gbp/usd buying opportunities

It is obvious that gbp/usd has been in a long term trend (over a year) and the best type of playing the pair was buying of dips. It has been moving up in waves over a year and I believe we are going to see another cycle up. To tell the truth the first wave up in a bullish move is about to end. If you look at the chart you can see that the pair found its bottom on the first of March and made two strong moves up. I expect it to run some 50-100 pips more from a current level before reversing and a leg down next week.

I marked support and resistance levels on the chart. You can play both waves, but the trend is up now. I expect the pair to reach previous top of 1.4350 by the end of the month and possibly move higher later in the year, provided price action confirm bullish trend continuation pattern.

There is some chance of the pair going sideways and forming a narrowing range, but I favor the pair moving up in waves, the way it went down from the 25^th of January. So, there are hundreds of pips to be claimed and a lot of money earned. I have positions in gbp/usd and gbp/jpy opened expecting them to close tomorrow or Friday and wait for another opportunity to buy.

If you want to try trading currencies, gold and other commodities as well as securities eToro company is the best broker I know.

Disclaimer: All trading involves risk. Only risk capital you’re prepared to lose. Past performance is not an indication of future results. This content is for educational purposes only and is not investment advice.

Volatile range trading strategy

So, it is high time to discuss the last market state: volatile range and try to define how you can trade it. I just want to remember that according to my definition are four types of market states: calm trend, calm range, volatile trend and volatile range. Each has specific conditions that make prices move in a unique way and specific strategies to trade these moves. Volatile range is probably the most complicated market state as it is pretty difficult to trade. However, as I do not believe that markets are random I will try to share with you some insights of mine regarding the conditions of this specific market state. 

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See also my other posts and videos on the topic:

Best Forex trading system

Calm range trading method

Calm trend trading

Volatile trend strategy

Short lived momentum reversal trading system

How to make money in trading breakouts

Nicolas Darvas trading method

What is volatile range?

Volatile range is directionless choppy price action that is most often contained within specific market range, usually a very small one. It often travels from one small range to another, then back, then to the first level again. These kind of ranges often develop after huge market moves and it indicates that market hast lost momentum and is consolidating before making new move. This market state can last from weeks to months and even years. These volatile ranges often develop other volatile ranges within themselves. If you look at the chart of gbp/nzd pair below you will see what a volatile market range looks like. 

You can clearly see how after sharp move down the pair started consolidating and moved into a prolonged big range with smaller sub-ranges inside. I like comparing this kind of price action with an elevator in a three-four store building. The elevator has very limited space to travel in a building of such size and it can change its’ location very fast by going from the first to the third floor and then back.

You can see price blocks that could be compared to building floors and see how price travels within our ‘price building’ or stays at the same floor for prolonged period of time. 

The way to trade these ranges

As you may see the ranges during these periods of choppy price action are quite small. gbp/nzd pair is very volatile and makes big moves and yet it can stay within 200 pip range for a few weeks, then move to another range of 200 pip width and then back to previous range. So, how do you trade that?

Firstly, you need to wait and become sure what the size of the range is. You look at the chart and see price past action. In a real life situation you may not be sure where the bottom or top of the range is if it has just started to form a new range. After any significant trend is over wait for the security to form a range. That is: wait for it to make a top and a bottom of the range. Only then, when the price visits these places for the second time you trade REVERSALS. If you have been reading this blog long enough you have probably noticed how I love trading reversals. This is especially true about trading volatile range. There is not enough ‘meat to chew on’ as range is very small, so you get the most by selling at the top of the range and buying on the bottom of it. 

Let’s walk through some trades

From price action we may see that the pair made a top and a bottom of the range from 14^th to 19^th of February (2013). On the 19^th it visited the bottom of the range for the second time and made a reversal. This was the first possibility to buy. A big bullish 4 hour candle at the bottom gave us a clue that buyers started stepping in and we bought at the break of two 4 hour candle charts at 1.8248 level with a stop below the low of the day and exited at previous top at 1.8390 (ten pips before even number).

The price made a reversal there and we placed a sell stop order below the bearish 4 hour candle at 1.8342 with a stop above the high of the day and exited at previous low of 1.8160 or at 1.8210 (ten pips above the even number).  

Then price proceeded to break the floor and made the bottom for another floor 1.7954. It then quickly returned to the previous floor and hit the ceiling of the top floor again. It made a few attempts to break it, but failed. If you had traded the price action purely technically you would have lost on the first attempt to go down on the 26-27^th of February, but if you had waited till fundamentals came out you would have skipped the above mentioned dates and traded GDP of British pound and made a successful trade by selling Pound again below 1.8339 level with a stop above day’s high and closed your trade at 1.8210 after four days. You see how the price lingered for a few days and only then collapsed by reaching the floor again. Trading these ranges requires a lot of patience. Choppy price action might get on the nerves of any trader. 

On the 1^st of March the pair made a reversal at the floor and started rising, but failed to reach previous top. So, either you would have exited with some profits at an even number at 1.8290 (ten pips below even number( entry point 1.8232 with a stop loss 1.8166) or you could have pushed your stop at break even and got neither profit, nor loss from this trade. 

Then for about two weeks the pair got stuck between two floors until it made to the ground floor (from past perspective (we know that it was not ground floor now)) again. It formed a cluster of candles (that indicates a reversal) and broke upwards back to the top floor. A break of the floor could have been a good possibility to enter the market and come back to the ceiling of the floor. So, a buy stop at 1.8170 with a stop 1.8052 and the target of 1.8390 would have been an excellent trade. 

Do your own homework

The pair then again made two attempts to break the level and failed. I do not want to continue telling how you could have traded these as now you can pretty much figure that for yourself. Do your homework, analysis and design the best ways how you could trade these situations in the future. When the same market conditions appear you will be equipped to make an intelligent guess and smart trade. You will make mistakes along the way, but practice makes perfect. So, continue analyzing the right side of the chart (the first one) trying to find best entry, stop loss and take profit areas for your trades. You won’t believe how much you will learn by simply doing this. People fail to trade successfully not because they do not have any strategy, but they tend to be reactive rather than proactive. You need to be ready before things start happening rather than reacting to what is happening. Daily analysis (maybe even writing a trading journal) would help you a lot to become a proactive trader who plans his trades and executes as well as manages them with sound discipline. 

Conclusion

Trading volatile range requires: establishing high and low of the range, trading reversals at both ends when market price action confirms a reversal (bullish and bearish candles, 123 reversal patterns and fundamental news releases), setting stops above high (if selling) and below the low (if buying) of the day market reaches the top or bottom of the range. Your target always is the other end of the range (if buying you go to the top (resistance) , if selling you go to the bottom (support)). Do not forget that market can slip through current range and set new one. Be flexible and watch what happens when market reaches its’ freshly made bottom or top. Finally, plan your trades and trade your plan. This is how you will become a pro using any kind of trading system. 

Ok, time to finish! I have covered all market states and finally finished my series. Next time I am going to tell you how to select best candidates for your trades. I wrote somewhat on the topic, but I want to deal with the theme exclusively, so that you could learn to choose the best pairs that have the highest potential to move strongly.  

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

6 key elements of technical analysis

Today I want to talk about importance of technical analysis and various aspects of it that should help you in making profitable trading decisions. I know that most people want to know the fundamentals of economics, finance and see the big picture of how global economy works. However, we should understand that our perception and understanding of what we see in the world may be very subjective and if we make decisions (in trading) based on those subjective assumptions we might end up losing all of our capital. Therefore, I am more for doing technical analysis than I am for doing fundamental analysis. This does not mean you should not study fundamentals. It means you have to compare what you know with price action and follow the market, not your opinion. 


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Disclaimer: All trading involves risk. Only risk capital you’re prepared to lose. Past performance is not an indication of future results. This content is for educational purposes only and is not investment advice. 

Even if your opinion is right about economy you should never forget that there are a lot of powers working in the market and they have enough capital to push the price where they want, no matter what state this or that economy is in at a given moment. This can have a very negative impact on your trades, especially if you are a short term trader. I saw a lot of times how good economic news is accepted very negatively by participants, or market makers I’d better say and prices start falling. So, if you follow your opinion you may be right and lose money, if you follow the market your fundamental opinion might be wrong, but you make money. So, that is a big plus for studying technical analysis. 

When you finish reading the post read other related articles and watch my videos:

RSI

MACD

Moving average

Resistance

1. Resistance and support levels

I personally believe that resistance and support levels are the greatest tools of TA. These are levels where price comes and usually reverses. These levels are extremely important in range trading for when prices are stuck in ranges support and resistance levels are visited a lot of times and they do hold till finally a breakout occurs. One would wait for reversals around these levels and often be able to catch a new swing and go to the other end of the range making nice money. Patience and risk management is the key element here. 

2. Technical indicator

Technical indicators have been developed by a variety of trading specialists to help one in making trading decisions with the help of those indicators most of which are based on moving averages. The most popular indicators are: MACD, RSI, various moving averages, Stochastics, Bollinger Bands, Pivot points, Price channels and many more. I do not want to mention all of them, nor discuss them in detail as I do not believe you should base your trading decisions on those alone. Try to use them with other technical or fundamental analysis tools. My favorite indicators are MACD and RSI. I wrote posts on the usage of both of them as well as moving average indicator.  

3. Price action

It is a movement of a security in some direction and by using tools of technical analysis a trader is often able to guess the direction of price in advance. The application of those tools might be subjective as looking one and the same pattern two traders will probably form a different opinion. If one includes things such as fundamental news releases into one’s analysis his accuracy in predicting price action will grow. Most traders like looking at candlestick patterns, support and resistance levels and other methods to predict direction of price in the nearest future. No one will do it one hundred percent correctly all the time. Learning from mistakes and perfecting one’s methods of analysis should make one’s speculation better. 

4. Trading strategies

There are plenty of trading strategies that purely rely on application of technical analysis. If you visit sites like Forex factory, Babypips, dailyfx and many more you will find a lot of free trading strategies that are based on TA. Most are based on the application of technical indicators, some on breakout of support and resistance levels, others on news trading and many more. If you are a newbie you can visit one of the above mentioned sites and back test some of the strategies, which you will like most. 

5. Chart patterns

Those that like trading swings or trends that last longer than a week will often wait for developing chart patterns that would indicate a continuation of an existing trend, show a possibility of a break out of a current chart pattern, show places of a possible reversal and many more. The most famous chart patterns are: triangles, head and shoulders, inverted head and shoulders, wedges and rectangles. Some traders rely purely on those patterns while making their trading decisions and make big money in financial markets. One of them is Dan Zanger who made millions in stock market when it experienced dot.com bubble. He also pays much attention to volume, which is not very important if you are a Forex trader for you cannot know exact volumes if you are trading currencies. It is important if you are trading stocks though. 

6. Trends and swings

Predicting long term trends and swings is probably one of the best things that technical analysis can help you to do in trading securities. We know that securities tend to stay in ranges for a long time. Some say that the ratio is ten to one. It means that securities could be in ranges for about ten months in ranges a year and only two months trend. But if one wants to make consistent profits, one should also learn how to identify an emerging trend and trade in the direction of it. One of the best ways to do it is to identify the limits of a range (support and resistance levels) that a security is in at a given period of time and wait for those limits to be broken. That’s how a lot of traders of the past and present made millions of dollars. They also kept building a line of positions after the breakout and would exit all of them when they saw the slightest sign of reversal.

That much information about technical analysis. I hope to expand the post and add more information on the topic in the nearest future. 

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

123

123 pattern is the topic of the post. I hope you have heard about this technical pattern or read somewhere on the net. I have been mentioning it in my posts quite often and want to discuss it in more detail today. This technical structure can be found in large, medium and daily trends, usually at the end of them and it is a sign that the trend is about to end. To tell the truth you can find it also in small time frames, but those are not that significant as long time frames. It is a reversal pattern. One thing you will notice with all possible patterns and indicators is that they best work on long term time frames: monthly, weekly and daily charts. Some traders use this reversal formation and trade it without any other indicators on monthly and weekly charts. Daily charts, hourly charts and of course minute charts require more filters in order for you to trade the pattern. 

Disclaimer: All trading involves risk. Only risk capital you’re prepared to lose. Past performance is not an indication of future results. This content is for educational purposes only and is not investment advice.

When you finish the post read my other articles too and watch a video:

Day trading strategies and rules for dummies

Swing trading

Moving average

Follow the leader

MACD

Structure of the pattern

Formation in silver (reversal in an uptrend)

Let us study an example with the pattern both in the uptrend and the downtrend in silver commodity. Silver has been in an uptrend since the end of 2008 collapse in the markets. When markets picked up, silver was probably the strongest of all commodities. However, after rallying for quite a long time it finally exhausted itself and in the days of April 25^th through 29^th  (2011) it formed a reversal pattern and collapsed. So, number 1 was the top of the price (49.78), number 2 was the bottom of the corrective rally down and number 3 was one more attempt to take previous high (unsuccessful one). After that silver went through number two and a downtrend started. 

Structure in silver (reversal in a downtrend)

After a few weeks silver finished its downtrend by forming 123 pattern in the days of May 12^th through 23^rd  (2011) and started going up again. So number 1 in this case was the bottom of the price, number 2 was the corrective rally upwards and number 3 was an attempt to take previous low of 32.31 (unsuccessful one). 

Speed of development of the patterns and the pace of trends that follow them

In both situations the price reversal happened very fast. The top was formed in 4 days and the bottom in approximately 2 weeks. It is a general rule that tops are formed faster and downtrend is much faster and more dramatic than an uptrend, while bottoms are formed more slowly and then uptrends develop slowly as accumulation increases with time. When 123 is formed at the top and prices starts going down fear rules in the market. This could be the reason why downtrends are so dramatic. Optimism takes time to develop and that could be the reason why prices do not go that fast in uptrends. It is sometimes said that what bulls have built in 3 months, bears destroy in 1 month. Looking at present markets you can change the ratio and say that what bulls have built during 10 months, bears destroy in 1 month. So, have this in mind when you trade these patterns. A lot of great and famous traders made their fortunes in downtrends. 

We should also remember that markets change and sometimes they develop ugly ranges of 6 months or more and only then a new trend begins. If you looked at gbp/jpy daily chart you would see that we have a lot of swings up and down and no real long trends in the pair for about a year. 

How to trade it

I believe you must know the answer by now. If you have it at the end of an uptrend, you place a sell stop below the point two of the pattern and when it is broken you go down together with the market till it exhausts itself (or another 123 pattern is formed at the bottom). If you have it at the end of a downtrend, you place a buy stop above the point two of the pattern and when it is broken you go up together with the market till it exhausts itself (or another 123 pattern is formed at the top). 

Exit rules can be trickier than those for entering the pattern. If you do not want to use any indicators I would say you should use only long term charts: monthly and weekly (monthly would be more advisable) and search for those patterns on large time frames. In that case you would be a true investor who invests only long term. However, your capital would be much safer. Of course, be sure that you do not invest more than you can afford to lose. 

Trading on monthly charts enables you to trade all possible securities: forex, stocks and commodities. So, you will have more opportunities to trade than you had following just one market. 

If you want to trade the pattern on smaller time frames, you should use 123 pattern as part of your other trading system and never alone, for you will have a lot of bad signals by following the system on smaller time frames. 

How I use the structure for day trading

I like the pattern as it helps me to day trade. I firstly determine the direction the market is in. If it is a swing up I wait for counter trend rally down so that I could add on dips. When the rally does come I open 1 hour chart of the security I am watch and wait for 123 to develop on the chart. Then I follow the same rules for entry I described you above. 

You can in the example below that gbp/usd is in short term swing upwards with higher highs and higher lows. It means you need to wait for counter trend rally to enter your position in the direction of the trend. You see it forming on one hour chart during Asian session and a nice breakout off the pattern during London session. You place the stop below the low of the pattern and take your profits at the previous high.

 

Good luck in trading 123 patterns. 

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Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.