At the beginning of this week my method suggested a possible trade to me. It was a long scalp trade to be taken on the break of the 213.92 scalp line. However the trade suggested and the trade I actually took were two very different trades. When the price came to my scalp line and was about to break I asked myself the 5 questions I mentioned in yesterdays post.
1) What happened last time it approached this line/area?
It encountered strong resistance and moved away so it is likely that next time it breaks the line it will gain momentum and make for a good trade. This is obviously a good sign and it suggested to me that I take the trade.
2) What does the candle movement leading up to this point suggest?
The candles suggest that there is a strong struggle between the bulls and the bears but whenever one side gains the upper hand they do not manage to keep it for long. The candles are all small and indicative of a undecided market. This is obviously a bad sign if the market has no clear favored direction taking a trade is not a great idea.
3) What does the current price movement suggest?
The overall price movement suggests that we are in a period of extremely low volatility. Looking at GBP/JPY’s average daily range of 280 pips the current movement is only 1/3 of the average daily movement. This obviously means the market is moving far below its normal range and that taking a trade targeting 50 pips would be dangerous. It does not seem at the moment like GBP/JPY is moving enough to meet my trade targets.
4) If triggered and entered what possible complications can this trade have?
The fact that we are in the Asian session which is the slower moving of the sessions suggests we could see even less movement than we saw in the London session. 60% of all trading happens in the London session if it only managed to range 100 pips in the London session there is little hope the Asian session will be better. The overall range in the last few days has been extremely tight so I could end up holding onto the position for days without reaching my targets. Furthermore the market has no clear direction, whenever it picks a direction it is quickly turned around.
5) Considering all these things should I take this trade?
No not at the moment. The low volatility and undecided direction make for an unstable market and taking a trade would be too risky.
This is all done very fast, I do not write any of it down it is all done in my head. At this point what are we left with though? The 213.92 area is very obviously a resistance area and I want to trade it but I am not going to take a risky trade because I want to get into the market, I know better. So what I do is I work out a game plan.
The main problems I had with the current GBP/JPY movements were:
1) Lack of direction
2) Low volatility
Lack of direction is easy to deal with you just need to wait until the market picks a direction. Low volatility however is a little tougher. By the time the market becomes volatile the trade is likely over. So you have to make an educated guess as to what needs to happen for the market to regain some volatility.
My first step was to replace the 213.92 scalp line with the 214.00 line. The 214.00 is a psychological level, and it is so close to the 213.92 that moving the line to that level will not make a huge difference, it’s only 8 pips. The idea is that since it is a psychological level a break past the level could create some volatility. Also if it breaks the 214.00 it indicates that the market has picked a direction, so for me 214.00 was the perfect line to use at this point. Yes the 213.92 was my scalp line and I am not in the habit of changing my lines but every situation is unique and this situation called for it. The price was ranging so near to my scalp and it was ranging so weakly that if it broke the scalp line it could very possibly not have sustained the break. If the move was not sustained where would be the likely point that it would turn around? The psychological level of course! All psychological levels provide some support and resistance, when the price is already weak a psych level could very easily hold the price back. So my immediate thought was to wait for a break of the psych level instead, that would indicate that the bulls actually had some potential of making a bullish run.
Great so my trade was ready to go I would enter when it broke the 214.00. When the break came though I was still very cautious, the current market conditions were not the best for a trade. I had to play this one safe, I did not enter instantly instead I watched for signs of volatility. When it hit 214.10 I was ready to enter, at that point it had proved to me that it had picked a direction. Then all of a sudden it stalled and eventually came back down, I didn’t enter. After the mini reversal I reassessed the situation. I came up with 3 points:
- It is obvious the bulls are currently more powerful than the bears so that is a good sign.
- The market is ranging tightly so it wants to break, it is however the Asian session and low volatility is to be expected. As we near the London session if the bulls still have power the break is likely to come.
- The market has picked a direction and has displayed that it has some of the strength required to move in that direction.
So I said to myself if when we are near or in the London session if the new candle manages to break the previous candles high (214.10) I will enter. Breaking its previous high is a very clear indication that the pair has picked its direction and that it plans to make a bullish run. The fact that we are in or very near to the London session indicates that we will probably see increased volatility and that could give this move the energy it needs to hit my target.
About 30 min before the London session started GBP/JPY made its move, it broke my level, I entered and let it run up. I closed the trade out at about 214.75 for around 65 pips profit. I exited the trade because the MPC meeting minutes were due out in about 1.5 hours and I did not want to risk staying in. I had my 65 pips profit, so I took it and wrapped up another successful week of trading.
So there you have it my thought process for this trade. You can see this is not as simple as wait for a break and enter no questions asked. I ask myself questions and I consider all the factors before entering. This is what I believe makes the difference between a successful traders and failed traders. If you type ‘Forex’ into Google 99% of what comes up will be scams. They all advocate trading without using your brain, what bullshit. Your brain is your greatest asset and using it is what will make you a successful trader. So please don’t become a robot, be human and think your trades through logically. Remember this is a market in which 90% of traders fail, those 90% are the ones trading the ‘no thinking required’ systems. To succeed you need to separate yourself from those guys and start to think. Do not shut off your emotions; do not blindly follow a trading method.
Oh and all this may seem very hard to get the hang of and I won’t lie to you it is. If you’re afraid of a little hard work this is not the business for you.
More and more I have started looking at reversals recently. For that I want to thank you guys, all of you. I started Forex4Noobs with the intention of helping people with their trading but in the process I have learned much about my own trading. Teaching my method to all you guys has forced me to look at my method and in looking at my method I have learned much about it. Since opening this site about 1 year ago I have grown as a trader, I hope you guys have too.
Anyway the reason I write this is because I have realized I am a little too rigid with my method. These two trades I am about to explain are what made me come to this realization. Neither of these trades are real trades based on my method, that doesn’t matter though they both worked. See the concepts I use in my trading; candles, S+R lines, and price action are really the fundamentals of trading. They are the rawest, truest and most organic forms of technical analysis. Limiting them to a method is misusing them so I have decided not to limit them anymore. Does this mean my formed method is invalid? no the basic concepts of it are still very valid but at the same time a lot about my method will change. On that note lets dissect this reversal trade.
For 8 day I watched and waited for GBP/JPY to break through that 214.00 area. All that time waiting for a trade while the pair was stuck in such a tight range was tough but this is what defines us as traders. Traders, true traders know that the trades will always come, and that sometimes they just have to wait. The people who abandon their trading method and run off in search for a new method just so they can take a trade will likely never make it. Being able to stick it out through periods like this proves that you have what it takes to be in this business for the long run.
Finally on the 8th day of this cumbersome range the price broke through the 214.00 area and it made for a great trade. A breakdown of that trade can be read in the post below (Part 1). The bulls pushed up but eventually they stalled:
What does this mean though? Well the bulls and the bears are two opposing forces. The bulls want to go up, that’s all they want, always forward not one step backwards. The bears are the opposite they want to push down, always down not one step backwards. So every little pip movement shows us a struggle between the bulls and the bears. If in one tick the pair moves up a pip the bulls just won that tick, if it goes down the bear’s just won that tick. You have to imagine that every move the pair makes is part of a never ending struggle between the bulls and the bears. When you see a bullish candle form on your chart it tells you that the bulls are stronger and they’re doing their job, pushing the market up. Conversely when you see a bearish candle it means the bears are stronger and they’re doing their job, pushing the market down.
So what is a range then? A range tells us that neither side has the strength required to move any significant amount of pips in its natural direction. The bulls try to push up but they’re hindered by the bears, the bears try to push down but they are hindered by the bulls. No side can win the battle until one side gains the strength required to break out. How do the bulls or bears gain that strength? Well it could be a number of things but this time it was pushing through the 214.00 resistance area. When the bulls pushed through that resistance area buyer confidence instantly grew and they started buying. So the bulls got stronger and they started pushing up further and further. It was a bullish breakout.
Then after some nice bullish movement all of a sudden came the reversal candles:
What do the reversal candles tell us? Well they tell us that the buyers lost their confidence so the bulls have lost their strength. The bulls are again equally matched in strength by the bears. No direction is favored because neither the bulls nor the bears have the strength to breakout yet. These reversal candles say to us that the bullish run is dead for the moment and that the market will possibly turning around. However in trading ‘possibly’ is not good enough just because we see the possibility of a reversal we cannot take the reversal. Taking it based solely on ‘possibly’ is gambling and we are not here to gamble. So what do I do? I wait for confirmation of a reversal, I set a line and I say to myself ‘when it crosses that line I will go short’. See the crossing of that line is only significant because it confirms the reversal; it tells me the bears now have power and the bulls are weakened.
The line I set was the purple 215.11 seen in the 4hr chart above, below you can see the line on the 15 min chart :
Now this line plays absolutely no significance in my trading at any other time. It is however a minor S+R line and looking at the line on the 15 min chart you can clearly see that. We get four very clear bounces from the line, sure there is 1-3 pips of difference but on a 4hr GBP/JPY chart that means nothing. I placed this line because it is the nearest applicable S+R line. Even though it is a very minor line and I wouldn’t normally use it the line does represent some form of support so if it breaks it does indicate the bears are gaining power over the bulls. When looking for reversal confirmations I am willing to use minor lines like this.
Eventually the 215.11 line broke and as you can see in the 15 min chart pic above when it broke it went right down. From here I am sure you know what you have to do, get in and make some pips! Now personally I only took 35 pips here, I already had 65 pips for the week, I took 35 pips to make it an even 100 pips. I had already stopped trading for the week so I really did not want to push it. I am a very disciplined in my trading, I do not need 2000 pips per week, I have a target of around 100 pips and when I reach it I’m done. I spend the rest of the week relaxing and enjoying my life. I knew this trade was very possibly worth more than 35 pips but what can I can I say I wanted to wrap-up my week.
One more thing about this trade is that we saw three reversal candles. The more reversal candles the stronger the chance of reversal. Especially when they do what we see in this pic below:
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