What did not happen is insightful, too

In Forex trading, when studying price action:

It’s not only about what happened, what did not happen is insightful, too

When I look at the charts it is easy to only focus on what happened, but often there is invaluable insights in what did not happen.

Only focusing on what happened may limit my ability to really read what is happening.  Here is a quick video that may assist in illustrating my point.  Then below is some chart examples.

Here are some price examples from the chart of what happens when I can identify where price does not go.

Understanding the relationship between where price does go and does NOT go will help in placing stops and limits.  Trading levels instead of individual bars and time periods will also make me a more patient trader allowing to filter out the noise.

Where to draw Horizontal Lines and why? Part 3

Using reaction at price levels to determine price direction.

Support and Resistance Trading.  Part 3.  

Part 1 of this case study showed how I choose support and resistance price levels using red horizontal lines.  Part 2 of the case study I discussed how I can use the levels to determine trading direction, where to enter, place limits and stops.  Here in part 3, I will continue to discuss the clues provided by price action for USDCAD during Q1 2013.

Once price chooses a direction, I must remain focused and watch closely for clues suggesting the move will continue, stop and or reverse.  Stop and or stalling, at a level, in itself, is not enough to suggest the move is over.  The clues of continuation or reversals come from price behaviour at structure levels: making or failing to make new HH or LL, putting in new HL or LH.  All of this helps to define the trend direction and it’s strengths.  In addition, I like to use Fibonacci retracement and extension levels. 

Note: 1.00000 is a psychological big number, it can be expected to see natural resistance around it.  So too is 1.01000 but to a lesser extent.  Careful with trading at these levels and be wary of false breaks though once a side is chosen the moves can be significant.

The chart below brings in my use of Fibonacci retracement levels when they align with horizontal lines. 

The second chart brings in EMA lines, I like to look at the charts in this order.  First identify levels, then bring in Fibonacci levels and then EMA lines. 

 

Where to draw Horizontal Lines and why? Part 2

Identifying Support and Resistance Levels.

Case Study: USDCAD 2013 Q1.

PART 2.

How I draw, qualify and use horizontal lines.  USDCAD Case Study Jan 2013, Q1.

To begin, I will identify the key horizontal lines from October – December 2012, Q4.  Then use these to read and understand why price moved as it did during January to March 2013.  Here, I am using quarterly segments as forex trading requires patience in regards to time.

  • The first chart identifies 4 lines: the periods high, low, and it’s structure high and low.
  • Chart 1 summary:
    • High 1.00582  Low .97364.
    • Early in the quarter structure high (SH) resistance is about .98800 which then becomes the structure low (SL) support in early November.
      • This suggest below the line sellers are stronger than buyers and therefore affect price more.  When price level .98800 is broken, to the upside, it suggest sellers no longer find this price level attractive and sell less, if at all.
      • After price broke above .98800 it suggest buyers are outnumbering sellers.
      • After trading above .98800 price then came back down to  it, again.  It would be highly probable to expect buyers to outnumbered sellers here and price should move back up.  That is exactly what happened and a new HH was set in Middle of November.
    • Later in the quarter, early December, the SL at .98800 is broken, as price came back to it, buyers were not liking this price level and therefore price continued further down establishing a new structure low at about .98200

I will now use these identified levels from chart 1 to read and interpret Q1 2013, chart 2.

  • Chart 2 has two red horizontal red lines which were the highs and lows as identified on chart 1.  Now, in this case, I need to read price action to see how Q4 high was reached instead of the Q4 low.
  • The end of December had put in a new structure low at .98200 and this level held throughout January as price moved sideways early on.  If price was going to the Q4’s low of .97364 then it would need to break the structure low if .98200, this did not happen as price broke out of the sideways box, up.
  • The green box labelled Rotation Bullish; when I see a price pattern like this, I view it as possibly market movers switching sides.  In this case switching from sellers to buyers.  They are buying USDCAD.
  • The early part of January gave clues suggesting price may move up towards the Q4 high.  First, the structure low at .98200 held.  Second, a bullish price rotation pattern emerged, and price moved up outside of it.
  • If price does not move towards the next key support level then chances are it will move to the opposite next key resistance level.

All of the above tells me sellers are selling less and less at these price levels.  When sellers are selling less it means price will move higher.  Or, I can say: buyers are buying more and more, and as their demand to buy more grows price will move up.

Either way the behaviour of price is suggesting taking long position should have a higher probability of being right than taking short positions.

  • Taking a long trade once price moved out of identified bullish rotation box, in this case, paid nicely.  Though price stalled a little above the rotation box it did not show any signs of reversing down.
    • Possible signs of reversing down would be price moving back into the box.  Or breaking below and closing below the impulse bar that moved price out of the box.
  • From the slow down above the green breakout box, price then moved up and through SH quickly hitting limit 1 target.
  • The closes above the structure high (SH) formed a bullish flag pattern further suggesting the Q4 high is in play and reachable.  Once price took off up, again, it quickly reached Q4 high hitting limit target 2.  There was nothing in price action suggesting sellers had any fight or interest in slowing down the buyers.
  • Above the Q4 high additional highs were not made suggesting sellers liked this price and started selling preventing price from moving further up,  and or buyers were unloading their longs, and or fewer new long contracts were being added at this level.
  • As price moves down from this level, I need to look for clues to answer is price reversing the long-term trend or is the current up trend just pulling back?
    • From this new high, above the Q4 high, price retraced down to the previous structure high (SH), around .99700 finding support.  Once a bottom was found and price resumed up it can be safe to say a new higher low (hl) has been put in and price is not reversing but just pulling back.
  • Once the steam of the bulls ran out and sellers entered the market a double top was set in early March and priced moved down from there finishing out Q1 2013.  This will be where I pick up for Part 3.

Conclusion

I can use previous significant, in this case the quarterly, highs and lows to identify support and resistance levels to gain insights for future price action.  At these price points, I can draw horizontal lines then wait for when price reaches them again.  If price does not move to one and then aligns to move to the opposite level then, I can look for trades in that direction to that level. Once the level is reached, I should continue to read the price clues, left behind by buyers and sellers, to see where price may go next.

I can further draw in and use structure highs and lows to gain insight to which level price may move to and how to evaluate it once it gets there.  The key is to read and see who is winning the battle, buyers or sellers.  If buyers are winning then price will move to resistance levels.  Once it reaches the level another battle will occur between buyers and sellers.  If at resistance levels buyers are winning the battle then price will break that resistance level and move further up.  Often when a significant high or low is broken price may come back and test it. These are ideal areas to join the longer term trend but entry signals must provide high probability with low risk.

Where to draw Horizontal Lines and why? Part 1

The Art of drawing horizontal lines and how to evaluate their strength. 

Identifying Support and Resistance Levels.

This case study is to assist me in better choosing where to place horizontal lines and how to evaluate their usefulness.  I will select obvious highs and lows from recent price action to draw horizontal lines, for this I will use red lines.  I will determine these horizontal lines from past price action but their usefulness is in the future.  Well chosen price levels to draw horizontal lines can serve as boundaries to where price may move to and or reverse from, in the future.  In between these obvious support and resistance levels will be other valid points to draw horizontal lines,  I call these levels structure high or low, and will use blue lines to highlight them.

This case study will only identify horizontal lines and look to see when they come into play again.  I will focus on the battle between buyers and sellers before price return to a line, again.  Once price returns to an earlier identified level, I must continue to read the battle between buyers and sellers at the lines.  This is a significant battle to understand and to know who is winning, as it will give valuable insights towards whether the line will hold or be broken through.  If sentiments are correctly read based on price action at these levels it can help prevent taking low probability bad trades in the wrong direction.  Reaction at these key significant levels can be excellent guides towards the medium to long-term trend direction and strength.

Clues towards who is winning the battle, at key price levels, identified by horizontal lines, may come from structure levels and or when higher lows (HL) and or lower highs (LH) are set.  When higher lows are being made it suggest buyers are greater than sellers and in control of the overall up trend.  When lower highs are being made it suggest sellers are greater than buyers, at the key levels, and will move price down.

Using my combination of support / resistance levels with structure highs and lows has help me avoid a lot of bad trades with low probability of success.  Understanding it more and combining it with a few other price action tools should help me identify higher probability trade set ups, and then entries with protective stops and realistic limits.

Here is the EURUSD daily chart with key significant highs and lows identified by red horizontal lines and in between structure highs and lows with blue lines.  Below the picture is a definition of how I may use these lines.

  • A support horizontal line is drawn at the lowest low for a chosen time period.  The support level will hold if buyers like this price more than sellers and enter the market taking long positions.  The absence of sellers at this level will move price higher until sellers see a level they like and enter the market.  How do I know, from price action, that buyers are greater than sellers?
    • Knowing that a level has held is not an immediate result.  When price approaches and reach a support level, depending on the time line being used, the first challenge would be to wait for the bar to close, this is where patience and focus is greatly needed.  Once the bar closes, I need to look where it closed.  If price moved and closes below the support level, then this may suggest the level is broken.  This would happen if buyers did not come in and buy at the support level or if they were outnumbered by sellers.  More clues are need to assist in correctly evaluating.  For example, after closing below support, if price moves back up and puts in a new lower high then moving back down to the support level this may suggest the level is broken and price should move further down.
    • If price bounce off the support line and move higher up breaking structure highs and lower-highs then it suggest the level held.  Setting higher lows above the support level is another clue support has held.  Further, indicator tools should become aligned bullish.  If these fail to happen then the support level may become weak and price may break through it when reached again.
  • A resistance horizontal line is drawn at the highest high for a chosen time period.  As price approaches and reaches the resistance level, it will hold when sellers are selling more than buyers are willing to buy, here.  If more people are selling than buying at a resistance level then it should hold and price move down (of course, if this does not happen then buyers are stronger and price moves up, sometimes it is not what happened but what did not happen that can help read price action).
    The further down price moves without significant rallies up shows the strength of sellers over buyers.  If price cannot break and close above the resistance level and then proceed down breaking structure support levels with rallies only producing lower highs, this all suggest sellers are in control and price is likely to move further down.  When this is happening all indicators should read bearish.  If at any time this is no longer true then it may suggest sellers are losing control and buyers may be coming into the market in greater numbers.  This is why patience, focus, and discipline is needed to win at forex; when all three of these are being used it can help to prevent bad wrong trades with low probability.

In Part 2, I will review and discuss the above as it played out in USDCAD Q1, 2013.  I believe this simple tool of drawing horizontal lines and then reading price reaction at them can be used on any trading instrument and on any time frame.  Though, dentifying these levels, especially on higher time frame charts (4-hr to weekly) will aid in analyzing the reliability and limits of price action tools and indicators on lower time frames, 1-hour to 15-minute charts.

I went LONG NZDUSD

My most thought out and complete trade, ever!

Final update and thoughts post trade.

1st position hit limit for 159.9 pips gained.  Newly added (4th position) hit limit and closed for 61.6 pip gain.  Original position 2 and 3 hit trailing stop and closed for 140.2 pips each.

My most thought out and complete trade ever, and still I did not remain in the trade until targets reached.  I over managed and was to aggressive with the stops.  The final two open positions closed after hitting aggressive trailing stop on “shake out” day.  Had trailing stop been better placed, targets would have been achieved as price move up sharply after “shake out,” right up to 0.81015

Though price had put in a double top and moved down to the 21 ema sharply, I could have been more patient as this alone was not a signal that price was reversing trend from up to down.  I have a lot of tools I could have used to help determine if this was a reversal or pull back.  In hind sight, almost all of my tools showed it did not signal a reversal though live the signals were and remained bullish.

The aggressive trailing stop was poorly placed as it was both above the 4-hour 21 ema, and at a previous resistance area that was coming back to be tested as a, now, support level.  This is not an ideal area to sell especially in a bullish trend and impulse legs.  The resistance turn support held and price quickly propelled up to targets.

I have to let my winners run and be more patient.  Had I read the charts with a little more focus and patience, A long trade should not have stops above the 21 ema, and at a recent broken resistance level.  It would have been better placed below the immediate impulse leg which began at the opening of the week.   I was concerned with locking gains and lost sight of the trade set up and it’s that it’s potential was still in place–price action was bullish not bearish.  I had little to fear except greed.

The fear and greed cost me, since closing this trade, prematurely, I have missed out on a few excellent trade set ups for NZDUSD.  This is just another example of losing even when I close for a gain.  I lost my focus, edge and confidence as my emotions were focused on missing out hitting identified targets.  This distracted me from seeing and feeling the rhythm of price and I became unsure.  I need to trade with more focus, patience and never stop reading the charts while keeping my emotions out of the process.

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Update Monday July 22nd, added a new Long Position

Update of open Long trades in NZDUSD.  Added a new long position and adjusted targets.

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The Entry on July 12th.  Writing blog July 19th. 

I have been studying price action of NZDUSD, almost exclusively the past month or so.  Here is the NZDUSD Case Study.

From the rotation, price moved up sharply breaking structure resistance to the upside.  I thought, if price moves back down to the previous resistance it should now hold as support and I should take a long entry.  Priced moved down and closed below the 21 EMA but also put in an immediate short term double bottom and price remained above the lower lows.

Seeing all of this, I took three long positions.  It was not the best entry at price kept moving against me, but stops were not hit.  Stops were big as they were below the established lower low below .77000 and limits were big too.

Partial target taken at double top of the recent highs from July 11th.  The next target is at a previous LH, from June 19th, which is below .81000 and also near the .382 level of the impulse leg retrace.  Extended target is further above, at the high of June 14th, and just above .81000, but may get adjusted if target two is achieved.

Partial Target hit and remaining position are positive and risk free.  Two positions remain open.

At the time of writing, Friday evening, 1 position hit limit and closed with two positions still open and stops at positive levels.  The daily chart is looking bullish and the 4-hour chart has run into some resistance. This is expected resistance and why position partially closed here.

Next Wednesday July 24th, 5pm EST, NZD official cash rate announcement followed by statement.

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The Overview

NZDUSD fell sharply from about .85800 down to .76800 creating a down impulse leg.  But, I started following it from .81300 down to the low of about .76800 which was hit on June 24th.  From here July NFP numbers, and FOMC minutes were on the horizon.

Before the release of the NFP numbers, I was studying which way price may move and noticed a pattern I have seen many times before.  I call it “rotation.”  Rotation is market moves switching sides, in this case unloading shorts and picking longs.

I was initially looking, even expecting, price to retrace up to the .382 level before NFP and FOMC releases.  That did not happen as price moved side ways, in a range between  of about .77000 to .78200, for about 11 or 12 trading days.  As price unfolded in this range, I thought a direction would be given with the release of both NFP and the FOMC minutes.  Either price would continue it’s way down establishing new lower lows or begin it’s retrace to .382 or higher of the big down impulse leg.

Here is a chart daily chart highlighting the identified points.  With the release of both NFP and FOMC price did move sharply down, from where it was, but it did not produce a new LL below the June 24th low.  This led me to believe that a bottom was already found at about .77000

I should start to look for long trades up to the .382 level.  If price won’t break a support or resistance level then it is likely to go in the opposite direction.  In this case, it found support at .77000 and could not break it.

EURUSD Trend Reversal or Pull Back?

EURUSD: Is the 15 day down move over?
Has Euro found a significant level at 1.2756, support?

Update August 19th, one month later.

The take away lesson one month later is trading with identified levels goes a far way to give insights of where price may go and the patience it takes to see it through.  To answer whether it is trend reversal or pull back is still uncertain, but identified levels are still valid and in place.   The analysis was right.

Though the chart and price action has been bullish up for all of July and most of August price is at a double top resistance level at 1.34215.  The impulse down leg of June has retraced almost 100% back up.

If price level 1.34215 (the beginning of the impulse down leg) gets broken and closed above, on the daily chart, then EURUSD may run up to 1.37000. NOTE: the impulse down leg did not produce a new lower.  The March/April lows are still in place, which are also the lows for the year, 1.27460

I need to watch for price action behaviour to determine if buyers or sellers are in control.  If buyers out number the sellers then 1.34215 may get violated and price could run up to 1.37000.  If the sellers are in control and short EURUSD in large amounts, then price will hold at 1.34215 and decline down to key support retracement levels or further.

I need to watch levels and alignment of signals all pointing in the same direction, when this happens that will be the direction price moves in sharply.

Price moved up above the “Buy ?” blue line and continued up where is slowed down a little at .786 after a slight pull back and delay it resumed up to .886 level then pulled back again but still bullish.  A double top at 1.34215 is still play.

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July 15th, 2013

Below are Daily, 4-hour, and 1-hour charts for EURUSD with key support, resistance, and Fibonacci levels identified.  Based on which way price break I will look for entries in that direction.

The charts with their identified levels provide me with “if then” statements allowing for quick and easy evaluation of the charts.  Now that the levels have been identified just need to check in periodically to see if they are reached and how they are reached.  Trading levels like this instead of individual bars, tick-by-tick, is a lot less stressful!

On the 4-hour chart there is a blue line labelled “Buy ?” and one labelled S2.  When price breaks and closes on either side of these lines trade in that direction.

  • If below S2 trade short and target the .618 level, S1, or a double bottom and below if move is strong impulsively.
  • If above “Buy ?” blue line then trade long targeting the recent high and or the .786 retrace level of down impulse leg and further up to a double top at 1.34162 and beyond if move is strong.

Reviewing EURUSD 4-hour July 7th

Reviewing price action lessons from the past few weeks:
June & July 2013

Update, Monday July 15th, 6pm EST.     Where  and when to enter EURUSD?

The original post below discussed the up trend followed by the symmetrically equal down trend for EURUSD, 4-hour chart.  Below, I wrote reminding myself not to look for or take LONG trades until a structure resistance level LH level has been broken.  Price was stair stepping it’s way down and would continue to move impulsively down until a bottom is found.  Confirming a bottom could not happen until a structure level is broken.  This has now happened!

A structure LH is now broken along with the 21 EMA, and it was done impulsively.  Now that an up impulse leg is in place, I need to look for Longing entries.

Note: based on my system of trading there were no signal, on the 4-hour chart, to go long until now.  The IB bar which broke the the 21 ema and then structure is the signal therefore, until this signal is given no long entry was present.  The following bar was a continuation bar up which too was impulsive in nature.  Only now is a retrace occurring possibly providing an opportunity to enter long.  Need to check daily chart for insights.

 

Original Post, Sunday July 7th, 2013

To establish and train my reticular activating system below is a review of price action for EURUSD on the 4-hour chart.  The principles guiding these patterns repeat themselves many many times on all time lines and all currency pairs.  Using fractal trading can help provide insights to determine trend pull back versus trend turn around and bring harmony between differing time lines.  The key is to see the rhythm with in price and exercise patience, focus, discipline, and confidence in my analysis.

The chart below shows Mirror Symmetry between the move up and the current move back down.  This fantastic symmetrical trending move provided high probability low risk trade set up but more importantly it prevents low probability high risk trades.

EURUSD 4-hour chart

Analyzing the 4-hour chart well can be done as it takes 4-hours before a bar is complete, however, because it takes 4-hours I can lose patience and focus putting myself at risk for low probability trades.  The key is to trade levels not the individual bars.  Either a level is his or not.

Trading using price structure, Impulse Bars, the 21 ema, trend lines with price waves measured by LL, HL, HH and LH, and common sense can help see high probability set ups with low risk.  Entry and trade management requires confidence of my analysis and to wait until each 4 hour bar is closed before adjustments, if necessary, are made.

These reliable price behaviour repeat over and over as they are governed by fundamental technical principles.  If price is rejected at a support or resistance level (structure) then it suggesting it’s heavily defended and price should move to the opposite level.  For example, if a resistance level holds then likely price may move to the opposite support level and vice versa.

If price moves sharply in one direction leaving an impulse bar it suggest price has strong momentum in that direction.  If an impulse bar breaks a structure level and or the 21 ema it further shows its strength and it makes no sense to trade against it.

I do not trade the news, but it is important to know when news is being released.  If the release of major news items moves price to key levels and then breaks it, I should not go against the move, but see they are in harmony and trade with it.

As price moves and establishes HH, HL or LL and HL it leaves points that can be connected.  These form trend lines.  A trend line may serve as moving support and resistance structure level and they are governed very similar to the horizontal lines.

A impulse bar which breaks “a line” can be reliable, but one that is preceded by the opposite colour candlestick becomes more powerful (See, both circle 1 and circle 2, IB in above chart).  Circle 1 shows two consecutive up bars that together can be called an Impulse move.  Notice how the bar preceding the two up bars was a down bar, I call this “misdirection before and impulse bar. “ Similarly, at the peak before the big down impulse bar the preceding bar was an up bar.  An IB and surety of a structure broken or held cannot be known until the bar closes.

Trending moves are in place until structure level(s) has been unquestioningly been taken out!  That is in the current down move unless the most recent LH and 21 ema are both broken the down leg will remain in play and how it is taken out matters.