NZDUSD Case Study

Price Action Case Study: NZDUSD

June 25th, 2013

The key to synthesizing all of the clues given by price action, from the various time interval charts, is not to focus on the live bar or the recent bars, but to look at what did and did not happen. When all of it is taken into consideration then the fractal harmony between time lines begins to present itself.

In hindsight, I can look at a chart and give a detailed explanation of why and where to take an entry, where to exit, and when not to do something.  With in the explanation, I can give understandable reason to take entries, set limits, where to place stops and how to adjust them accordingly.  The goal is to anticipate these explanations live and execute them as real-time trades.

The difficulty of hindsight analysis is translating the actual time into “real-time.”  When I look at a chart in hindsight and explain what happened, I can do it in a short time, but live is much longer.  Every 1-hour bar has four 15-minute bars, every 4-hour bars has four 1-hour bars and sixteen 15-minute bars.  This takes time to unfold.

It’s easy to say wait until the bar closes but that takes time and patience.  It further takes focus to see if the set up or pattern or trend direction is still valid at the close of the bar.

The purpose of this case study is to learn to read price action and become more aware of why price moves in the big picture.  I am hoping it will serve to help me see and understand the rhythm and purpose of price levels and who is effecting price more, buyers or sellers.

One of the goals is to help develop and train my reticular activating system (RAS).  If I can train my RAS, I can become more efficient at looking at the charts.  I need a systematic approach in defining what to look for and then determining what to do.  I need to learn to identify and see repeatable reliable price behaviour and when they presents themselves.  A well-trained RAS looking for high probability low risk opportunity will improve my understanding of when to trade and how to manage it.

Trading systematically is reading what has happened then being able to anticipate what may happen next.  Anticipating what happens next may be done through “if then, do this” statements.  Given that this has happened then price may go there and when it gets there expect a result.  The expected result is taking a trade in that direction.

Charts taken Wednesday June 26th:


Explaining the chart images:

Chart 1 is the plain 15-minute chart for NZDUSD.  Included is the 21 EMA and the grey shaded area is 1 full day of trading showing the previous days high and low.  Inside the grey shaded area the horizontal line shows the daily opening price level.

Chart 2 shows how I mark up the chart to read what has and has not happened and what it may mean.  Insightful clues can be gained from knowing what has happened and how it happened.  Reading single events in isolation is not enough to see what is happening.  Each event is a piece of a puzzle, forming a pattern, and they must all be read together for potential clarity in price direction.

I will review what has happened going from left to right:

  • At the extreme left, a channel is formed.  While the channel was live there were very little to suggest which way price would break.  In this case, price broke to the downside closing both below and the channel and the 21 ema.  This leg down also closed below structure indicated by the blue line (BSD, break structure down).
  • From the channel break, I could conclude the bears are in control and therefore look for short trade entries.
  • After trading and closing below the recent structure level it rallied back up to the 21 ema leaving a bearish pin bar right on the 21 ema line.
  • Bringing in all of this together presented a high probability low risk short trading opportunity.  That is, price broke down outside of the channel, close below structure low and all below the 21 ema.  This suggest that sellers are stronger than buyers and price needs to drop further down before buyers become interested in buying.  It’s low risk as stops would go above the channel high but early clues to exit and adjust would be if and when price broke above and closed above the identified pin bar on the 21 ema line.
  • Off this initial entry price drops sharply 30 pips before rallying back up to the 21 ema, again.
  • At the second rally to the 21 ema price touches the line 3 times without going to far above it or even closing above it before dropping 50 + pips.
  • The termination of this down moves ends at a perfect Fibonacci 1.618 extension drawn from bear pin bar down to the bottom of the 30 pip drop and back up to the pin bar high.  The termination point also leaves a bullish pin bar but this is not the defining signal that the down move is over as price is still below the 21 ema and in a down channel.
  • Insightful clues that the down leg is over starts to present itself when price bounces off the 21 ema but cannot produce a new LL.
  • After the higher low is put in price rallies quickly with a small size impulse bar (IB) and closes above the 21 ema.  It then drops down but failing to close below the small IB and produce a new HL.  Still there is not a clue to take a long entry.
  • The signal for a long entry does not come until after the big impulse bar that moves price all the way up above the earlier channel starting off these swings, the drawn in upper red horizontal line at 0.77826.
  • An aggressive entry could have been after seeing a close above the 21 ema or on the big IB bar as it starts to move up into an area it should not be if sellers were still in control.
  • A safe systematic entry could be seeing the big IB move, drawing in fib retracement and then waiting for price to show bullish tendencies at either the .382 or .618 levels.
  • In this case the bullish buy signal came at the .618 level.  It is a little tricky to see but this is where patience, focus, discipline, belief, and confidence is important.  At the .618 level price break below the 21 ema but cannot produce a new LL or get down below the IB bar.  When it break back above the 21 ema it suggest that the retrace is over and will continue back up.  Stops would go below the cluster at the .618 level or below the IB bar.  Target would be back up for a double top where the strong resistance boundary is.  Trade to boundaries!
  • The second half of the chart shows very similar pattern as the first, like a pattern repeating itself-fractal!
  • Quickly: from the resistance boundary price retrace and puts in a structure low moving up but failing to break the previous high leaving a LH.
    • From the LH price moves down and breaks the recent structure put in place and closing below the 21 ema.  Price then rallies back to the 21 ema which is aligned with structure.  It then drops 40 pips down putting in a HL failing to establish a new LL.
    • From the HL it moves up breaking and closing above the 21 ema then moving back up to the resistance boundary high.
    • This time price closes above the HH but on the 15 minute chart.  A fractal pattern may be presenting it self between the 15-minute and the 1-hour charts.  After setting this HH and breaking structure up price sharply drops down to the previous higher low (HL).
    • Again, do not trade at boundaries until they have been clearly been broken and in sync on a couple of time lines.

Chart 3.  Combing the 15-minute chart with the 1-hour chart begins to show fractal harmony and boundaries of moves.

  • Displays the same price action from the 15-minute chart but in 1-hour candlestick format.
  • The important key here is to see the down channel suggesting a down trend is in play and remains in play.
  • The second key is to see the range trading developing, possible trades at boundaries.  Long trades at the bottom of the box and short trades at the top.
  • No trend reversal, to the upside, until price breaks above and out of the box.
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Structure support / resistance, 21 EMA

Using structure support and resistance levels to determine if break of 21 ema indicates a trend change

Thursday, USDJPY, Update:

  • No Lower highs has been broken and price is trading below the 21 ema.  A new LL has been set.
  • Price had a .382 retrace up but nearing a near perfect .382 AB=CD completion.

Tuesday, USDJPY, 2-hour chart

  • USDJPY has been on bullish upward trend since October 2012.  However, the last three weeks or so price has been moving down almost an 800 pip drop.   When will the fall stop, turn around, and head back up?
usdjpy 2 hour chart 21 ema
Trend Trading using the 21 EMA
  • One the chart above, I can see price moving down and the 21 ema is following behind it.  A few times price has broken above the 21 ema line but only to resume its bear trend further down.

Why?  How to determine when a 21 EMA break signals a trend turn around?

  • The best answer is to look at structure support and resistance as defined by LH and LL, in this case.
  • When price break above the 21 EMA, I need to ask: “did it also break an earlier lower low resistance and or a LH.”

So, from the above chart

  • at the blue line labelled structure res 1, as price broke above the 21 ema it did not also move up past the structure res 1 level.  For a signal to be valid that price is going to turn around and head further up this level needs to be broken, as well.  It did not, the structure res 1 held, and price moved further down with the 21 ema nicely behind it all the way.
  • Similar scenario at structure res 2.  Priced moved down further pulled back up and closed above the 21 ema line but could not break the previous LL support now turning resistance.  For price to have pulled further back up this level would need to be broken.
  • Again, the same pattern played out at structure res 3.  Priced moved further down setting a new LL then pulling back up and breaking the 21 ema line and trading above it until it reached the previous LL support now turn resistance.

This pattern will continue until the 21 ema is broken along with a previous support turn resistance and Lower High all have break and close above.

Yes, one may say there were pips to be gained after price broke the 21 ema.  This would be true but that would be counter trend with bigger riskier stops.  The higher probability lower risk trade may be taking trend continuation trades at the resistance level.  And, I prefer to have multiple reasons to take a trade.  Breaking the 21 ema is not enough by itself.

AUD, GBP, NZD – Trading Week June 10th-14th

Observations, Ideas and Trades:
10th – 14th, 2013

Friday’s Trades:

  • 32 pip winner on GBPCAD.
  • Price had a straight 120 pip drop, then consolidated putting in a double bottom.
  • After the double bottom an impulsive bar up broke both structure and the 21 ema.  Seeing all of this, this was my signal to take a long entry.
  • I did have some concern that I was taking a long postion below the 1-hour 21 ema but I liked that double bottom, impulse bar breaking both structure and the 15-minute chart 21 ema, and my target was modest.  Though the stop:limit ratio was not favourable, just under 1:1.
  • Had price moved below the impulse bar any move back up close the entry, I would have adjusted the stop and look to exit with as small a loss as possible.  Price did not move below the impulse.
    • Update post trade: Price looks strong to the upside with a possible move higher to at least the double top.  However, unlike yesterday AUDUSD trade I am happy to have closed the full position at target.  That was the plan and sticking to the plan is preferable.  No need to get greedy.

Thursday’s trades, AUDUSD:

Post closed trade update, see third image, below.  Making arbitrary decisions, not following my plan, and not reading price action is NOT a good way to trade.  If I am going to trade and behave this way, I should stop trading and find something else to do.  I became short sighted and greedy closing the trade without a signal.  Acting arbitrarily, abandoning my plan, I missed out on hitting my original target, 48 pips lost.  I acted like this because I was afraid to lose the pips I had gained and stopped reading price behaviour.  I turned a good analysis and recognizing a nice set up into partial winner.

Yes, price was falling against the trade, but where did it fall to?  I should have known better and not let my mind believe price will fall further without a true signal.  That is, until it broke the 21 ema or a structure level.  Had I been patient and read the charts, I would have seen that on the 15-minute chart price did not touch the 21 ema nor did it violate any recent structures-this would have been the first obstacle for a move further down.

I closed the trade to preserve and keep what I had made.  The only certainty about forex trading is uncertainty.  If I cannot accept uncertainty then again trading might not be for me.   I need to let my winners run.  My winning trades are not only to make money, but to cover losing ones as well.  If I cannot realize the full advantage of my winners then my overall account will suffer.

Another option which would have been more ideal would have to close part of the position leaving the rest to play out.  This achieves both capital preservation and managed risk.

  • Yesterday evening price action was inconsistent within a 80 pip range, see circle labelled N.
  • Prior to the N labelled 15-minute bar priced dropped 40 pips then rallied back up 80 pips on the  next bar.
  • Price then dropped back down about 90 pips leaving a long wick to the top, bearish pin bar.
  • However, within all of this rapid price fluctuation a new LL was not set.
  • No newer low not being set is clue 1 that price may move higher.
  • The second clue is after not setting a new LL price moves and closes above the 21 ema on the 15 minute chart while, at the same time doing the same on the 1-hour chart.
  • The third clue is price breaking the resistance level at N closing above the blue rectangle.
  • Drawing a fib from f2 up to the high shows price holding support at .382 level.  The .382 level would have been an ideal level but I did not see it at first.
  • Looking back now, choosing f2 as point A for the fib retrace is valid as that is the beginning of the up leg after breaking the 21 ema.
  • As priced was approaching the top again I thought this will not be a double top and that price would break through it.  It did but I had to patiently wait a couple of bars before it made its move.  Though noting that the following two bars after entry did not make new LL.
  • Now I have to decide do I leave stops as they are or bring it to break even.  I will watch if price breaks the 21 ema down or if the former HH now turns to support?  At present stop is below the .382 level.

Wednesday’s trades, AUDUSD, part 2:

Long AUDUSD, Wed June 12thLong trade off 21 ema and structure resistance on Impulse Up bar

  • After yesterday’s evening HH level was set price came and closed below the 21 ema on the 1-hour chart.  But after stalling there for about 2 hours of trading price quickly moved back up over the 21 ema in two impulsive 1-hour bars breaking the HH level.
  • Noticing that the 21 EMA and the previous HH were aligned along with the .382 fib level. I took a long trade which at the time of writing is up about 24 pips and stops moved to break even.  Plus breaking the LH from Monday price action.
  • This is now a risk free trade.  I moved the stop to break even because the set up looks good and price should not come back down after moving up +24 pips positive money.  Also, the close of the 10am EST bar left a long bullish pin bar wick above the 21 ema.  This all suggest price has more upside but if it comes back down then it has more down side to go.  No need to lose money now.
  • First target is a double top with second target at a possible AB=CD pattern completion at fib extension levels (the parallel dash lines).

Wednesday’s trades, AUDUSD, part 1:

audusd trades june 12th
15 minute chart.  Wednesday trades on AUDUSD.  Note: The fib lines are adjusted to the present time.
  • Yesterday evening, after the big impulsive bar up setting a new HH, price retraced back to the 21 ema.  I took a long but did not like the slow side ways movement of price.  So, I closed it for a small gain.  Turns out there were more room for it to go down.
  • The the better long entry would have been after price came back above the 21 ema.  The earlier setting of a new HH should have suggest that the previous support at .94170 would hold and when price gets back over the 21 ema it becomes confirmed.
  • This morning, after adjusting the fib retrace from a previous LH to the recent LL I saw price stalling at the .618 level.  My first entry was above the blue line but closed it a for a quick small gain.  I closed it because I was not sure if the blue line would hold as support or price break through it.  Once price did choose a side, it broke through it I took short trades for about 24 pips in gain.
  • The target on this morning trades was last nights HH level.  This was quickly hit for a full position close.

Tuesday AUDUSD Trades:

  • Monday evening (Tuesday trading day) I took a short trade in the circle labelled 1.  I took the short trade as price had broken immediate area structure down and below the 21 ema line.  On the pullback toward the 21 ema I went short.
  • However, I was not patient and exited just before price dropped down to where I had limit level.  I was impatient as there were no upside pressure with price breaking structure and below the 21ema without coming back to it.  In fact,aftere break below the 21ema price dropped over 70 + pips.

    audusd trdes jun 11
    2 AUDUSD Trades. First was I was impatient without cause closing for small gain just before price took off to target. Second, I adjusted accordingly and minimized loss.
  • The short trade was targetting 50 pips which would have been easily attained before pulling back and touching the ema line.
  • My second trade on AUDUSD was this morning on a retrace up to the .618 level but I closed part of it for a positive 2.5 pips and the rest got stopped out.
  • I entered the short trade thinking .618 level would hold but was not liking the rhythm of price so closed part of the trade and lowered stops to reduce risk.
  • Unlike my EURUSD trade, I did not take another trade (long) as the daily and 4-hour charts are still in bear mode.

Close of Monday Daily Chart Update:

  • AUDUSD, At Oct 2011 support.
    • Priced gap down on the weekly open but finished the day up.  The daily low was the within a couple of pips of the October 2011 low, .9386.
      Other than being at a strong support level and an 88 Week low, the daily chart does not present a trade signal.  Possible short term resistance at .9529
  • GBPUSD, still inuptrend mode
    • Daily bar closed up but price at a resistance level, around 1.5597 with support around 1.54100 which is also around the .382 retrace level of current leg up.  Last week weekly bar was sharply up but closed below resistance level of 1.5597
  • NZDUSD, Still looking bearish
    • Like the AUDUSD it gapped down to open the week but the daily bar finished up but below resistance level.  Resistance is around .79400 with some support at .7808 or .7678
      Both Friday and Mondays daily bar closed below the .618 retrace level of June 2012 up to April 2013.

Monday 10am Update:

  • AUDUSD: Week opened with a gap down but price remaining inside opening 4-hour bar.  No signal
  • GBPUSD: Similar to EURUSD after the most recent rally up price looks like it is taking a break and forming a shelf around 1.55200 which is a short term .382 retrace level.  A more ideal long entry is around 1.54200
  • NZDUSD: 4-hour chart; after gap down to new LL price moving up but looking at resistance around  79.100.  Look for break of structure to the down side for possible short trade

EURUSD June 10th – 14th

Tracking price action on the daily, 4-hour and 1-hour charts for the trading week
June 10th -14th, 2013

Thursday update EURUSD:

  • Price still moving sharply up.
  • Any move down would be a pull back until price has a full break of structure and rotates below the 21 ema the up trend will continue.

Tuesday’s EURUSD Trades

  • UPDATE: the third trade got stopped out over night for a 20 pip loss.  Stop was poorly placed.  It should have either been moved to break even or the swing low on the blue (chart below).  Price dropped down to my stop and turned immediately and rallied up over 80+ pips which would have easily hit my target of 50 pips.
  • First trade: after price came down and broke structure (break below, close below) to the down side on both the 1-hour and 15 minute charts I decided to take a short trade off the 21 EMA line on the 15-minute chart.  The entries are at 1S with stops at the red line.
  • I originally had stops above the recent high but did not like the rhythm of price and when I saw price coming back to test the 15-minute 21 EMA I moved it down to the most recent swing lower high.
  • I thought if price is above the 21 EMA on both the 1 hour and 4-hour chart so it may not be a good resistance on the 15-minute chart plus, the daily and 4-hour charts are still trending up.  By lowering the stop I got stopped out, but for a lot less than I would have if not adjusted.
  • There were good reasons to adjust the stop as price should have moved further down after breaking structure and if it came back to this level then it would suggest it has more to go up, against me.
  • Second trade was a long trade right after being stopped out short.  This was a quick scalp and quickly recovered some of the losses from the earlier stop out.  I was aggressive with the positive stop here as I thought this was going to be the next move up and price would not come back, but it did.
  • When it came back further down after setting new highs I was a little confused as to where price may want to go.
  • However after watching it play out from about from 10:30am to 2:15 pm EST I decided to take a long trade which is still positive at the time of writing, up about 25 pips.
  • I took the long trade because the pull back down of price did not go where it should have if price was going to bounce down from Resistance.  As the 21 EMA kept holding on all time lines and no new lower low being set plus the daily and 4-hour charts looking bullish, I decided to go long.
  • I am targeting 50 pips (1.33393, which is a 1.272 fib extension level) with about a 22 pip stop level.  The stop is just below an up impulsive bar.  Though, I will watch if price breaks the 21 ema and maybe close for positive or break even is needed.  There is room between the break even point and the 21 ema to adjust accordingly.

Tuesday June 11th, 11:00am EST.  Uncertain of trade signal but biased to upside

eurusd 1 hr stop area jun 11
EURUSD is in an up trend. This chart identifies, If I was in a long trade from where would stops be placed. The purpose of this is to watch when this stop level gets hit, it may indicate to start looking for short trading opportunities. Until it gets it look for long trade entries.
  • The Resistance level of 1.33081 is still holding.  The 10am EST 1 hour bar broke above but closed well below it.
  • Price may move until it finds support either at 1.3180 or even lower at the daily retrace of .382 level (1.31100)
  • Look for a break below close below yellow to confirm further move down.

Monday June 10th

  • As of Monday 10:00am no clear signal though looks like price is forming a shelf on 1.31962
  • Look for price to rally up from here or break below.  Watch for further signals.
eur daily jun 10
EURUSD Daily. Look for short to medium term pullback of price before moving up further. Support around the .382 of current up leg.
Price remain inside Thursday big up bar
  • Weekly chart; last week weekly chart closed up but below the lower high resistance set from the week of April 27th but
  • Daily chart; last weeks Thursday daily bar closed above the high of the lower high from from week of April 27th.
  • On 4 -hour chart identify Thursdays highs and lows as Price may remain within this range
  • Expect a pullback before a continuation Upward.  Support may be found around 1.30741 with possible resistance around 1.34

Trade Levels Not Individual Bars or Price

Interpret Price at Key Reference Levels Not at Tick-by-Tick Price.

Identifying key identified price levels in advance will help me understand the direction price wants to go.  When looking at a chart to see what is happening or not happening I must have a frame of reference.  The live bar is only useful in relation to established significant qualified levels, is price moving towards or away from a level.  Chances are if it’s not going towards one level then it’s going to the other.  Those levels can be support or resistance areas, higher highs, lower highs, lower lows, higher lows, and or Fibonacci retracements or extension areas.

Things to identify on a chart:

  • Current and recent impulse legs. Ideal impulse leg is from a LH to a LL and HL to HH with stong bars majority being of the same colour.
  • Fib retracement levels of impulse legs and adjusted as the leg lengthens.
  • Fib extension levels, drawn once a strong key fib retrace level has been hit, especially, .382 and .618, or  a full retracement has occurred.
  • Horizontal lines at support and resistance levels.

 

To test this idea, below I have placed the 4-hr chart for AUDUSD, USDCHF and GBPUSD with identified levels and marked areas for possible trades.  I will update each of these charts after the close on Friday or if levels achieved before then.

Identifying levels and key structure areas should help the worry and uncertainty of trading, but more importantly give me defined things to look for on a chart.

AUDUSD

AUDUSD 4 HOUR CHART
AUDUSD after rate decision, which sounded bearish, price has been dropping sharply after the pre rate announcement rally. Nearing ABCD completion at Fib Extension levels and approaching Key support from Oct 2011

USDCHF

usdchf 4 hr
USDCHF possible short trade at resistance region or long if it drops down to 1.618 which also align with structure support.

GBPUSD

GBPUSD
At .618 level which aligns with a structure Lower High. Look for reversal signal to short

——————————————————————————————————————

UPDATE

AUDUSD Update

Trade levels not bars
Was looking for buy signal at Fibonacci extension confluence.  Buy entry could have been on 1.414, 1.272 confluence but the safer entry would have been on the break above the down pin bar.  Targets could be .382, .618 and or the 21 EMA which is not shown on the chart.  It looks like price has more to rally up.  I don’t expect .618 to hold if retested.  Looking now for a double top to .97931 but must wait for up rally continuation signal on lower time line (1 hour chart).

USDCHF Update

Fib Extension confluence did not hold
USDCHF. In this case Fib extension confluence did not hold BUT price did not rally up to the identified Resistance level suggesting it had more down side to go.  It went down to a double bottom on the previous HL that produced the most recent HH for a full retrace.  This may still have more to go down but both Long and Shorts should be considered closely with patience until near term structure levels have been broken.

GBPUSD Update

GBPUSD 4 hr chart
GBPUSD has had a nice stair step rally up to a previous HH breaking and closing above it.  The entire move up has not had a structure level broken or tested to the down side.  This rally may have more to go.  Look for possible entries on the immediate leg .382 retrace but up signals must present on lower time lines.  If price does retrace further down a better entry might be at a .382 / .618 confluence lining up with a previous LH level.  Both the 21 EMA and Ichimoku is strong Bullishly aligned.