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Monday, June 2, 2014

Forex Trading Strategies The Market Never Forgets

 I’m going to share with you a very powerful trading ‘tip’ that will significantly improve your understanding of price dynamics as well as how to read a ‘naked’ price chart.
The ‘tip’ is somewhat simple on the surface, but a bit more involved when we dive down a bit, and that’s the part I’m going to help you with today. What I’m talking about is the tendency of a market to never ‘forget’ where a major move started.
How many times have you seen a market retrace back to a level or area where a recent major move started from, only to respect that level almost exactly before making another strong directional move? It happens often enough to be something that you need to understand and know how to make proper use of, because these scenarios can often yield very high-probability / high reward to risk trades.

Let’s hit the charts for an explanation of this powerful trading technique

Before we proceed, it’s important to note that what I’m about to discuss with you is not a ‘perfect science’, but it’s an occurrence in the market that is critical to understand, and a tool to have at your disposal when you’re analyzing charts.
The first point you need to understand is: A market will often ‘remember’ and respect where a major move started. That is to say, if a market retraces back to the level or area a major move started from, many times (not every time) it will again bounce or fall away from that same level / area. As a price action trader, this is a HUGE clue for us and we can use it to develop several high-probability entry techniques:
In the example chart below, we can see a few important things taking place.
1) A key resistance level was established near 9735.00 – 9700.00 in the DAX30 market (German Stock Index). This key resistance level and the big move lower from it established an ‘event area’.
2) The first major test of this key level / event area a little over a month later, resulted in a bearish pin bar sell signal that led to another large decline.
 For our purposes here today, you should know that an event area is a level or a small area / zone on the chart where a big price move started from. A price action signal by itself can start an event area, it doesn’t have to be at an existing support or resistance level. However, if a big move starts from a price action signal in conjunction with a key level of support or resistance, this is an even stronger event area.
3) The next important thing to note on the chart below was that as the market tested the event area when the pin bar sell signal formed, it reversed yet again, because the market didn’t ‘forget’ about that event area…


marketneverforgets
In the above chart, not only could have we traded the pin bar sell signal from the key resistance level / event area, but on the subsequent test of that event area, we could have taken what I call a ‘blind entry’ at the event area. The entry would have basically been a limit sell entry somewhere in the range of where the pin bar formed, with a stop loss set just above the resistance near 9714.00 / pin bar high. This is called an ‘anticipatory’ blind entry at an event area on a retrace, or sometimes I will call it a ‘second-chance’ entry.
Note: A price action signal at a key level or event area is a bit ‘safer’ of an entry technique than a ‘blind entry’ because it gives us some ‘confirmation’ for an entry, but as price action traders it’s important to be able to read a chart and understand the dynamics of event areas, because we won’t always get the price action signal when we want one. Thus, as you gain experience you can try to enter ‘blindly’ at one of these tests of an event area, I also sometimes call event areas ‘hot points’ in the market as they are important ‘hot’ areas where a significant price action event occurred recently.

Let’s look at some more examples:

In the chart example below, we can see a good example of how to use an event area both with and without a price action signal as the entry trigger.
Note the first pin bar on the left of the chart, this initially formed the event area because of the strong down move that followed. So, we knew this level / area near the pin bar would be important on subsequent tests in the future. Sure enough, price has respected this event area on each subsequent re-test.
The pin bar buy signal from February 27th would have been a very obvious trade since it was rejecting and false-breaking down through the event area and price had bullish momentum behind it at that point. Note the nice up move that followed.
Next, when the market retraced all the way back down to the event area on April 4th, we could have successfully entered long on a ‘blind’ limit buy entry near the event area, note the powerful up-move that followed over the next four days.


marketneverforgets2

Now, let’s look at another example of how a recent event area clued us into a potential ‘blind’ or price action signal entry.
Note, the key level near 1.6670 area on the GBPUSD and the big move lower that started from that level on January 24th, this big move told us that this was a level the market might not ‘forget’ (event area). A long-tailed pin bar sell signal formed here on March 13th, this price action signal and the move lower from it further solidified this level as an event area. Note, how the market then fell away from that level as price sold lower from the pin. We then had another re-test of the event area that led to a modest move lower before the market surged up above the event area. Now, as the market retraced back down to the event area, you would have already known this level was important and an event area (now you know for future reference).
You could have entered a blind buy limit near 1.6700 – 1.6670 area, or you could have waited to see if a buy signal would form. In this case, a very nice long-tailed pin bar buy signal did indeed form and price is still moving higher from it as of this writing. 


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