSD, USDJPY, and AUDUSD.
Location of the Divergence
It is essential to identify the location of the price. In this bullish divergence trading strategy, the price should form the divergence in a critical support level. Any divergence from a random place rather than a vital level would not provide good profitability. Before moving to the entry point, we should find Negative Positive and Negative (NPN) MACD histogram to form.
Entry
After forming the divergence, we should wait for a bearish reversal candlestick to enter the trade. Make sure to enter the trade as soon as the candle closes.
In the bullish divergence trading strategy, stop loss would be below the reversal candlestick candle with 10-15 pips buffer.
The first take profit level would be based on 1:1 risk: reward, where you should close 50% of the trade and move the stop loss at breakeven. Later on, the 2nd take profit level would be based on near term event level from where the market is expected to show some correction.
However, as part of the trade management, you can extend the take profit level based on the market momentum. If the price shows an impulsive bullish pressure near the resistance level, it may break the level by creating a new high. In that case, you can extend the take profit level if your trade management system allows.
Bearish MACD Regular Divergence Trading Strategy
Bearish MACD regular divergence happens when the price of a currency pair moves to the opposite direction of the MACD histogram from a prominent resistance level. It is also considered as a negative divergence signal.
Timeframe
Similar to the bullish divergence, this trading strategy works well in H1 and H4 timeframe. You can use this trading strategy in all timeframes, but the higher timeframe provides a reliable result. On the other hand, traders often find it challenging to observe the price in daily and weekly timeframes. Therefore, H1 and H4 are ideal for swing traders.
Currency Pair
The bearish MACD divergence trading strategy works well in most major and minor currency pairs, including EURUSD, GBPUSD, USDJPY, and AUDUSD.
Location of the Divergence
It is essential to identify the location of the price. In this bearish regular divergence trading strategy, the divergence should format a significant resistance level. Any divergence from a random place would not provide good profitability.
Before moving to the entry point, we should find Positive Negative Positive (PNP) MACD histogram to form.
Entry
After forming the divergence, we should wait for a bullish reversal candlestick to enter the trade. Make sure to enter the trade as soon as the candle closes.
Stop Loss and Take Profit
In the bullish divergence trading strategy, stop loss would be above the reversal candlestick candle with 10-15 pips buffer.
The first take profit level would be based on 1:1 risk: reward, where you should close 50% of the trade and move the stop loss at breakeven. Later on, the 2nd take profit level would be based on the near term event level.
Summary
Let’s summaries the MACD regular divergence trading strategy:
Find the divergence based on NPN and PNP from a significant level.
Enter the trade after a reversal candlestick formation.
Stop-loss should be below or above the reversal candlestick with 10 to 15 pips buffer.
The first take profit would be based on 1:1 risk: reward ratio, and the second take profit would be based on the price action on the next event level.
There are more ways to use divergence as a trading strategy. Besides the divergence formation, you should focus on how the price is approaching a critical level. Any weakness at a significant level would indicate the first impression of market reversal. Later on, the divergence would indicate the final try of the opposite party. Happy Trading!
Introduction In our previous course lessons, we saw how to trade breakouts in an effective manner. As we know, Breakout trading is one of the most common ways of trading the financial markets. Most of the other trading tools tend to fail in accurately identifying a trading signal, or they lag a lot in doing […]
Introduction In our previous course lessons, we saw how to trade breakouts in an effective manner. As we know, Breakout trading is one of the most common ways of trading the financial markets. Most of the other trading tools tend to fail in accurately identifying a trading signal, or they lag a lot in doing […]
Introduction
In our previous course lessons, we saw how to trade breakouts in an effective manner. As we know, Breakout trading is one of the most common ways of trading the financial markets. Most of the other trading tools tend to fail in accurately identifying a trading signal, or they lag a lot in doing so. But that’s not the case with breakout trading. If done accurately, it helps traders in making consistent cash from the market.
In this lesson, let’s learn how to trade breakouts using trendlines. Trendlines are one of the simplest tools you can use to trade the breakouts on both lower and higher timeframes.
Trendline and it’s working!
A trend line highlights the ongoing trend by connecting the swing lower highs in an uptrend and swing higher lows in a downtrend. Just like S&R levels, trendlines also signify the appropriate areas to enter the market. The only difference is that support and resistance levels are horizontal areas while trendlines are sloping. Now let’s get to the topic.
Trading Breakouts Using Trendlines
Upward Trendline
An upward trend line connects a swing high to swing low from the lowest point to the highest point in an ongoing trend.
Buy Trade 1
The price chart below represents a trendline Breakout on the daily chart.
By looking at the market, it is clear that the sellers had a hard time going down as the buyers continue to give a strong fight. After a couple of months, sellers gave up, and buyers took the show to break above the trend line. The hold above the trendline confirms the buying entry in this pair. After riding the uptrend for a bit, we understood that the buyers got weak. Hence we decided to close our positions at the most recent higher high.
Buy Trade 2
The image below represents a trendline breakout in the CAD/JPY forex pair.
The pair was in a strong uptrend, and during the pullback phase, when the price action broke above the trend line, it indicates that the buyers are ready to lead the market again. The hold above the trendline confirms our buy entry. The original trend was quite strong, so the stop below the trend line was good enough to ride a new trend.
Downward Trendline
Downward trend line connects a swing low to swing high from the highest point in a trend to the lowest point in a trend.
Sell Trade 1
The chart below represents a trendline breakout in the GBP/USD Forex pair.
As we can see, the buying trend was quite strong, and the price action closely followed the trendline. A breakout below the trendline is a clear indication for us to go short in this pair.
Sell Trade 2
The price chart below represents the breakout of a trend line in the GBP/USD Forex pair.
We can see the pullback on a weekly chart, and during the pullback, the price broke below the trendline. This shows that the sellers are desperate to take the price down. After our entry, the price went down and turned sideways. After a few weeks, it again goes down, and we choose to close our trade at the most recent lower low.
This attempt is to give you an understanding of how to trade trendline breakouts in most of the scenarios. In our upcoming lessons, let’s delve deeper into this concept. Cheers!
Everyone wants to be the hero in the market and claim that they have picked the top or bottom of a currency pair. However, apart from boasting, there is no gain from repetitive selling at every new ‘high’ in hopes that this one would be the final ‘high.’ One of the biggest dangers encountered by novice traders is picking a top or bottom with no logic. The pure die-out is an intraday strategy that picks a top or bottom based upon a strong recovery after an extended move.
Time Frame
As it is an intraday strategy, the highly suitable time frames are 1 hour and 15 minutes.
Indicators
In this strategy, we will be using two indicators. The two indicators are RSI and Bollinger Bands.
Currency Pairs
This strategy works best on major currency pairs only. Among these, the preferred ones are EUR/USD, USD/JPY, GBP/USD, GBP/JPY, and USD/CAD.
Strategy Concept
The strategy looks for intraday fake-outs using three sets of Bollinger bands and the relative strength index (RSI) on the hourly and 15-minute charts. The trade setup is formed when RSI hits either an overbought or oversold level. The market is considered to be overbought when RSI moves above 70, while the market is considered oversold when RSI goes below 30.
This signals a possible reversal in the market and that we can start looking for a trade in the opposite direction. However, rather than just immediately buying or selling in hopes for a trend reversal based solely upon RSI, we add in three sets of Bollinger Bands, to help us identify the point of over-extension. We use three sets of Bollinger Bands because it helps us assess the extremity of the move along with the extent of possible U-turn.
The conventional theory of Bollinger bands suggests buying or selling when prices hit the two bands. In our strategy, we will totally be using three Bollinger bands, and when prices hit the third band on any side, we say that the move is within the 5% small group, which characterizes the move as extreme.
When prices move away from the third standard deviation Bollinger band and move into the zone of first and second Bollinger band, we are confident that the currency pair has hit its extreme point and is moving into a reversal phase.
Finally, we look for one last thing before making an entry: a candle to close fully between the second and first Bollinger Bands. This last step helps us screen out false moves and assures that the previous move was really exhaustion. This is a low-risk and low-return strategy that is suitable for traders who like to scalp the market.
Trade Setup
To illustrate the strategy, we have considered the USD/JPY currency pair, where we will be applying the 1-hour chart strategy. Here are the steps to execute the strategy.
Step 1
Firstly, open the 1 hour or 15 minutes chart of the desired currency pair. Then plot the Bollinger band and RSI indicator on the chart. We need to plot 3 Bollinger bands with the same ‘period’ but different standard deviations. The first Bollinger band (BB) should have a standard deviation (SD) of 1, the second BB will have SD of 2, and finally, the third BB will have SD of 3. RSI will carry the default settings.
The below image shows the Bollinger band indicator plotted on the USD/JPY currency pair and the RSI on it.
Step 2
If we are looking for an overextended move on the downside, wait for the price to cross below the lower band of the 3SD BB or if we are looking for an overextended move on the upside, wait for the price cross above the upper band of the 3SD BB. Along with this, we need to see that the RSI goes below the 30 ‘mark’ in a down move and moves above the 70 mark in an up move. Both conditions need to be satisfied simultaneously.
In the example since we are looking for a ‘buy’ trade, we have to wait for the price to cross below the lower band of the 3SD BB along with the RSI reading of below 30. The below image shows that the conditions mentioned above are fulfilled.
Step 3
In this step, we wait for a candle to open and close between the 2SD BB and 1SD BB zone. It is important to check that the entire body of the candle is within this zone, and it closes near the lower band of the 1SD BB. This was for a ‘long’ setup. In the case of a ‘short’ trade, the only difference is that the candle should close between the upper band of the 2SD BB and 1SD BB.
In the below image, we can notice a bullish candle that closes well within the required zone, which is a sign of reversal.
Step 4
In this step, we determine the ‘stop-loss’ and ‘take-profit‘ for the strategy. Stop-loss is placed below or above the ‘low’ or ‘high,’ respectively, from where the reversal began. As we are trading against the trend, the ‘take-profit’ is set at 1:1 risk to reward. We will also lock-in some profits when the market starts moving in our favour, to ensure that we don’t lose money if it turns midway.
Strategy Roundup
In this strategy, we combine two technical indicators to identify the market’s top and bottom, without making wild guesses. This means we are determining overextended moves logically and technically. After practising well on the 1-hour chart, we can spot trade setups on the 15 minutes time frame. Since these are counter-trend trades, the probability of success will be less. This strategy is very simple to understand if we have basic knowledge of indicators.
One of the most annoying things for a trader is getting stopped out of a ‘long’ trade on the lowest possible tick, after which the prices reverse and move higher. Likewise, nothing can get more annoying than getting out of a ‘short’ trade on the highest possible tick of the move, after which prices reverse and ultimately move in our direction for profit.
All of us would have experienced this unpleasant reality more than once. We have designed a strategy specifically to take advantage of these spike moves in currencies by carefully getting into a trade by anticipating a reversal.
Traders who like to bank on consistent and small profits might feel this strategy appealing despite experiencing frequent stop-outs. Before going through the strategy and the trade setup, we must understand that while it misses infrequently, but when it misses, the losses can be very large.
Therefore, it is absolutely crucial to honor the stop-loss in these setups because when it fails, it can mutate into a relentless runaway move than could blow up our entire accountif we continue to hold on to our trades.
Time Frame
This strategy works well on all time frames above the 1 hour. This strategy cannot be used for scalping as the risk is higher.
Indicators
In this strategy, we will not be using any indicators as it is based on pre-determined rules and price action.
Currency Pairs
This strategy applies to almost all the currencies listed on the broker’s platform. However, illiquid pair should be completely avoided.
Strategy Concept
The trade setup that is formed using this strategy lies on the assumption that support and resistance points of tops and bottoms exert an influence on price action after they are breached. They act like a magnetic field attracting prices back to these points after a majority of the stops have been triggered. The thesis behind this strategy is that it takes an enormous amount of power to breakout or breakdown from tops or bottoms that are created after an extended move.
In the case of a top, for example, making a new ‘high’ requires not only huge capital and power but also enough momentum to fuel the rally further. By the time it makes a ‘new’ high, much of the momentum has passed, and it is unlikely that we will see a new ‘high.’ Dolphins have a very strong memory, and since this strategy is based on the memory of the price, we have named this strategy as ‘The Dolphin Strategy.’
Trade Setup
In order to explain the strategy, we have considered the EUR/USD pair, where we will be applying the strategy on the 1-hour time frame. Here is the step-by-step approach to executing the strategy effectively.
Step 1
First, we need to identify a sequence of ‘higher highs’ and ‘higher lows’ on the chart when looking for a ‘short’ trade setup. Similarly, we need to identify a sequence of ‘lower lows’ and ‘lower highs’ when looking for a ‘long’ trade. Then we are required to mark the highest point (‘short’ setup) or the lowest point on the chart (‘long’ setup).
In our case, as will be executing a ‘short’ trade, we have identified a swing ‘high’ on the chart shown in the below image.
Step 2
Assuming that we have calculated our position size, we will ‘sell’ half of our position size at the ‘high,’ which was identified in the previous step. In a ‘long’ setup, we will ‘buy’ half of our position size at the ‘low’ identified previously. If the market is strongly trending upwards or downwards, we have to take a position of size lesser than ‘half.’
We are taking half of our ‘short’ positions at the previous ‘high’ once the market starts moving upwards after a retracement.
Step 3
In this step, we have to measure the distance of the ‘retracement’ or ‘pullback,’ which takes place after the price makes the ‘high’ or ‘low’ that was identified in the first step. Measuring this distance with the help of a measuring tool is crucial as further steps of the strategy are based on this distance.
The below image shows the distance of the ‘pullback’, measured with the help of a vertical pink line.
Step 4
In this step, we need to measure the exact same distance that was measured in the previous step above the ‘high’ in an up move or below the ‘low’ in a down move. In a ‘short’ setup, when the price starts moving above the ‘high,’ we will execute the remaining half of the positions at the half-way mark of this distance. Likewise, in a ‘long’ setup, we will execute the remaining half of our positions at the half-way mark of this distance, when the price starts moving lower.
The below image shows the point on the chart where we have executed the remaining positions.
Step 5
Now that we have entered the market with full position size, we have to set an appropriate stop-loss and take-profit for the trade. The ‘stop-loss’ is placed at the price corresponding to the distance of the ‘pullback’ that was measured in ‘Step-3.’ We take profits at two places in this strategy.
The first ‘take-profit’ is at support turned resistance or resistance turned support line. And the second ‘take-profit’ is at the ‘higher low’ from where the market goes back to the ‘high’ identified in the first step. In a ‘long’ trade, it will be at the ‘lower high’ from where the market goes back to the ‘low’ identified in the first step.
Strategy Roundup
One of the concerns for some traders might have with the ‘Dolphin Strategy’ is its asymmetrical structure and complex rules. Readers with good maths skills and trading experience notice the best of the trade setups using this strategy and harvest high risk-to-reward ratios. Traders need to be very strict with their stop-loss as the market might move in one direction only. However, the strategy works in our favor as it is a high probability setup.
Introduction Some traders are extremely patient and wait for the perfect setup while others are extremely impatient and need to see a move in the next few minutes or hours or else, they are quick to hit the button for a ‘sell’ or a ‘buy.’ Most of the time, these impatient traders are chasing the […]
Introduction Some traders are extremely patient and wait for the perfect setup while others are extremely impatient and need to see a move in the next few minutes or hours or else, they are quick to hit the button for a ‘sell’ or a ‘buy.’ Most of the time, these impatient traders are chasing the […]
Introduction
Some traders are extremely patient and wait for the perfect setup while others are extremely impatient and need to see a move in the next few minutes or hours or else, they are quick to hit the button for a ‘sell’ or a ‘buy.’ Most of the time, these impatient traders are chasing the market and necessarily take action when the market has already moved in one direction.
In other words, if they see that momentum builds in one direction, they piggyback on the momentum in hopes for an extension move as momentum continues to build. Once the ‘move’ starts showing signs of losing strength, these impatient momentum traders will also be the first to jump the ship.
So, if our strategy is based on momentum, we need to have solid rules for ‘entry’ and ‘exit’ to protect profits. At the same time, we should be able to do trade management to ride as much of the extension move as possible.
In this regard, we have developed a great momentum strategy that we call the ‘Momo’ trading strategy because we look for momentum or momo burst on very short term price charts.
Time Frame
The ‘momo’ trading strategy works well on the 5-minute time frame. This means each candle represents 5 minutes of price movement.
Indicators
We lay two indicators on the chart, the first one of which is 20-period EMA. The second indicator that we use is the MACD histogram. The settings for the MACD histogram is the default, where the first EMA = 12, second EMA = 26, and signal EMA = 9. All of these are based on the closing price of the candle.
Currency Pairs
This strategy applies only to the major currency pairs. Some of these include EUR/USD, USD/JPY, GBP/USD, GBP/JPY, USD/CAD, etc.
Strategy Concept
We use the Exponential Moving Average (EMA) to help us determine the trend of the market. Once the trend has been established, we use the second indicator to gauge the momentum of the move. We essentially wait for a reversal in the market, and then we try to take position only if the momentum supports the reversal move enough to create a large extension burst.
The position is exited in two segments, and the first half helps us lock some gains and ensures that a winner does not turn into a loser. The second ‘take-profit‘ attempts to catch what could become very large with less risk since we have already booked some profits earlier.
Trade Setup
In order to illustrate the strategy, we have considered the chart of EUR/USD, where we shall be applying the strategy to initiate a trade. All the steps will be performed on the 5-minutes time frame.
Step 1
Open a 5-minutes time frame chart of the desired currency pair and plot the 20-period EMA on the chart. Along with this also plot the MACD indicator on the chart. After plotting both the indicators, look for the currency pair to be trading below the 20-period EMA. The MACD histogram should be negative during this time period.
In the below image, we can see that the market is in a strong downtrend, and currently, the price may be overextended to the downside as indicated by the two indicators.
Step 2
Next, we need to wait for the price to cross above the 20-period EMA. When the price crosses the EMA, we need to make sure that the MACD is in the process of crossing from negative to positive or is in the positive territory no longer than 5 bars ago (in case of a downtrend reversal). The fulling of both these criteria together is a very strong sign of a reversal in the market. The two indicators combined together are very useful for identifying reversal in the market.
The below image shows the crossing of the price above the EMA with a single bullish candle, and, at the same time, the histogram also turns positive.
Step 3
We enter the market for a ‘buy’ or ‘sell’ after the market moves at least ten pips above or below the EMA. This is an aggressive form of ‘entry’ which may not be suitable for everyone. The conservative way of taking an ‘entry’ is by waiting for the market to re-test the EMA and then enter at the retracement. But if the momentum is strong, the market might just continue moving higher. In these times, traders who entered aggressively will only make money. It all depends on the nature of the trader.
As we can see in the below image, we have taken an aggressive ‘entry’ in the pair, i.e., exactly at ten pips from the point of crossing of the EMA. The histogram also shows that the momentum is building on the upside.
Step 4
In this step, we will determine the stop-loss and take-profit for the strategy. As mentioned before, the first take-profit is set at 1:1 risk to reward, which ensures we don’t lose money if the market turns around from the middle. The second and final take-profit is set at 1:2 risk to reward, to take advantage of the market momentum, which leads to an extended reversal. The stop-loss is set just a little below or above the EMA, which will be about 10-15 pips. A conservative trader can place the stop-loss below the ‘low’ or above the ‘high’ from where the market reverses.
We can see in the below image that the momentum continues to build on the upside (indicate by histogram), which is why the market moves smoothly to our final take-profit after we enter.
Strategy Roundup
As this is a momentum-based strategy, we can also use trailing stop-loss to capture gains of the new trend. Since liquidity is the basic requirement of the strategy, we recommended using this strategy in pairs like EUR/USD, GBP/USD, USD/JPY, and some other major pairs only. The ‘momo’ trading strategy is a powerful strategy to capture momentum-based reversal moves. However, sometimes it may not work, and it is important to figure out why it failed.
In the previous article, we discussed a strategy that was in the European session. However, there are a fair number of traders who prefer the U.S. session as they feel the market tends to be more exciting and thrilling. These traders consider the Asian session to be boring and quiet most of the time.
Many part-time retail traders based in the United States and Europe miss out on opportunities in European and U.S. sessions because of work and other business commitments. The only time they are left with happens to fall in the apparent boring and quiet Asian session. Therefore, it becomes necessary to come out with a strategy that is exclusively meant for the Asia session.
The strategy we will be going to discuss today is suitable for trading during the early-morning Asian hours. This time period has numerous opportunities for traders in different time zones across the world, whether they are part-time or full-time traders. We hope that the strategy will greet everyone like the bright morning sun.
Time Frame
The good-morning Asia strategy works well on the 4-hour time frame. This means each candle represents one day of price movement.
Indicators
This strategy is based on pure price action, and hence no indicators will be used during the process.
Currency Pairs
This strategy applies only to the AUD/JPY currency pair.
Strategy Concept
Opening hours of the Asian market begin a couple of hours after the U.S. market closes. The Asian market direction tends to take its cue from the previous day’s movement during the U.S. session because the U.S. market is the largest economy of the world, and most of the institutional banks are located in the U.S.
It is observed that when the U.S. market closes with the bullish sentiment, the Asian market usually starts the day bullish. If the U.S. market closes with the bearish sentiment, the Asian market remains bearish throughout the day.
During the early morning Asian hours, the best currency pair to take advantage of this phenomenon is none other than the AUD/JPY, as the Japanese Yen and the Australian dollar are the most active currency during the Asian session.
Looking at the price action, we take an entry right after the U.S. market closes at 05:00 PM. The first requirement of the strategy is that we need a ‘range’ or a ‘channel’ before the U.S. market closes. Depending on the position of the price and where the candle closes before the U.S., we take an entry. There are many rules that we need to follow before we can use the strategy profitably.
Stop-loss is placed above or below the technical levels, which is the easiest part of the strategy. The risk-to-reward ratio for this strategy is anywhere between 1.5 to 2, which is quite good.
Trade Setup
For this strategy, the closing of the 4-hour candle corresponding to 5:00 PM New York time is crucial for the strategy. Here are the steps to execute the strategy.
Step 1
Firstly, we need to identify a ‘range’ or ‘channel’ on the chart of AUD/JPY. This becomes our trading region, where we will be carrying out all the trades. A ‘range’ or ‘channel’ is confirmed only if the price has reacted and reached the other end at least twice after touching the extremes.
We have considered an example of a trade where we will be applying the rules the strategy step by step. The below image shows the 4-hour time frame chart of the AUD/JPY pair, where we identified a ‘channel’ with multiple touches on either side.
Step 2
In this step, we need to pay close attention to the position of the price and the closing of the U.S. market. The most important part of the strategy is looking out for the price action taking place at the end of the range, which should be occurring at the close of the U.S. market. Depending on the signal we get from the market, we will take an appropriate currency pair position.
At the close (U.S.) if the price closes as a bullish candle from the support, we will enter for a ‘buy’ at the opening of the subsequent candle. If the price closes as a bearish candle from the resistance, we will enter for a ‘sell’ at the opening of the subsequent candle.
Step 3
In this step, we take an ‘entry’ with a suitable size and determine the stop-loss and take-profit for the trade. As mentioned earlier, we will enter for a ‘buy’ or ‘sell’ right after the U.S. market closes, and the next candle opens. This ensures that the risk to reward will be higher.
The stop-loss for the trade is placed a few pips below or above the key technical level of support or resistance. To increase the risk to reward ratio, we can also place it just above or below the previous candle. This would require some experience of using the strategy over a long time. The ‘take-profit’ is set at the other end of support or resistance. We can have a larger ‘take-profit’ if we are trading with the trend of the market. The ‘take-profit 1’ ensures that we lock in some profits if the trade goes against us.
Strategy Roundup
This strategy is suitable for traders with little time to trade. Furthermore, it does not require complex market analysis. It does have some strict rules which might reduce the creation of the trade setups. The ‘entry’ time of the trade is fixed at every morning. Since Japan and Australia are the first countries in Asia where markets open, there will be ample liquidity in the market that will allow traders to execute ‘long’ and ‘short’ positions very easily. All the best!
A price movement can be considered a breakout when the price clears any critical level on the price chart. These levels can be support/resistance, trend lines, Fibonacci levels, etc. Many professional traders wait for the price to hold above the breakout to take long positions. Conversely, they wait for the price to hold below the breakdown level to take short positions.
When the price confirms that the breakout is valid, volatility tends to increase as the price started to move in the direction of the breakout. The reason why breakout trading is popular among the traders is that it sets the future trend direction. This makes it easier for traders to make consistent profits from the market.
Breakout trading strategy is universal, and we can apply it to the hourly, daily, weekly, or even monthly timeframes. Investors, swing traders, and intraday traders prefer breakout trading the most compared to any other form of trading. The longer price action holds inside the breakout, the stronger breakout we must expect, and also, the longer time the price action moves in that direction.
During the consolidation phase, when the price is preparing to break out in any direction, we will notice a couple of price pattern formations such as channels, triangles, flags, etc. These patterns will give us the clues on which side the breakout may occur—using these signals to enter a trade before the breakout is crucial. But if you are a conventional trader, wait for the price to break above or below the price to take the trade.
Trading Various Breakouts
Trend Line Breakout
Ascending Trend line Breakout
The below price chart represents an ascending trendline breakout on the NZD/CHF daily Forex chart.
As you can see in the below image, when price action broke below the ascending trend line, it is an indication of sellers stepping into the game. The hold below the trend line confirms the selling entry. We have placed our stop-loss at the previous high and rode the huge downtrend.
Descending Trend line Breakout
The image below represents the breakout of a descending trend line in the GBP/CHF Forex pair.
As you can see below, we took a buy entry when price action went above the trend line and started to hold above. The hold confirms that the buyers are in control, and they are ready to make a brand new higher high. After our entry, price action blasted to the north and printed a brand new higher high. We chose to close our trade at the most recent higher high. The stop-loss order placed just below the trend line is safe enough.
Range Breakout
The price chart below represents a Ranging market in the NZD/JPY Forex pair.
Most of the time, you would have observed traders taking buy/sell trades when the market moves in a range. But in this strategy, let’s trade the market only when the price breaks the range. Just like any other breakout, Range breakout also indicates the winning of one-party over the other.
The hold above the breakout confirms that the range is broken, and it is a good idea to go long. We choose smaller stops because the hold above the range gave additional confirmation.
That’s about breakouts and how to basically trade different breakouts in the market. In the upcoming lessons, we will be going through many of the concepts related to breakouts.
Introduction The activation of a trend can be from a political decision or an improvement in the GDP of the economy. Some other reasons include the central bank policy announcement and the discovery of new resources. Trends move like waves causing long to short term price movement in both the directions of the market. In […]
Introduction The activation of a trend can be from a political decision or an improvement in the GDP of the economy. Some other reasons include the central bank policy announcement and the discovery of new resources. Trends move like waves causing long to short term price movement in both the directions of the market. In […]
Introduction
The activation of a trend can be from a political decision or an improvement in the GDP of the economy. Some other reasons include the central bank policy announcement and the discovery of new resources. Trends move like waves causing long to short term price movement in both the directions of the market.
In an uptrend, we observe that, at a certain point in time, price pullback, or retrace before continuing with the upward movement. Similarly, in a downtrend, prices retrace upward against the downward movement before continuing their way down again. This ebb-and-flow movement can be frustrating for many new traders because they are not familiar with such market moves and often get stopped out before the market starts to move in their direction later.
Experienced trend traders usually wait for a retracement before taking a trade in the direction of the major trend. This is how the trend bouncer strategy was introduced. The Bollinger band indicator provides an effective way of identifying the up and down movement of a trend.
Since this is a trend trading strategy, we will have more than one profit target. We have two specific profit levels for this strategy.
Time Frame
The trend bouncer strategy works well with the 1-hour and 4-hour time frame chart. This means each candle on the chart represents 1 hour and 4 hours of price movement, respectively.
Indicators
We will use two Bollinger bands with the following settings.
Moving average 12, deviation 2
Moving average 12, deviation 4
One should have a clear understanding of the Bollinger band indicator before using it for this strategy. Refer to our articles on Bollinger bands for an explanation of the indicator.
Currency Pairs
The strategy is suitable for trading in all currency pairs listed on the broker’s platform, including major, minor, and few exotic pairs. However, it is better to trade in highly liquid currency pairs.
Strategy Concept
With the Bollinger band indicator’s help, we can objectively identify the ebb-and-flow movement of a trend. When the price hits the upper band of the first Bollinger band (MA 12, Dev 2), it indicates an upward movement. In this scenario, we prepare to go long in the currency pair. As prices retrace back to the centerline of the Bollinger band (MA 12), a significant retracement has occurred, and it is time to enter for a ‘long.’
Similarly, when prices hit the lower band of the Bollinger Band (MA 12, Dev 2), it indicates a momentum to the downside, and we prepare to go ‘short’ in the currency pair. As prices retrace back to the centerline of the Bollinger band (MA 12), and it is time to enter for a ‘short.’ We will exit our ‘trade’ in two places, which we explain in the coming section of the article.
Trade Setup
In order to illustrate the strategy, we have taken the example of the USD/JPY currency pair on the 4-hour time frame, where we will find a ‘long’ opportunity in the market using the strategy. Here are the steps of the trend bouncer strategy in forex.
Step 1
Firstly, open the chart of a currency pair and plot two Bollinger bands. The moving average of the first Bollinger band is 12, with a standard deviation of 2. Moving average of the second Bollinger band is also 12 but should have a standard deviation of 4. Since it is a trend trading strategy, it is best to use the strategy on the pullback of a new trend. However, it can also be used on a reversal, but the reversal should be confirmed before applying the strategy.
In this example, we see that the market has shown signs of reversal, which could extend on the upside.
Step 2
The next step is to wait for the price to hit the upper band of the first Bollinger band, in case of an uptrend. Similarly, the price should hit the lower band when trading the pullback of a downtrend. This gives us the confirmation that a trend has been established. Now, we need to wait for a retracement of this move before we can enter the trend.
In the below image, we can see that the price exactly touches the upper band of the first Bollinger band (MA 12, Dev 2), and now we will wait for a pullback to join the trend.
Step 3
The next step is to wait for the retracement to touch the Bollinger band’s centerline. The intersection of the price and the centerline is the entry signal for the strategy. An important point to make a note here is that the pullback shouldn’t come in a single candle. This means the pullback should come in multiple candles. The longer it takes, the weaker the pullback. In such cases, the is a higher chance that the trend will continue.
In our example, we are entering for a ‘long’ as soon as the price touches the Bollinger band’s centerline. We also see that the pullback has come in 6 candles, which is desired.
Step 4
As mentioned earlier, the strategy has two ‘take-profit‘ points. The ‘take-profit’ points are set based on the risk to reward ratio. The first one is at 1:1 RR, and the second one is at 1:2. The reason for the two ‘take-profit’ points is that since we are trading with the trend, the market has the potential to make new ‘highs’ and ‘lows.’
Strategy Roundup
Understanding the trending nature of the market helps us to identify the direction and timing of our entries. The best part of this strategy is that we bank profits in various stages. With a momentum indicator like the Bollinger band, we greatly increase the odds of being profitable in the long run.
A correlation coefficient is a number that describes the extent to which two instruments are correlated to each other. The number ranges between -1 and +1. This number moves from periods of positive correlation to periods of negative correlation. Located on one end of the scale, +1 is considered a state of the positive correlation between two instruments.
If the number is anywhere between 0 and +1, the two assets are said to move in the same direction, with a certain degree of positive correlation. On the other end of the scale, -1 is considered a state of negative correlation between two instruments. If the number is anywhere between 0 and -1, the two instruments are said to move in the opposite direction, with a certain degree of negative correlation.
The strategy we will be discussing today seeks to exploit the inverse correlation between the dollar index and Gold’s price. According to the World Gold Council, Gold tends to rise when the U.S. dollar falls. It is observed in the past that the correlation coefficient for Gold and the dollar index was between -0.6 and -0.8. This means if the dollar index is up, there is a 60% to 80% chance that gold prices would come down. In contrast, if the dollar index is down, there is a 60% to 80% chance that gold prices would come down. Let us see how the strategy works.
Time Frame
The commodity correlation strategy works well in the Daily (D) time frame. This implies that each candlestick on the chart represents the price movement of one day.
Indicators
We will be using the ATR indicator in the strategy. No other indicators are required for the strategy.
Currency Pairs
There are two charts we need to focus on in this strategy. The first one is the spot Gold or XAU/USD, and the second one is the chart of the dollar index.
Strategy Concept
The dollar index’s price action is used as a reference to initiate a trade on the XAU/USD. Technical levels of support and resistance on the dollar index chart are used to spot long and short trades on XAU/USD. If the price closes below the support on the dollar index chart, a long trade is initiated on the XAU/USD the following day. Similarly, if price closes above resistance on the dollar index chart, a short trade is initiated on the XAU/USD the following day. The risk-to-reward of this trade is 1:2. A bigger target can be achieved by allowing the trade to run its course.
The strategy is very simple for those who have a basic understanding of support and resistance. Another reason behind its popularity is that it does not involve the usage of complex indicators. The trade setups are not formed too often as we are using the daily time frame charts. Hence, a lot of patience is required for the application of the strategy.
Trade Setup
Here are the steps to implement the commodity correlation strategy. In both the instruments, we will be using the daily time frame chart only.
Step 1
The first step of the strategy is to open the dollar index’s daily time frame and mark key areas of support and resistance on the chart. If one is looking for ‘long’ trades, the identification of the support area is crucial. And if one is looking for ‘short’ trades, identification of ‘resistance’ trade is crucial. After marking out of the lines, wait for the price to breakout or breakdown. In case of a breakout, we will look for ‘short’ trades in ‘gold,’ and in case of a breakdown, we will look for ‘long’ trades in ‘gold.’
We have taken an example of a ‘long’ trade where we will be executing the steps of the strategy. In the below image, one can see that the price has broken below the long term support.
Step 2
Next, we open the chart of XAU/USD, where we look for ‘long’ or ‘short’ entry. We enter for a ‘long’ in ‘gold’ on the following day of the dollar index’s break of support. Similarly, we enter for a ‘short’ in ‘gold’ on the following day of the break of resistance in the dollar index. The entry is taken right at the opening candle on the next day.
In our case, we are entering for a ‘long’ in ‘gold’ on the following day since the price had broken the dollar index’s support on the previous day.
Step 3
In this step, we determine the take-profit and stop-loss for the strategy. The stop loss is mathematically calculated where it is placed at the amount obtained after multiplying 2 to the value of the ATR indicator on the previous day. This means if the ATR value is 30, then stop loss will be set 60 points away from the current market price (CMP). The take-profit is extended up to a point where the trade results in a risk to reward ratio of 1:2. As mentioned earlier, since this is a long-term chart, the trade has the potential to give higher returns.
We can see in the below image that trade has almost reached our ‘take-profit’ where this is the current state of the market.
Strategy Roundup
Part II of the commodity correlation strategy seeks to take advantage of the negative correlation between the dollar index and gold prices. Using the dollar index as a reference, we are activating trades on the XAU/USD pair, which is nothing but the price of spot gold.
However, the interest rates announcement by the Federal Reserve will try to keep the inverse relationship between the U.S. dollar and Gold. This strategy is ideal for traders around the world who do not have time to watch the markets on a daily basis. The strategy can also be used to look for investment opportunities in Gold.
Trading the news is one of the best ways to make a profit within a short span of time. This is because volatility is highest during these announcements, and traders look to capitalize on these news releases by analyzing the data and the price movement.
The strategy we will be discussing is amazingly suitable for traders who love the volatility associated with news announcements. One of the biggest advantages of trading the news is accessibility. Today, we can access the news outcome as soon as they are released without any delay.
Many free websites report economic events every day. The one which is widely used by investors and traders is a site called forexfactory.com. This site is user-friendly, and the economic calendar allows us to view the upcoming news at a glance.
The news that has red-coded flags linked to them have the greatest impact on the currency pairs. We will prefer to trade the news events with the highest impact as opposed to the orange or yellow ones because the possibility of large movement is high. Today’s strategy is also based on such news releases.
As the actual and forecasted figures are extremely important for this strategy, we will be watching these numbers very carefully. That is the reason why this strategy is named as ‘Gawk The Talk.’
The top news announcements that cause the greatest moves in the forex market are Interest Rates, Gross Domestic Product (GDP), Employment Change, Trade Balance, Consumer Price Index, Purchasing Manufacturing Index (PMI), and Retail Sales.
Time Frame
Gawk the Talk strategy works well with the 15 minutes and 1-hour candlestick charts. This means each candle on the chart represents 15 minutes or 60 minutes of price movement.
Indicators
No indicators need to be used in this strategy.
Currency Pairs
The strategy is suitable for trading all currency pairs; however, it is healthier to trade in currency pairs such as the EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD.
Strategy Concept
The idea of the strategy is simple, where we long on the affected currency when the actual figures are greater than forecasted figures by a minimum factor of 15%. To lower the risk, we focus on news events that are related to the U.S. economy. Which means we will be primarily trading the U.S. dollar either as the base currency or counter currency.
We will use the 15 minutes time frame chart to determine our entries since the news is usually released in 15-minutes intervals. Some common times of news releases include 8 A.M., 9:15 A.M., 10:30 P.M., and 11:45 P.M.
For example, if the Reserve Bank of Australia raises the interest rates, we will go long in AUD/USD. And if the interest rates are lowered, we take a short trade in the pair. For news announcements that affect the United States, it is best to trade in the two most liquid pairs: EUR/USD and USD/JPY. Remember, we go long in the pair if the news outcome is positive for the base currency and ‘short’ in pairs wherever the currency is a counter currency.
Trade Setup
To illustrate the strategy, we will use the Unemployment rate news announcement, which was released on the 2nd of July 2020. As mentioned earlier, we will be dealing with currency pairs involving the U.S. dollar only. Hence, depending on the news data, we will take a suitable position in the EUR/USD pair.
Step 1:
The first t step is to go to the forex factory website and look for news releases that have the highest impact on the currency. The easiest way to find such events is to look for the red-colored flags on the left-hand side of the event. We will not consider any other news results other than red ones.
In this example, we will be analyzing the Unemployment rate data of the United States.
Step 2:
An important point most traders miss out while trading using this strategy is that they trade just based on the numbers. They forget to look at the charts from a technical angle. In this step, we mark the key technical levels on the chart based on the current state of the price.
As we can see in the below image, just before the news announcement, the price is at the resistance area. This means a ‘short’ trade is considered to be less risky than a ‘long’ trade at this point.
Step 3:
This step is the crux of the strategy. In this step, we take an appropriate position in the currency based on the news’s outcome. If the actual numbers are higher than the forecasted numbers, we will go long in that currency. Likewise, if the actual numbers are lesser than the forecasted numbers, we will go ‘short’ in that currency. The difference between actual and forecasted figures should be a minimum of 15% before we can take enter the market.
In our example, we see that the Unemployment rate was better than what was predicted by economists. This means the data is positive for the U.S. dollar, and thus we can expect bullishness in the currency. Therefore, we take a ‘short’ position in EUR/USD soon after the market falls from the resistance.
Step 4:
Stop loss for the strategy is placed just above the news candle, which is technically the right spot for placing the stop loss. The take-profit is also placed at a key technical level, which could be a hurdle for the trade. The risk to reward ratio of trades placed using this strategy is a minimum of 1.5. However, one should book partial profits at the halfway mark in order to lock in some profits.
In this case, the price moved about 60% of our take-profit, where would take some profits off. However, more often than not, the price does hit the take-profit levels.
Strategy Roundup
The strategy we discussed today is mostly for the aggressive traders and people with large risk appetite. In this strategy, we are essentially taking advantage of the volatility and the fundamental factors that affect the currencies. The trade management rules of the strategy ensure that we don’t make huge losses even if the trade does not work completely in our favor. Cheers.
There are millions of strategies out there in the market. Some work exceptionally well, while some fail miserably. Trading successfully is not about knowing several strategies, but about one strategy that works consistently. All professional traders are never in the hunt for trying out different strategies. They have expertise in a single strategy and know when to apply it and when not to.
Here, in this article, we shall be walking you through a simple yet extremely strategy that both day and positional traders can apply. Besides, we will enlighten you on the dos and don’ts of the strategy.
Understanding a Trend
The most evident state of the market is a trend. It is indeed the best state to trade as one can easily bet on the market’s direction. In technical terms, the trend is the state of the market, where the price makes higher-highs/higher-lows or lower-lows/lower-highs.
A trend alone can be of different types – based on the pattern. The above image of a trend is how an ideal trend looks like. However, the number of occurrences of this type of trend is very less. Apart from the ideal trending market, we can have other types of the same state.
Figure 1: In this type, the market breaks about the Support and Resistance (purple line), retraces through the line, and then makes another higher high.
Figure 2: Here, the market makes a HH by breaking about the S&R (purple line), pulls back insignificantly, away from the S&R, and makes a higher high.
Figure 3: The market made HH passing through the S&R, retraced a little, tried to make a higher high, and failed. Later, it retraced more than the previous time, and then successfully made a HH.
What is the ‘Higher High Failure’ Countertrend Strategy?
The “Higher High Failure” countertrend strategy is based on the third figure of the above image. It is named countertrend because the overall trend of the market is up, but the strategy is to take a short position.
According to the strategy, in an uptrend, if the market fails to make a higher high on the very first attempt, then one can prepare to go short on the security.
Logic
In a sequence of higher highs and higher lows, if the market fails to break above the recent HH, it is an indication that the trend is preparing for another push down before heading up. The failure also indicates that the buyers are not strong enough to push the market higher with one retracement. Since the buyers are slowing down, one can swing down from the seller before the market resumes its trend. Note that the length of this south wing depends on the strength difference of the buyers are sellers.
Trading the Higher High Failure Strategy
Consider the below chart of Euro / US Dollar on the 1H time frame. We can see that the market is in an uptrend making higher highs and higher lows.
The most recent higher high made by the market was 1.11834. The market then retraced to 1.1098, tried to make a new high from the previous one, but failed by leaving a wick on the top.
The failure to make a higher high indicates that the buyers are losing momentum, and as a result, the sellers could temporarily take over the market. In addition, the wick on the top at the resistance area signifies the strength of the sellers. Thus, right after the price shoots down at holds below the S&R (grey ray), one can go short on the pair.
Take Profit Placement
Since the buyers shot up from 1.10988 the previous, we can expect a reaction from the same level. Hence, 1.10988 would be the safest level to place the take profit level. If the sellers are strong in momentum, one can ride down until the S&R.
Stop Loss Placement
Stop-loss few pips above the wick can keep you away from getting stopped out. But it is risky to keep the stop loss right above the resistance level.
On the flip side, this strategy will work like a charm on a downtrend as well. For a downtrend, the strategy could be termed as a “Lower Low Failure” countertrend strategy. Let’s take an example of the same and understand how to trade a down-trending market.
In the below chart of GBP/CAD, we can see that the market is in a downtrend, making lower lows and lower highs. Level 1.70006 was the most recent LL. The market retraced to the S&R and tried to make a new LL but failed. During the failure to make a LL, a spinning top candle appeared, which was then followed by a bullish candle to close above the LL level. This confirms that the sellers are have temporarily faded out, and the buyers are going take over the market.
Take Profit Placement
Take profit can be placed at the price where the market tried to make a lower low previously. In this example, the TP would be at the S&R.
Stop Loss Placement
The safest stop loss for this strategy would be right below the price where it failed to make a LL.
Important Points to Note
The price should attempt to make a higher high and fail. The strategy cannot be considered for an equal high.
After the failure to make HH, the price should hold below the S&R level.
The strategy will not work if the price makes HH, holds, and then drops below the S&R.
Since it is countertrend trade, make sure to take profits at every hurdle.
The stop loss must be above the high of the higher high failure, NOT right at the resistance.
We hope you found the strategy interesting and useful. Do test it out in the live market and let us know the results in the comment section below. Cheers!
Strategies that we discussed in the previous set of articles were based on indicators and price action patterns. We are going into the trading strategies, where we will combine popular candlestick patterns and price action. The next two articles will discuss the 123 patterns as a reversal trading strategy and continuation trading strategy. First, we will look at the 123 pattern as an indicator of the end of a trend and also a market reversal. Hence, it is also known as the 123 top and bottom pattern.
The 123 top and bottom is a very powerful pattern that signals a reversal of a trend. It is also used as a trend continuation pattern, which we will be discussing in detail shortly. First, let us discuss the 123 patterns as a reversal trading strategy.
Time Frame
A fascinating feature of this strategy is that it applies to all time frames starting from 15 minutes to ‘daily.’ Before trying this strategy on extremely small time frames such as the 5 minutes or 1 minute, a lot of experience is required.
Indicators
As mentioned earlier, in this strategy, we will not be using any technical indicators. The only prerequisite of the strategy is to have a clear understanding of the 123 patterns before reading about the strategy.
Currency Pairs
The strategy is suitable for trading in all currency pairs. However, it is suggested to look for the trading opportunities in major and few minor currency pairs only as the patterns are more reliable and evident in these pairs.
Strategy Concept
The strategy begins by identifying three main points. For example, in an uptrend, when the market hits a new high, label that point as 1. We then wait for the price to pull back to a short-term support area. This point is labeled as 2. Finally, when the price moves up to an area between points 2 and 3, we label this as point number 3. We then take an entry at a suitable location, which we will address in the later part of the strategy.
The pattern is complete when the price stays below point 2. The strategy is to sell the currency pair on the break of point 2. The take-profit of the strategy is placed at a point that results in a 1:2 risk-to-reward ratio. The stop loss is put just above point 3, whereas a more conservative stop loss is placed just above the move, in order to maximize the risk to reward. The trader will be able to make this choice by trading the pattern again and again. Let us understand the step by step process of the strategy.
Trade Setup
In order to illustrate the strategy, we have considered the GBP/AUD currency pair, where we will look for ‘short’ trades by identifying the 123 top patterns. In this example, we are applying our strategy on the 15 minutes time frame and during one of the major trading sessions.
Step 1
The first step of the strategy is to look for point 1, which is essentially the highest point of a trend. The criteria for selection of point 1 is that the market should reach it’s previous low or high twice before it starts moving lower or higher.
In our example, we can see that the previous lows have been tested multiple times, and thus we have chosen the highest point as our point number 1.
Step 2
The next step is to mark the point number 2. When the market pulls back to the recent support or resistance area after reacting from point 1, we mark this as point 2. Remember that the price should not only reach that area but also react and move higher (for uptrend) or lower (for downtrend). This confirms the key technical level.
Step 3
The formation of the 123 pattern is complete after identifying the third point. When the market moves in the area between points 1 and 2 and later comes goes back to point 1, the point from where the market reversed becomes our point 3. Now the next step of the strategy is discovering the ‘entry.’
Step 4
In this step, we will be discussing the ‘entry.’ There are two ways of entering the market in this strategy. The first one is an aggressive way to take an entry on a break of point 2, and as the market starts moving in that direction. Traders who are confident about the pattern and have belief in the market can opt for such an ‘entry.’ The second one is a conservative approach where one takes an ‘entry’ at the test of the previous support or resistance. This gives additional confirmation that the market is ready to go in a favorable direction.
In this case, we have entered the market right after point 2 is broken, which is a little aggressive.
Step 5
Finally, we need to determine our stop-loss and take-profit levels for the strategy. The stop loss is placed a little higher than point 3, or if one wants to maximize their risk to reward ratio, he/she can place it at a 50% mark between point 2 and point 3. The take-profit is placed at a point where the resultant risk to reward is at least 1:2. However, if there is a hurdle in between, profits can also be taken at such points.
Strategy Roundup
The 123 pattern is a major trend reversal pattern is one of the best strategies for trend reversals. One can trade using this strategy on any time frame. The strategy is based on the idea that the market is losing momentum in the direction of the major trend and could reverse any moment. The probability of this strategy is high and does not require knowledge of technical indicators.
In this series of different states of the market, we understood the terminology and the concepts involved. However, in the forex market, if we do not go practical, there is the least use to the concept. In other words, one must understand how to trade in the market, knowing its state. In this final lesson of the series, we shall dive deep into the topic and understand how to apply them in the market.
Trading a Trend
Trading a trending market is the simplest and safest way to trade in the market. This is because, in a trend, it is evident on which party is dominating the market. For example, in an uptrend, it is clear that the buyers are more powerful than sellers. And hence, we look for buying opportunities rather than selling.
In a trend, the market makes higher highs and higher lows. In other words, the market moves in one direction with temporary pullbacks in the opposite direction. These pullbacks (retracements) typically turn around to the original trend direction at the support and resistance levels. So, to trade a trend, we wait for the market to make a higher high / lower low and retrace to the S&R level, before triggering the buy or sell.
Consider the below chart of USD/CAD. The market is in a clear downtrend. The market made a new lower low by breaking below the grey ray. It then retraced back to the S&R area (grey ray) and is currently moving sideways. And this sideways movement in the market has high significance.
After the sellers made a new low, the buyers began to show up. They made it until the S&R level. And the market is currently in a range. As per the definition of a range, we know that there is strength from both the parties. In other words, the buyer who was temporarily dominating the market is slowing down as they are unable to make a higher high. And this price action is happening in the S&R area of the sellers. Therefore, we can conclude that the sellers are here to continue their downtrend.
One can enter when the price is at the top of the range (resistance) or when it starts to fall from the resistance. Placing the stop-loss few pips above the S&R level, and a take profit at the Low, is the safest approach to trade a trend.
Trading a Range
In a range, the market moves between levels – Support and Resistance. In this type of market, there is power from both buyers and sellers. Typically, the market shoots up from the support and drops from the resistance. However, randomly buying at support and selling from resistance is not the right way to trade a range like a professional. To trade a range with high odds in your favor, you must be aware of the overall trend. And you place your bets on the direction of the overall trend.
Consider the below chart of NZD/CAD. We can clearly see that the market is in a range. But, looking from the left, the market is in a strong uptrend, and the price is holding above the S&R level (grey ray). In the current market, we see that the price dropped below the bottom of the range, touched the S&R level, and shot right back up into the range. Thus, confirming that the big buyer is preparing to do the buys.
Since the price strongly reacted off from the S&R level and held above the support of the range, we can prepare to go long on the market. Stop-loss from this trade would be below the S&R level, while the target point would be at the top of the range. In hindsight, the buyers were able to push the market above than the resistance.
This brings us to the end of this series. We hope you found this lesson and the previous chapters interesting and informative. Stay tuned until we release our new set of lessons.
In the previous lesson, we discussed the concept of retracement and reversal. We also understood how they are different from each other. However, just knowing if the terminology will not help in the forex market. Being able to predict if the price is retracing or reversing is the name of the game because this will significantly bring down your losing trades and increase the number of winning trades.
Retracement or Reversal?
In technical analysis, there are several ways to predict if the market is undergoing a retracement or a reversal. Here are some of the ways to differentiate between the two.
Fibonacci Retracement
Fibonacci retracements are very popular in technical analysis space. They are based on a sequence of key numbers identified by Leonardo Fibonacci, a mathematician.
In technical analysis (trading), Fibonacci retracement is drawn by taking two extreme points on a price chart, which results in different levels or ratios – 23.6%, 38.2%, 50%, 61.8%, and 100%. These Fibonacci ratios are used by traders to determine possible support and resistance levels in the market. Typically, these are the level where the price tends to hold and reverse from the current direction. Having that said, the price does not hold at every Fibonacci level. It holds perfectly only when it is combined with the price action on the charts.
Consider the below chart of EURCAD. In the recent chart, we see that the market is in an uptrend. The grey ray represents the support and resistance level. After making a higher high, the price has retraced to the S&R level.
Now the question arises if this retracement is a pullback to the uptrend or a potential reversal. To figure this out, we shall apply the Fibonacci retracement to the chart.
In the below chart, we have incorporated the Fibonacci retracement onto the price chart. If we look at the same S&R level, we see that the price is also holding at the 38% level. Hence, this gives us double confirmation that the market is preparing to head north. And in hindsight, the price does make a higher high.
Market Transition
Traders, especially Price Action traders, study the movement in the prices to determine if the market is preparing for a possible reversal. If a market is going for a reversal, the market gives simple yet effective hints and clues about it. The violation from the definition of a trend is the clue that the market is possibly going to turn around for a reversal.
Let us consider the example of a reversal to the upside. Initially, the market will be in a downtrend, making lower lows and lower highs. But, when it retraces and tries to make a new lower low, it leaves equal low. This becomes our first clue on a market reversal. From the point of the equal low, it rallies up but fails to make a lower high.
Instead, it makes an equal high. These two hints are an indication that the price is not moving according to the definition of a downtrend, and there could be a possible reversal. To confirm the same, we wait for the price to make a higher low. If it does make a higher low, instead of a lower low, we can predict that the market is preparing to head north.
Below is a self-explanatory illustration for the above explanation.
Take the below quiz to check if you have got the concepts correctly. Cheers!
Oil is one of the largest commodities in the world that is traded heavily. The reason for high liquidity is that it is a basic necessity. It is needed to run factories, machinery, ships, and cars. Canada is one of the largest exporters of Oil, and it forms a major part of the total volume of commodities exported. Due to these reasons, Canada is positioned in the world’s top ten oil-producing nations, and as a consequence, it’s economy is severely impacted when oil prices decline. Many traders today predict the movement of the Canadian dollar using the price of Oil.
When oil prices rise, the Canadian dollar tends to strengthen. Similarly, when oil prices are low, the Canadian dollar tends to weaken. Japan, in contrast, is considered as the net importer of Oil. So, when oil prices rise, Japanese yen weakens, and when oil prices drop, Japanese yen strengthens. Many traders are not very comfortable trading Oil due to the volatility it possesses.
An alternate and improvised way trading oil directly would be to utilize knowledge of oil prices to trade the CAD/JPY currency pair. As Canada is the net exporter and Japan is the net importer of oil, oil price becomes a major indicator for the movement of the CAD/JPY currency pair. That is why we have named this strategy a ‘Commodity Correlation Strategy.’ Let us dive into the strategy and explore the steps involved.
Time Frame
The commodity correlation strategy works well with the daily (D) and weekly (W) time frame charts. Swing trading is the most suitable trading style for this strategy as it has a long-term approach to the price. Therefore, the strategy cannot be used for day trading or on 4-hours’ time frame chart.
Indicators
We use just one technical indicator in this strategy, and that is the Average True Range (ATR) to set the stop loss for the trade. We don’t use any other indicator during the application of the strategy. If one is not familiar with the ATR indicator, it is recommended to refer our article on ATR before understanding the strategy.
Currency Pairs
This strategy can be used with CAD/JPY currency pair only, with the movement of oil prices as our leading indicator.
Strategy Concept
The price movement of crude Oil is used as a reference to catch a ‘trade’ in CAD/JPY currency pair. Key levels of support and resistance on the crude oil chart are used to spot long and short opportunities in CAD/JPY pair. If price closes above resistance on the oil chart, a long trade is activated on the CAD/JPY the following day. Similarly, if the price closes below support on the oil chart, a short trade is triggered on the CAD/JPY the following day. The risk to reward of trade taken based on this strategy is a minimum of 1:2, which is above normal. A bigger target can be achieved by allowing the trade to run.
Trade Setup
In order to explain the strategy, we focus on the price chart of crude Oil and CAD/JPY currency pair. We are not concerned with any other forex pair. The strategy can be easily understood by those who have basic knowledge of support and resistance.
Step 1
Firstly, we need to open the chart of crude Oil and then find key levels of support and resistance. After marking support and resistance levels, we wait for a breakout or breakdown of the range. After the breakout happens, make sure that the breakout is real and a faker. A close candle well above the resistance area gives us a confirmation of the breakout, and thus we can expect a continuation of the price in the direction of the breakout.
The below image shows how the breakout should be along with the confirmation candle.
Step 2
Now, we need to open the chart of CAD/JPY currency pair and locate the price on the day when the breakout took place on the oil chart. Since the breakout on the oil chart is above the resistance, we will ‘long’ in CAD/JPY currency pair after a suitable confirmation sign from the market. A bullish candle on the next day is the confirmation signal for going ‘long.’ In a case of a breakdown below the support, a bearish candle in the CAD/JPY pair on the next day of the breakdown is suitable for going ‘short’ in the pair.
In the above example, we see the formation of a bullish candle on the following day, which triggers a ‘buy’ trade. Let us see what happens further.
Step 3
In this step, we determine take-profit and stop-loss levels for our strategy. The stop loss for this strategy is calculated by multiplying the value of ATR by 2. The stop loss is placed by the number of pips obtained after performing the calculation. The take-profit is placed at the price where the risk to reward of the trade will be at least 1:2. However, in most cases, the trade has the potential to provide move higher.
In this example, the risk to reward of the trade was 1.5 as the major trend was down.
Strategy Roundup
Using the Commodity Correlation Strategy, traders can take advantage of the positive correlation between Crude oil prices and the CAD/JPY currency pair. This strategy is especially suitable for traders who want to trade in Oil but do not enjoy the volatility associated with it. This strategy is also suitable for traders who do not have the time to day trade and prefer long-term positions in the pair.
Crude Oil has the highest correlation with CAD and JPY Forex pairs. Hence we have considered these asset classes. You can use this strategy for different Forex pairs depending on which commodities they are correlated with. We hope you found this strategy informative. All the best.
Divergence is used by traders to determine if there is going to be a reversal or a trend continuation. They sometimes work exceptionally well and, at times, goes entirely in the anticipated direction. Thus, to increase the consistency of divergence, we have listed out some rules for trading divergence.
#1 Focus only on four price patterns
For legitimate divergence to exists, their price pattern must be either of the following:
If spot a divergence on the indicator that does not have either of the above price action, then the divergence will not work.
Several times, the price consolidates and shows divergence on the indicator. But there will not be any proper top or bottom to confirm that the divergence is real. Thus, such divergence must be ignored.
#2 Connect the lines only for significant highs and lows
Now that you know, we are concerned with one of the four patterns – higher high, lower low, equal high, and equal low. When it comes to drawing the trend lines, you must make sure the highs and lows are major enough to be considered. A little bump up or dips that may look like a higher high or lower low must be ignored.
#3 Mark the corresponding highs and low
Always start by drawing the highs and lows from the price charts. Then you mark the highs and lows on the indicator corresponding with the highs and lows with the price.
Pro tip: Draw two vertical lines to perfectly mark the corresponding highs and lows.
#4 Compare the length and strength of the pushes
This is one of the most important points to consider. In a trending market, the price makes higher highs or lower lows. But, when there is a divergence for a particular push, you must make sure that the momentum is weaker, and length is smaller than the previous trend sequence.
In the above chart, we can clearly ascertain that the lower low, which had divergence was much weaker and shorter than the previous push. As a result, the market reversed and had a big bull run.
#5 Do not try catching a falling knife
There are times when the market does not consolidate before reversing its direction. There could not be any entry for such trades. But there are traders who chase the market and end up buying at very high prices, which could be bad for business. Thus, you be patient and wait for the right opportunity, because buying at higher prices, could hinder the risk to reward ratio, leading to a high risk for small profits.
Divergence is a powerful tool in trading. It works like a charm when used correctly. However, traders enter right after they spot a divergence, which is an incorrect method to trade it. Early entry can lead to spikes or wrong comprehension; as a result, executing your stop loss. Thus, precise entries are as crucial as understanding divergence. This shall go over some tips and tricks to not enter early in a trade.
The Double Confirmation Rule
When we spot a regular divergence, the market does not reverse immediately. The majority of the time, it goes through a consolidation phase. And patiently waiting through the price action is necessary. Here is an example that explains how long a trader must wait before taking the trade.
Below is the chart of GBP against CAD on the 15mins time frame. Reading from the left, the market was in a downtrend, making lower lows and lower highs. In the second lower low, we see that the indicator failed to make a lower low but made a higher low instead. There are several ways through which the market can reverse its direction. The double confirmation rule is for the situations when the market holds above the S&R level (purple ray).
According to the rule, the price must successfully hold above the S&R level two times. This is a confirmation that the S&R level has potentially turned into Support. So, when the rule is satisfied, you can place a buy order right at the S&R level. A logical Stop Loss must be maintained a few pips below the start of the buyer who broke above the S&R. Whereas a safe Take Profit can be at a strong Supply area.
The Spike confirmation
The previous case dealt when the scenario when the market held above the S&R level. Conversely, this is a scenario when the market holds below the S&R. Let us understand the spike confirmation entry with an example from real charts. Below is the chart of EUR against USD on the 15mins time frame. Initially, the market was trending down with lower lows. From the most recent low, we see that the price moved down, but the MACD indicator is faced up, indicating divergence.
When the buyers began to pull back, they were unable to pass through the S&R level (purple line), unlike the previous example. Thus, we cannot apply the double confirmation rule. Instead, the spike confirmation is applied. The spike confirmation is applied for scenarios when the market holds below the S&R level. According to it, one must wait until the market attempts to make a lower low and fails. After the failure, one can prepare to go long.
The Logic
When the market holds below the S&R level, it means that the sellers are not done with their business. The job of a seller is to make lower lows by holding below the S&R. So, though there is divergence, we cannot ignore the fact that the sellers are still in the game. Thus, we must wait for the sellers to attempt to make a lower low. And if the price shoots right back up, it signifies that the sellers are done with their business, and the buyers have taken over the market.
Once the buyers come up strong, you can trigger a buy at the most recent S&R (dotted line). The Stop Loss will go right below the area where the sellers had failed. Take Profit can be at a potential supply area. But in this case, we see a divergence when the price made a higher high. Thus, the positions must be liquidated in the area shown in the chart.
Note that the same principles can be applied to an uptrend as well. These were only a couple of effective ways to enter using divergence. As you gain experience, you come with your own rules too.
In the previous lesson, we discussed regular divergence and its types. In this lesson, we shall continue with the second type of divergence – hidden divergence. The concept of divergence in this type remains the same but differs in the indication it provides.
What is the Hidden Divergence?
In a trending market, the prices make higher highs or lower lows. In addition to that, it sets in higher lows or lower highs as well. When the market prepares to reverse, the lower low or higher high turns to equal high or equal low. The higher lows or lower highs become the other way round. And in the new leg of the trend, if there is divergence, it is referred to as hidden divergence.
In simple terms, hidden divergence is used to indicate trend continuation in the middle of a trend or typically at the beginning of a new trend.
Types of Hidden Divergence
There are two types of Hidden divergence based on the direction it indicates:
Hidden Bullish Divergence
Hidden Bearish Divergence
Let’s understand how each of them is formed with examples as well.
Hidden Bullish Divergence
In a downtrend, the market makes lower lows and lower highs. In preparation for a reversal, it leaves a higher low instead of a lower low. Also, there could be a higher high or equal high. In this price action, if there is a lower low in the oscillator, it indicates a hidden bullish divergence. It signals that the price could continue to go north.
In the above chart of AUD/USD, we can see that the market is coming from a downtrend. Later, the market does not hold at S&R to make a new lower low but makes a higher low. Looking at the indicator, it leaves a lower low. Hence, showing divergence and indicating that the market has turned into an uptrend and will possibly continue its move up.
Hidden Bearish Divergence
In the market goes into a transition from an uptrend to a downtrend, the price which was making higher highs now starts to make lower highs. In addition, the oscillator puts in a higher high for the lower high in the price chart. Thus, showing a hidden bearish divergence. It is an indication that the market is going to continue in a downtrend.
In the above chart of AUD/USD, the market was initially coming from an uptrend making higher highs. Later, it turned directions and made a higher low instead of a higher high. But the RSI made a higher high for the same move. Thus, indicating divergence and most probable continuation of the downtrend.
Markets move in trend, channels, and ranges. For any market to undergo a change in the direction, it must happen as a transition. For example, a market that has to transit from an uptrend to a downtrend, it has to go from an uptrend to a channel, to a range, and then begin the downtrend. That is, at one point in time, the market does not hold at support & resistance, and stops making higher highs. And this market reversal is indicated by the regular divergence.
Types of Regular Divergence
There are two types of regular divergence:
Regular Bullish Divergence
Regular Bearish Divergence
Let’s understand each of them with the help of live charts
Regular Bullish Divergence
This type of divergence is used to give a bullish signal in the market. When the market is in a downtrend, making lower lows and lower highs, the oscillator follows the same path. At one point, the price chat makes a lower low, but the oscillator makes a lower high. The oscillator does the opposite of what the price did. And this referred to as bullish divergence. Here is an example of the same.
In the above chart of EUR/AUD, reading the market from the left, we see that it was in a downtrend. As the prices were making lower lows, the indicator followed the same. But later, when it made another lower low, the MACD made a higher low, indicating divergence in the market. When it left higher low, we see that the price did not make any lower low from the S&R level. And finally, the market reversed and began to move north.
Regular Bearish Divergence
Regular bearish divergence is used to forecast bearishness in the market. In an uptrend, the market makes higher highs and higher lows. The oscillator indicators follow the same trajectory as well. But, if the price makes a higher high and oscillator does the opposite (lower high), then it is referred to as a bearish divergence. It is an indication that something is not right with the uptrend, and there are possibilities of a trend reversal.
In the above chart of AUD/CAD, we see that the market made a higher high, and the MACD indicator made a higher high as well, indicating that the uptrend is still intact. But the second time when the market made a higher high, the indicator put a lower high—indicating that there is something wrong with the uptrend and could be a possible reversal. In hindsight, we infer that the market failed to make higher highs and then reversed.
Note that divergence provides an indication that there could be a possible reversal in the market. It does not give a signal to buy or sell. The reversal must be solely based on your strategy. Divergence is only used to confirm the strategy and increase odds in your favor.
There are several types of technical traders in the forex industry. Some trade based on price action while some trade using indicators. Price action traders typically do not use any indicator, but the Divergence is an exception to it. Divergence is an indicator concept that can yield immense risk to reward if used correctly. It is a powerful tool that helps traders catch the absolute peak and trough of the market.
What is Divergence?
Generally, the meaning of Divergence is to move apart. And the meaning of trading is no different. In forex, Divergence is a scenario when the price charts do not agree with the movement of the indicator. In a sense, if the price moves in one direction, the indicator moves in the other direction.
Formation of Divergence
Divergence can be found by comparing the price action on the charts with an oscillator indicator. Typically, Divergence is formed in trending markets. That is, they occur in markets that move making higher highs and or lower lows.
Consider a market a market making higher highs and higher lows. The job of an oscillator indicator is to follow the price action. Thus, the indicator should also follow an upward trajectory. But, if the charts make higher highs and the indicator makes an equal or higher low, then we conclude that there is a divergence in the market.
Significance of Divergence
Divergence is used to signify that there is something not right in the market and the uptrend. In an uptrend, for instance, the market breaks above the recent resistance (high), makes a new high, retraces to the Support & Resistance level, and continues the same cycle. But when the market makes a higher high with Divergence, there is a high possibility that the market might not hold at the S&R level. The market could reverse or might drop slightly below the S&R and then continue the uptrend.
Indicators used to Identify Divergence
Divergences can be identified using oscillator indicators. An oscillator, going by the name, moves between two levels – overbought and oversold. Typically, a level above 70-80 is considered overbought, and a level below 20-30 indicates an oversold market.
Following are the most commonly used indicators to identify Divergence
Based on the direction of the market, there are two types of Divergence:
Regular Divergence
This is the most used type of Divergence and very easy to spot. They are found at the top or bottom of a trend and are used to give a reversal signal. Regular Divergence can again be split into two types: Bullish Divergence | Bearish Divergence.
Hidden Divergence
Hidden divergences are relatively trickier to spot. Converse to regular Divergence, hidden Divergence is used for a trend continuation indication. They are typically found in the middle of a trend. Hidden divergences, too, can be divided into two types: Hidden Bullish divergence | Hidden Bearish Divergence.
That’s about the introduction to divergences. In the next lesson, we shall elaborate on each of the divergence types.
Crab is the last pattern that we are going to discuss in the harmonic group. Just like other patterns, the Carb is also identified and traded using the Fibonacci levels in order to determine the precise turning points. The Crab is a reversal pattern and is composed of four legs – XA, AB, BC, and C-D. Let’s understand them in detail below.
The Four Legs Of Crab Pattern
XA – In its bullish version, the first leg forms when the price action rises sharply from the point X to point A.
AB – The AB move goes against the actual market direction and retraces between 38.2% to 61.8% of the distance covered by the XA leg.
BC – In the BC leg, the price action resumes its original direction and retraces between 38.2% to 88.6% of the distance covered by the AB leg.
CD – The CD is the final leg that confirms the formation of the Crab pattern. Place the sell order when the CD leg reaches the 161.8% Fibs extension of the AB leg.
Trading The Crab Pattern
Bullish Crab Pattern
In the below GBP/USD Forex pair, we have identified the formation of the Crab pattern. The first movement XA can be considered any random bullish move. The second leg AB was a counter-trend, and it reached the 61.8% Fib leg of the XA leg. For the third move, price action goes up, and it retraces 38.2% of the XA leg. The last leg was the CD move, which 161.8% of the AB leg. The fourth leg confirms the pattern formation on the price chart.
We activated our trade at point D with stops below point D and taking profit at point A.
Bearish Crab Pattern
The price chart below represents the formation of a bearish crab pattern on the price chart. The first leg XA was the random move, and second leg AB goes up, and it retraces at 38.2% of the XA leg. The next third leg was the BC move, and it retraces 88.6% of the AB move. The last leg CD was the decision-making move, and it closes at 161.8% of the AB leg.
The trade activation was at point D, and the stop was a bit above the trade, and to book profits, we opted out for the most recent lower low.
Conclusion
The Crab pattern rarely appears on the price chart, but when it does, it provides excellent risk to reward ratio trades. If you are new to harmonic trading, practice trading this pattern on a demo account first and only then trade on the live account. Always remember to trade the Bearish Crab pattern in an uptrend, and Bullish Crab patterns in a downtrend only. Cheers!
Bryce Gilmore and Larry Pesavento are the ones to first discovered the Butterfly pattern. It is a harmonic reversal pattern, and it is composed of four legs. The trading of this pattern is similar to the trading of Gartley and Bat patterns that we have learned in previous lessons. The Butterfly pattern helps us in identifying the end of the current move so that we can take the trade. There are both bullish and bearish Butterfly patterns, and we must be going long if we find a bullish butterfly and vice-versa.
Four legs of the Butterfly Pattern
XA – In its bearish version, the first leg of the pattern forms when the price action drops from the point X to A.
AB – The AB leg reverses its direction and retraces to 78.6% Fib level of the distance covered by XA.
BC – In the BC leg, the price action changes its direction and moves back down. It then retraces between 38.2% and 88.6% Fib levels of the distance covered by AB.
CD – This is the final leg of the pattern, and if this leg goes wrong, we can consider the pattern formed till now as invalid. The CD leg must reach between 127% and 161.8% Fib extension of the AB leg. Take the sell trade at point D.
How To Trade The Butterfly Pattern?
Bullish Butterfly Pattern
We have identified the formation of the Butterfly pattern in the USD/JPY Forex pair. The first push ‘XA’ was a random leg on the price chart. The second leg is a countertrend move, and it retraces to the 78.6% Fib level of the XA leg. For the third leg, price action goes up, and the BC leg reaches 88.6% of the AB move. Finally, the CD leg enabled the price to the 161.8% level of BC move.
Since all the legs are formed according to the instructions, we can consider this a Bullish butterfly pattern. When price action completed the last leg, we activated our buy trade in this pair. The stops are placed below the trade, and the take profit was placed at point A.
Bearish Butterfly Pattern
The chart below represents the formation of a bearish butterfly in a downtrend. The first XA bearish leg was any random move in the market. The AB leg goes countertrend, and it retraces 78.6% of the XA leg. The BC move was bearish again, and it retraces to 38.2% of the AB move. Now that the three legs are completed, all we need is to confirm the last leg to ho short in this pair. For printing the last leg, price action again goes back up, and it reached the 161.8% of the BC move.
After all these legs, price action prints a bearish butterfly pattern, and the trade activation was at point D. The first take-profit was at point C, and the second take profit was at point A. We have placed the stop-loss order below the point D. The reason for shallow stops is that if the price goes above point D, the pattern itself becomes invalid.
Conclusion
Placing stop-loss and take-profit order is subjective. If you are an aggressive trader, place your take-profit at point C and for conservative targets place the take profit at point A. For your information, trading the Butterfly is almost as same as trading the Bat pattern. The only difference is the final CD leg. It makes a 127% Fib extension of the initial XA leg in this pattern, rather than the retracement of it. Cheers!
The ‘Rectangle’ is a classical technical analysis pattern described by horizontal lines showing support and resistance levels on the price chart. This pattern resembles the concept of buying at A significant support level and selling at a predominant resistance level. The price can stay between the Rectangle pattern for a long time, or the pattern can be very small.
The appearance of this pattern implies that the supply and demand of the currency pair are in balance for an extended period. The price action finds resistance at the top of a rectangle and support at the bottom of a rectangle. The pattern can easily be recognized and confirmed after the formation of two highs and two lows. These highs and lows form two parallel lines above and below the price action. These lines act as a strong support and resistance levels to the price action.
Keep in mind that this pattern doesn’t have a bullish or bearish bias. It is a neutral pattern that shows both parties are holding an equal amount of power. Using this pattern, we can trade with the trend, or it can be used to trade the counter trend and reversals also. In short, the Rectangle chart pattern is both continuous and reversal as well. However, technical experts believe that using the Rectangle as a continuation pattern has higher odds of performing.
Trading The Rectangle Chart Pattern
Example 1
The Rectangle pattern can be easily found on the price charts, and it mostly appears on all the trading timeframes. The below chart indicates the formation of the Rectangle chart pattern on the AUD/NZD daily chart.
As discussed, there is no such thing as a bullish or bearish Rectangle pattern. When we find this pattern on any timeframe, all we need to do is to trade with the trend. We can also trade the Rectangle pattern, just like how we trade ranges.
The image below represents the same Rectangle chart pattern that is shown in the above figure but on the 240 Minutes timeframe. The orange box represents a couple of buy and sell opportunities, but we have decided only to trade this pattern with the trend. The green arrows represent our buying entry in the pair.
The below chart represents our entry and exit in the AUD/NZD Forex pair. The green arrow represents our entry in this pair, and the stop-loss is placed just below the orange box that represents the formation of this pattern. The placement of stop-loss depends on you. If you are an aggressive trader, place the stop-loss just below the entry, and the conservative traders must go for more profound stop-loss.
The take-profit placement is an art as we can exit our positions in many correct ways. You can make use of technical indicators to close the positions. When the trend loses its momentum, use the support, resistance area to close your positions. In the above example, we can see the reversed deeply as soon as we exited our position. This is because that is the place where the significant resistance line is.
Example 2.1
On the daily chart of the AUD/NZD, the below image represents the formation of two rectangle chart patterns in a downtrend.
The below image is the same rectangle pattern (1st) that is shown in the above chart but on a lower timeframe, which is 240 Minutes chart. Most of the time, we will find the Rectangle patterns in a trending market only. Also, this pattern represents the pullback phase of an ongoing trend. Another thing that a Rectangle pattern implies is that both of the parties hold equal power during the pullback phase. That is the reason for this pattern to form in the first place.
So be careful while trading this pattern because, in the consolidation phase, markets often throws a couple of spikes on the price chart. The safest way of trading this pattern is when the price action approaches at the upper area of the Rectangle. In the below chart, the Red arrow represents our selling trade in this pair.
The below chart represents our entry, exit, and risk management in this pair. The entry was at the top of the box. If you compare the stop-loss with take-profit, it clearly shows that we have opted for a smaller stop-loss, it was because the upper line of Rectangle acts as a primary resistance line. If the price action breaks the resistance line, the pattern by default gets invalid, and there is no need to hold our position. Around our take profit area, the price action started struggling, which indicates the power. Hence we decided to close our position.
Example 2.2
The below AUD/NZD Forex chart represents the formation of a Rectangle chart pattern on the 240 minutes chart. The pattern that you see below has appeared right after the previous trade that is discussed above. At times we will see these patterns consecutively, especially in a strong trending market. It is strongly recommended to go with the flow and trade them with confidence. The chart below shows that the price action spends some time in the rectangle box, and when it hits the bottom of the Rectangle, we activated our selling trade in this pair.
The chart below represents the entry, exit, and take-profit in this pair. As we can see, the entry was at the bottom of the Rectangle, and the stop-loss placement was above the Rectangle. For take-profit, we have waited for the sellers’ momentum to die out to close our trade.
Conclusion
For a Rectangle pattern to be valid, the price must have gone through at least two tops and two bottoms on the price chart. Always make sure to hold your trade till the market loses its momentum. You can also look for the formation of any candlestick patterns to exit the trades. If you activate your trade at the top of the Rectangle, make sure to place the stop-loss just above the Rectangle pattern. If the activation was after the breakout, place the stop-loss in the middle of the Rectangle range.
We hope you understood the trading of the Rectangle chart pattern. In case of any queries, let us know in the comments below. Cheers.
The Head and Shoulders formation is a popular Forex chart pattern, which is pretty easy to recognize on the price charts. There are both bullish and bearish Head and Shoulders patterns, and both indicate potential market reversals. This pattern consists of three peaks, which is developed after a strong bullish trend. The first and third peaks are of the same height, and they are classified as shoulders. The second peak of the pattern is the highest and hence classified as the head.
There are both bullish and bearish Head and Shoulder patterns. The appearance of bullish Head and Shoulder pattern on the price chart indicates that the momentum is transferring from the sellers to buyers. Likewise, the appearance of the Bearish Head and Shoulder pattern indicates the momentum is transferring from the buyers to sellers. While trading the Bearish Head and Shoulders pattern, it is advisable to go short when the price breaks below the neckline. Contrarily, go long when the price goes above the neckline while trading the Bullish pattern.
How To Trade The Head And Shoulders Pattern?
It is advisable not to wait for the perfect pattern instead look for the good entry/exits when you spot the pattern on the price chart. Sometimes the left shoulder will be bigger than the right shoulder and vice-versa. Please do not focus on minute details. Instead, our focus must be on deciding if the pattern looks reliable enough to trade or not. If the answer is yes, only then take entries.
Trading The Bearish Head And Shoulders Pattern
The below chart represents the formation of the Head and Shoulder pattern on the NZD/JPY forex pair.
As you can see, in the below NZD/JPY chart, the formation of the pattern doesn’t look perfect, but the overall pattern looks reliable to trade. We went short as soon as the price action broke below the neckline. The stop-loss order was placed above the second shoulder. For TP, we went double the size of the pattern. We had exited the market when the price got consolidated, as it implies the opposite party is gaining strength.
Trading The Bullish Head And Shoulders Pattern
In the below chart, we have identified the Bullish Head and Shoulder pattern in the EUR/CHF Forex pair.
In a choppy downtrend, a bullish Head and Shoulder pattern is formed. When the price goes above the neckline, it is an indication for us to go long. The take-profit is again placed two times the size of the pattern, and the stop-loss is just below the second shoulder.
In the above chart, we can clearly see that the Bullish Head and Shoulder pattern is not perfect, like the ones we see in textbooks. But still, our trade worked beautifully. So it is crucial to bends our rules here and there; we will hardly find such kind of perfect patterns. If we just wait for them, we will hardly get to trade. Also, once you gain some experience in trading this pattern, you will automatically be able to decide which pattern works and which will not. Mastering any pattern requires tons of practice and patience.
That’s about identifying and trading the Head and Shoulders pattern. Advanced strategies related to this pattern can be found in our trading strategies section. Please feel free to explore. Cheers!
The Wedge is a technical chart pattern that is commonly used by the traders, market technicians and chartists to find the upcoming market trend. This pattern is always formed at the bottom/top of the trend, indicating a potential change in the market’s direction. In short, the Wedge is a trend reversal pattern. One key benefit of the Wedge pattern is they it is comparatively easy to identify on the price charts. This pattern is traded by most of the technical traders as it provides precise entries and exits.
There are two types of Wedge patterns – The Rising Wedge & the Falling Wedge.
The Rising Wedge
The Rising Wedge is a bearish reversal pattern, and it appears in an uptrend. This pattern seems to look wide at the bottom and contracts as the price move higher. To form a Rising Wedge pattern, two higher highs must touch the upper line; likewise, two reaction lows to the lower line. The point at which the upper and lower lines merge indicates the completion of the pattern.
The Falling Wedge
This pattern is just opposite to the Rising Wedge pattern. It appears in an ongoing downtrend, and it is a bullish reversal pattern. The appearance of these patterns is an indication for us to go long. This pattern begins wide at the top and contracts as the price moves lower. To form this pattern, the two lower lows must react with the support line, and the two higher lows must react with the resistance line. When both the lines converge, we can say that the pattern is complete.
Trading The Wedge Chart Pattern
The Rising Wedge
The below chart represents the formation of a Rising Wedge chart pattern on the GBP/CAD Forex pair.
There are two ways to trade the Rising Wedge pattern. We can go short when the price hits the upper resistance line, and if the price breaks the below line, holding our positions for longer targets is a wise thing to do. The second and the conventional way is to wait for the price action to break below the support line and take the sell position only after the confirmation.
In the example below, we took sell entry when the price action broke the support line. Place the stop-loss just above the recent high and ride the markets for deeper targets. We had booked our profits when the price action started to struggle as it is an indication of a market reversal soon.
The Falling Wedge Pattern
The image chart represents the formation of the Falling Wedge pattern in the GBP/NZD Forex pair. We can see that both the parties were fighting in a downtrend and when the market prints a Falling Wedge pattern, it is an indication for us to go long.
At the beginning of March, the price broke above the Falling Wedge pattern, and we end up entering for a buy. The stop-loss was placed just below the support line, and the take profit was at the major resistance area.
That’s about Raising & Falling Wedge pattern and how to trade them. If you have any questions, please let us know in the comments below. Also, to learn advanced trading strategies related to this pattern, you can follow this link. Cheers.
The Rectangle is a technical chart pattern that is described by two horizontal lines acting like potential support and resistance levels on the price chart. Trading this pattern is similar to buying at the support and selling at the resistance level. Conventional traders can trade this pattern only after the appearance of the breakout.
The Rectangle represents a trading range, which indicates the fight between the two parties – buyers & sellers. As the price reaches the support level, buyers step in and push the price higher. And when the price reaches the resistance level, bears take over and force the price lower.
In this fight, one party will eventually get exhausted, and the winner will emerge when the price breaks out in any direction. So we can say that the Rectangle is a neutral pattern as either trend continuation or reversals may happen after the formation of this pattern.
Rectangle Chart Pattern – Trading Strategies
Buy Example
The below chart represents the formation of a Rectangle pattern in the GBP/CAD pair.
As we can see in the below chart, the market just started its uptrend, and during the pullback, it turned into the consolidation phase forming a range. This consolidation phase eventually forms the Rectangle pattern.
This pattern is very easy to spot and trade. We can wait for the pattern to break the range to enter the market. If you are an active trader, you can even take a couple of buy/sell trades in a lower timeframe. In the example shown below, we have decided to go long as soon as the price action broke the pattern from the upside. The stop-loss order is placed just below the Rectangle, and the take-profit is at the recent high.
Sell Example
The image below represents the formation of a Rectangle pattern in a downtrend.
The below chart represents the entry, exit, and the placement of stop-loss & take-profit orders in the GBP/NZD Forex pair. In an ongoing downtrend, when the prices reached the significant support zone, it started to hold. The sideways movement of the price shows that both the parties are super strong, and the breakout to any side will be a good trade.
After the battle, prices broke towards the downside, which is a clear indication for us to go short. The stop-loss order is placed just above the pattern. Because, in a downtrend, if the price breaks the Rectangle pattern’s resistance, it must be considered invalid. Hence there is no need to go for deeper stop-loss. We would always recommend placing the stops just above or at least at the same height as the pattern.
For booking profits, we didn’t choose any specific location. Instead, we were watching the price action keenly and chose to close our full positions when the sellers started to die. We can close our positions in different ways, depending on the market situation. For instance, we can exit the trade when prices approach the significant support area. We can even take the help of technical indicators to close our positions. Technical traders are also using price action techniques these days to exit their running positions.
That’s about the Rectangle chart pattern and how to trade it. If you have any queries, let us know in the comments below. Cheers.
The Triangle Chart pattern is one of the most frequently found Forex patterns on the price charts. Technical traders prefer trading this pattern as it provides greater insight into the future price movement and the upcoming resumption of the current trend. This is a consolidation pattern that occurs in the midway of the trend, and it signals the continuation of the existing trend.
The Triangle pattern is formed between the two converging trend lines as the price temporarily moves into a small range. We must wait for the breakout to happen in an existing trend to take a trade. There are three types of Triangle chart patterns, and they are the Ascending Triangle, Descending Triangle, and The Symmetrical Triangle.
Ascending Triangle
It typically appears in a bullish trend. When the price action breaks the upper horizontal trend line with increased volume, it indicates a buy signal.
Descending Triangle
It is a bearish continuation pattern, and it appears in a downtrend. When the price action breaks the lower horizontal trend line with increased volume, it implies that the original sellers are back in the show, and it is an indication for us to go short.
Symmetrical Triangle
It is composed of diagonally falling upper trend line and diagonally rising lower trend line. When the price action reaches the apex, the price can break out from any side. We must be taking our positions depending on the price momentum and strength.
How To Trade The Triangle Chart Pattern?
Trading The Bullish or Ascending Triangle Pattern
The below chart represents the formation of an Ascending Triangle chart pattern in the AUD/NZD forex pair.
In the below Ascending Triangle pattern, we can see that both buyers and sellers are super strong. When the buyers break above the resistance line, it indicates that the game is finally in the hand of buyers. Hence, this is the perfect time to go long. The stop-loss was placed just below the pattern, and we book the profit when price action reached the previous significant high.
Trading The Bearish or Descending Triangle Pattern
The below chart represents the formation of a Descending Triangle chart pattern in the GBP/NZD Forex pair.
As we can see in the below chart, the pair was in an overall downtrend. When the price action reached a significant support area, the market started to move in a range. This range eventually has turned into a Descending Triangle chart pattern. As discussed, this pattern indicates that buyers and sellers are aggressive in taking the lead.
But the breakdown towards the sell side shows that the sellers have finally won the battle. We have placed the sell order right after the breakout, and stop-loss was placed just above the recent higher low. You can observe from the below chart that after going short, the price action started to move smoothly in our direction. We have closed our entire position when the price is started to struggle going down.
That’s about Ascending and Descending Triangle chart patterns. There are many strategies we can use to maximize profits while trading this pattern, and they can be found in the Basic Strategies section. All the best.
We will be discussing many Forex chart patterns in the upcoming course lessons that are widely used by traders around the world. But none of those patterns can beat the popularity of Double Bottom and Double Top chart patterns. This pattern can be seen frequently in not just the Forex market but all types of markets.
This pattern is independent of timeframes, i.e., it appears on all the time frames and the strategies that we are going to discuss work on all the trading timeframes too. Fundamentally, the Double Top and Double Bottom are reversal patterns, and they consist of two price swings approximately the same size on the same price level.
Double Top Chart Pattern
The Double Top chart pattern typically appears in an uptrend. It is formed when a bullish trend is interrupted at some point, and as a result, the price action tends to range. If that range consists of two swing tops, we can consider that as the formation of a Double Top chart pattern. After the second top, the price action drops and starts a new bearish trend.
Double Bottom Chart Pattern
The Double Bottom chart pattern typically appears in a downtrend. It is formed when the downtrend is interrupted at some point, which results in the price action to form a range. In the consolidation phase, if the range consists of two swing lows, and if the second low is struggling to reach the BottomBottom of the range, we can confirm the formation of the Double Bottom chart pattern. When the second Bottom is printed, we can expect the price to print a brand new higher high.
Neckline
The Double Top and Double Bottom patterns consist of a neckline. The Neckline is often used to confirm the pattern. The Neckline in a Double Top pattern is the horizontal level at Bottom where the two tops converge. Likewise, Neckline in a Double Bottom pattern is the horizontal level at the top where the two bottoms converge.
How To Trade The Double Top & Double Bottom Patterns?
Double Top Pattern
The below charts represents the formation of a Double Top pattern on the AUD/JPY daily Forex chart.
In the below chart, we had activated a sell trade when the price action broke below the Neckline. The stop-loss is placed just above the Double Top pattern. It is advisable to set the take-profit order two times below the size of the pattern. Activating our trades at the Neckline is the safest and most professional way of trading this pattern; because it shows that the last buyers are out of the league, and going short positions from here is a good idea.
Double Bottom Pattern
The chart below represents the formation of a Double Bottom chart pattern on the GBP/AUD Forex pair.
As we can clearly see below, when the price action is closed above the Neckline, it indicates a buy signal. We can see the most recent leg of the buyers being very strong, which indicates the buyers’ strength. Hence, in this case, we have decided to place the stop-loss just below our entry. For placing TP, we chose the previous recent high, and we can see how perfectly the price respected our placement.
This ends our discussion on Double Top & Double Bottom Forex chart patterns. We, at Forex Academy, have provided a lot of strategies to trade this pattern in the Basic Strategies section. You can check them out to get a deeper insight into these patterns. Cheers!
Over the last six lessons, we discussed the Elliot Wave Theory from understanding the basics of applying it in the financial markets. In this article, we shall have a quick summary of the previous learnings.
The Elliot wave theory was discovered by a professional accountant named Ralph Nelson, who claimed that markets don’t move in random directions, but recurring swings called waves. Most importantly, Elliott stated that the waves are fractals. That is, each swing or wave in the market can be broken into smaller and smaller waves of the same type.
The market moves in the 5-3 Elliot pattern. This pattern is appliable on uptrend and downtrend. Also, it occurs in every timeframe.
Impulse Waves
In the 5-3 wave pattern, 5 refers to the impulse waves. The 5-wave pattern is a trending wave pattern that moves along the overall trend. It is made up of 5 waves where Wave 1, 3, and 5 are impulse waves towards the trend, while waves 2 and 4 are retracements to the impulse waves. Out of the three impulse waves, wave 3 is usually the strongest and the longest and is ideal for trading.
Wave 1 is where only a small number of people take positions.
Wave 3 is where the mass public enter, while smart & professional traders exit their positions.
Corrective Waves
For every trending market, there is a pullback. And this retracement corresponds to corrective waves. The corrective waves are a 3-wave pattern that moves against the overall trend. It is denoted as wave ABC or abc, depending on the timeframe. The first corrective wave begins after the end of the impulse wave. Note that, the corrective wave pattern should not go beyond the area of wave 1 impulse wave. If it does happen, the waves must be counted from the beginning.
There are 21 types of corrective patterns based on their design. The three basic ones include
The Zig-Zag Formation
The Flat Formation
The Triangle Formation
Rules in Elliot Wave Theory
There are three rules in the Elliot wave pattern to confirm the legitimacy of the pattern. The strategies will hold true only if the following strategies are satisfied.
Rule 1: Wave 3 must never be the shortest impulse wave.
Rule 2: The Wave 2 must hold above Wave 1.
Rule 3: Wave 4 must never cross in the price area of Wave 1.
Even if one of the rules is not satisfied, waves must be recounted from the start.
We have also discussed different ways of trading the Forex market using the Elliot wave theory, and that lesson can be found here.
Final words
The Elliot Waves are a great tool in determining the direction of the market. One can get a clear understanding of if the market is trending or retracing. Accordingly, one can take a trading decision by adding other tools which will help in precise entries.
We hope you found the Elliot Wave theory course informative and useful. Do try this out for yourselves as well. Happy trading!
The Elliot Wave theory is a subjective topic. The key to trading Elliot waves is to find and comprehend the waves correctly. By understanding the wave theory correctly, we will be able to figure out which side of the market we have to be on. For doing so, there are a few rules we can lay on the Elliot waves while confirming the legitimacy of a wave. They are based on waves in the 5-3 wave pattern. And most importantly, these rules must never be broken.
The Three Golden Rules of Elliot Wave Theory
Rule 1: Wave 2 must be above wave 1
Wave 1 is the impulse wave, which is towards the trend, while wave 2 is a smaller corrective wave against the trend. So, to hold the definition of an uptrend, the second wave must never go below the first wave. In other terms, there should be a higher low in the price.
Rule 2: Wave 3 must never be the shortest impulse wave
Wave 3 is the second push towards the overall trend. This wave represents the move where all big players buy into the market. Hence, this wave is the strongest and the longest. According to the rule, the wave 3 can be shorter than either wave 1 or wave 5, but not BOTH.
Rule 3: The Wave 4 must stay above the wave 1
Wave 4 is the second corrective wave in the 5-wave pattern. And this wave should never cross below the area of wave 1. In technical terms, the low of Wave 4 must be higher than the high of Wave 1.
This sums up the rules that need to be mandatorily followed while trading the Elliot Waves. So, even if one of the rules is not satisfied, then the Elliot wave pattern must be counted from the beginning, and the current must be discarded.
Guidelines for trading Elliot Waves
Now that you are clear about the rules, here are some guidelines for trading the Elliot waves. Note that these are guidelines and not rules. Hence, they are not a necessary condition to trade Elliot waves.
🌊 When Wave 5 is the longer impulse wave, then wave 5 can approximately be as lengthy wave 1.
🌊 It is useful in targeting the end of Wave 5. Traders also determine the length of the Wave 1 and add it with the low of Wave 4 and use it as a possible target.
🌊 Wave 2 and Wave 4 will usually be different forms. For instance, if Wave 2 was a sharp correction, then Wave 4 will be a flat correction and vice versa. With this, chartists can determine the time of correction of Wave 4
🌊 After a strong Wave 5 impulse wave advance, the 3-wave ABC correction pattern could come down only until the low of Wave 4.
These are the guidelines traders must understand and interpret in their own meaningful way. With this, we have come to the stage where we can apply the concepts and trade the Forex market. So, stay tuned for the next lesson.
In the last lesson, we discussed the impulsive waves and 5-wave pattern corresponding to it. A trend is made up of the combination of the 5-wave pattern and the 3-wave pattern. The 5-wave impulsive pattern moves along the original trend, while the 3-wave corrective pattern moves against the trend. In this lesson, we shall discuss the corrective wave and then interpret the 5-3 waves.
Corrective waves
In case of an uptrend, the impulsive waves are towards the upside, and the corrective waves are towards the downside. Continuing with the example mentioned in the previous lesson, the corrective waves are represented in the below figure.
In the above figure, waves a, b, and c represent the corrective waves. The overall trend of the market is up, but corrective waves are against it. In other terms, the 3-wave corrective wave can be considered as pullback for the uptrend.
Note: The 3-wave corrective wave is also referred to as the ABC corrective wave pattern.
Reverse Corrective Wave Pattern
The Elliot wave theory is applicable to both uptrend and downtrend. So, for a downtrend, the impulsive wave faces downwards following the overall trend, while the corrective wave faces upwards. Below is a figure representing the 5-3 wave pattern for a downtrend.
Types of Corrective Wave Patterns
The above illustrated corrective wave is not the only type of corrective wave that occurs. According to Elliot, there are twenty-one 3-wave corrective wave patterns, where some are simple and some complex. However, a trader need not memorize all of them at once. The following are three simple corrective waves that are most occurring in the market.
The Zig-Zag Formation
The zig-zag formations are very steep compared to the regular one and are against the predominant trend. In the three waves, typically, wave B is the shortest compared to wave A and wave C. Note that, the Zig-Zag pattern can happen twice or thrice. Also, the zig-zag patterns, like all other waves, can be broken into 5-wave patterns.
The Flat Formation
As the name suggests, in flat corrective wave patterns, the 3-wave pattern is in the sideways direction. That is, the wave C does not go below wave B, and wave B makes a high as much as wave A. Sometimes, the wave B goes higher than wave A which is acceptable as well.
The Triangle Formation
The Triangle formation is a little different from the other corrective patterns. The difference is that these patterns are made up of 5-waves that move against the overall trend. These corrective waves can be symmetrical, ascending, descending, or expanding.
These were some of the most used corrective patterns used by traders. These must be known to technical traders by default. In the next lesson, we shall discuss another important concept related to the Elliot Wave theory.
Momentum indicators are those indicators that determine the rate of price changes in the market. These indicators are helpful in determining the change in the market trend. In this lesson, we shall be talking about the MACD indicator, which is one of the most extensively used momentum indicators.
Moving Average Convergence Divergence – MACD
Moving Average Convergence Divergence – MACD is a momentum indicator that primarily works on the relationship between two moving averages of an instrument’s price. Precisely, it takes Exponential Moving Average into consideration for its calculation.
A misconception in the industry is that MACD is a lagging indicator. There are a set of people considering it as a leading indicator, while some see it as a lagging indicator and use it as a confirmatory tool. Note that MACD is both leading as well as lagging indicators.
MACD is said to be a leading indicator when it is used to identify oversold and overbought conditions. It indicates the possibility of a reversal when the market is actually moving in the other direction. However, this form is not widely used. On the other hand, it is said to be a lagging indicator if it is used for crossovers. One will be aware of the market trend when there is a crossover on the indictor. But when this happens, the market would have already made its move.
Also, that’s not it. The real element of momentum is added by the histogram. This true aspect of MACD reveals the difference between the MACD line and the EMA. When the histogram is positive, i.e., above the zero-midpoint line but is declining towards the midline, then it indicates a weakening uptrend. On the contrary, if the histogram is below the zero-midpoint line, but is climbing towards it, then it signifies a slowing downtrend.
Apart from this, it is also used for identifying divergence in the market. That is, indicates when there is abnormal motion in the market, hence, indicating a possible change in direction.
What is the MACD indicator composed of?
The MACD is made up of two moving averages. One of them is referred to as the MACD line, which is derived by finding the difference between the 26-day EMA and the 12-day EMA. The other is the signal line, which is typically a 9-day EMA. And there is a zero-midpoint line where the histogram is placed.
MACD as a Momentum Indicator
To understand how momentum works in MACD, consider the example given below.
Firstly, the market is in a downtrend where the purple line represents the Support & Resistance level. In other terms, this line indicates a potential sell area. Below the price chart, the MACD indicator has plotted as well. Observing closely at the histogram at the marked arrow, it is seen that the histogram was falling towards the zero-midpoint line indicating the weakness of the buyers. Also, this situation happened in the area where the sellers are willing to hit the sell. In hindsight, the MACD gave the right signal solely from the histogram.
This hence concludes the lesson on momentum indicators. We hope you found this lesson very informative. If you have questions, leave us a comment below.
