Counter trend trade below BIG support area, high confluence zone

Since the beginning of May AUDUSD has been dropping almost vertically about 800+ pips.  On the most recent down leg, after seeing a pullback wave up to the .618 level I drew a few Fibonacci expansion points using a couple of different levels.  This presented an excellent reversal entry zone to trade up, counter trend.

Intraday price moved below the strong support of .95821 however price stalled at a couple Fibonacci extensions levels.  I drew a Fib inversion from C to B and back up to C plus an fib extension of A to B then back up to A.  Using both extension and inversion created a confluence area of a possible rally up.

Confluence zone counter trend trade
Confluence zone for counter trend trade & Structure break entry
  • The were several entry areas.  The aggressive low risk entry was the 1.618 inversion of the C-B points as priced rally sharply from there.  The 1.618 was just above the A-B extension point of 1.414
  • On the Hourly chart there was a loose 3-drive step down to get to the 1.618 inversion.
  • Another possibly more safe entry could have been the open after the hourly bar closed which touched the 1.618 level.
  • Another entry would have been to wait for recent structure levels to be broken (closed above) then look for an ideal entry.  This is safe but presented a bigger stop value as stops would need to go below the days lowest low, about 65 pips away.
  • Target would be a .618 retrace of the recent down leg.

NOTES

  • I identified and drew the possible reversal zones around 5pm EST.  Therefore, it took 9 one-hour bars before the lowest low was reached.  Further, once price moved into the fib extension regions, below 1.272 level, it took 7 one-hour bars before the 1.618 level was touched.
  • This is important to know, when trading live as Forex trading is all about waiting and knowing what is going on.  The key is patience, focus and discipline.
  • This is easy after the fact but, live, the .382 level look liked a good resistance level as it was aligned with a former support area, point B.
  • It is important to see that the structure level was taken out on the 4am EST bar, it closed above the previous 8 one-hour bar highs.
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How not to trade, importance of well placed stops

This morning after watching a news release I took a short trade on USDCAD.  The trade was up about 22 pips with in 15-minutes, but ended up closing for a 9.1 pip loss.  Two things, first, I traded the news and second, poorly adjusted my stop.  After being up 22 pips my stop should have either remained above the daily high where it started or to break even, no in between.  Moving it to break even would have made it a risk free trade.  I did neither, instead made a bad decision with the stop at a 9 pip loss.

By choosing a 9 pip stop instead of break even or leaving it above the daily high; I was undecided between it being a trade or a scalp.  And, I over managed the whole thing.  If it’s a trade then leave the stop above the daily high, if a scalp then move to break even.  Waffling between the two turned a winning trade unnecessarily into a losing one.

USDCAD, Wrong Stop.  Trade technical price action NOT the news
USDCAD, Wrong Stop. Trade technical price action NOT the news

To make matters worse, I stopped thinking and over traded!  After the short closed for a loss I took a poorly thought out long position.  It was poorly thought out as I saw price rally up but it did NOT make a new higher high.  Instead it rallied into a former support level turn resistance.  Since it did not make new highs, I should have been more patient, waiting for a deeper retrace.

I took the long trade at another resistance level which got broken during the rally.  I was thinking this was price coming back to test the resistance as now support but, I should have seen that the rally only produced a new lower high NOT a new higher high.  This means that a long signal was not in place at this level.

The news release moved price but in an undecided way.  The moves were in both directions to support and resistance levels.  The Resistance level was at a .618 retracement and the support was also at a .618 retracement.  Trading either .618 resistance / support levels would have produced quickly in excess of 30 pips, in both direction.

Lessons:

  • When trading I must understand the difference between scalping and trading.  If scalping, I cannot allow a winning scalp to turn into a losing trade.
  • A scalp which is winning should either hit targets, close for positive gain or close for break even, but cannot close for a loss.
  • When scalping, I must define stops and limits in advance and even more so after entry and then even more so if it starts to be in the money.
  • Stops and limits are not only determined by price level but time can also be a factor, especially when it comes to stops.  For example, after identifying stop area(s) sometimes it may be best to use them only after a certain time has elapsed.
  • Never stop analyzing levels, do not get blinded by price.  Look for rallies or declines, do they create new higher highs or higher lows / lower lows or higher lows.  This may help determine trend reversal or trend continuation.
  • Do not over trade!
  • Do not over manage a trade! (If it is a trade)
  • Always identify whether it is a scalp or trade and set limits, stops and trade management accordingly.
  • Do not trade 15 minute charts.

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Another example: News moves price sharply but to a Resistance level and can’t break it.

Rally from News to Resistance level
Another example of price moving on news but, in this case, to a Resistance level.

The above chart shows another example of news moving price sharply to a reference (resistance) level.

How to trade this?

  • The 9pm bar would have been hard to trade live, it would be best to wait for it to close then analyze close relative to levels.  After it closed as a big up bar the simple instinct might be to wait for a retrace back down and enter long.  Is this right?
  • Upon close inspection I can see the rally during the previous day created a new short-term impulse leg up.  The low of the 9pm EST bar was just shy of retracing to that .618 level.
  • The move up from the .618 (point cc) broke above and closed above point bb.  However, it did not close above the earlier high (point xx) that produced the last leg down.
  • Yes, bb was broken but the nearby xx did not.  xx is a critical point as that was the highest high that produced the most recent down leg establishing the lowest low.
  • Price then remained in this resistance region for about 6 or 7 hours without breaking through or  closing above xx.  This suggest that the resistance level may hold and price continue back down in the overall down trend direction–presenting a high probability low risk trade.
  • Price could have continued up and break point xx and stop the resistance short trade out but depending on entry it would not have been more than a 30 pip loss.
  • If price cannot break a resistance then it will likely go the other way to the next support level which, in this case is over 90 pips away.  This gives a better than 3:1 ratio again, presenting a nice high probability low risk trade.
  • There are several entries, but no entry should be before point dd is set–that is the 1am EST 1-hour bar.  This is the first indication that sellers are greater than buyers.  The 1am bar went out of the resistance region but closed down.  After this bar closes any short entry in the resistance blue box would be ideal giving a very low stop-loss with a good payout.  It is important to see some selling come back into the market like it did after the 1am EST bar as price could have rallied up higher to the qualified Fib extension point sitting above which is also in another resistance zone.

NOTE:

It is important to see that this could have been a losing trade but it would have been low risk.  There was about 9 hours of price action between the 9pm EST news rally and the ideal entry going short from a resistance zone.

Aussie Dollar approaching May 2012 support again, will it hold?

AUDUSD is approaching strong support of 0.95821 again, will it hold or break through?
AUDUSD is approaching strong support of 0.95821 again, will it hold or break through?
  • Today’s price action had an almost .618 retracement of the current 4 hour down leg.
  • Two 4-hour bars did close above the .382 retracement levels but the second one left a pin bar just short of the .618 level
  • The short lived rally up is now followed by a move back down qualifying for a possible AB=CD completion.
  • If the AB=CD does complete it will be between the 1.272 and 1.414 Fibonacci extensions but more importantly it will mean a break below the strong support from May 2012 of 0.95821
  • If it does break through a possible completion of the AB=CD pattern will be around price level .94439
  • Will the support level of 0.95821 hold on a 3rd attempt to break through?  If it does hold and cannot break below then a the Fibonacci extension points of 1.618 aligns nicely with structure resistance for a possible short trade, around .97539

How to trade it from present price of about .96085?  This evening there is light Aussie, and USD News tonight, and tomorrow with BOJ Gov Kuroda Speaking at around 8pm EST.

AUDUSD 4-hour chart

4 hour chart
AUDUSD
  • 4 hour chart completed an almost perfect AC=CD pattern
  • AB=CD pattern also completed very close to the fibonacci expansion 1.618 of the AB leg
  • The completion was found at the support low from May 2012
  • Blue box is critical zone, will it be resistance and come back down to at least a double bottom?  or will it break through to at least point C?

AUDUSD continues downtrend

audusd daily may 22
AUDUSD Daily Chart – Strong bear leg down nearing support of May 2012
  • AUDUSD continues downtrend and moves down another leg creating a new potential resistance region.
  • Look for price to Not get back up to .98382 for at least several days.
  • Next support area is likely .9581 which is the May 26th 2012 low.
  • Even though in a strong down trend be careful with shorts, no shorts inside previous days bottom wicks until price closes below.  Ideal shorting area, if price gets back to it would be a .618 of mot recent 4 hour down leg.
  • NO longs until a lower high has been set and taken out.