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.