A slow market this morning. Little news until this afternoon. But a trade is a trade, and the best looking chart is not always the most profitable.
We got suitable signals from both GBP/USD (top chart) and GBP/JPY (bottom chart) at about 09:45. GBP/JPY some five minutes earlier. Although the price action favoured GBP/USD, Japan showed its colours earlier.
A trade is a trade, so we entered short GBP/JPY (the lower chart). The price action that looks the best does not always provide the speediest or best result.
We asked ourselves (1) what is the dominant price direction and are we following it, (2) is the market trending or ranging, and finally (3) is there price action that may interrupt our desired track to target?
Our answer to each was acceptable, our only concern with GBP/JPY was the significant number of 14,800 that we had to traverse on route to our goal of 30 pips.
On the other hand, if we had chosen GBP/USD its magnetic number of 13,200 slightly above possible entry, would have been an issue also.
A better plan would have been to take profit at the 14,800 price range and reassessed a reentry. But in hindsight is always easier.
We ejected the trade for a few pips profit and went back to waiting patiently.
First trade of the day. EUR/USD short for 19.2 pips.
Some great opportunities are often provided as the market transitions from the Asian to the European market time at about 8 am.
The UK market opening at 9 am often more volatile and regularly contains economic activity. This morning at 9.30 am, for example, has a GDP release for Stirling.
As conservative breakout traders, wherever possible we avoid the uncertainty that such news provides.
Our trade this morning is slightly more aggressive than usual. See chart below.
The Asian market provided a strong buffer above the 11,500 price level. The breakout short slightly after 07:00 was not an entry for us. Price bounced (reasonably aggressively) off the significant number of 11,500.
However, bar 1 and the doji before also on the 25 moving average line favoured a short. We entered on the close of the second doji (bar 1) which made our 19.2 pip target some 30 minutes later at bar 2.
Short opportunity off the 25 EMA but the 11,500 price is a buffer.
An update to our last screenshot. We Quite like the mix of GBP on the left and EUR and AUD on the right.
GBP on the left and EUR with AUD on the right.
GBP traded with (x) ticks set at 1470. The right-hand column is at 5-minute bars.
Strategy
Our strategy is a conservative breakout for each market; however, we will use our probability momentum strategy with GBP in a strong trending market.
The red arrow shows an entry from this morning in GBP/USD. The opportunity presented itself in both GBP markets. As we only trade one market at a time, it is a matter of picking one.
The Asian market time is often quiet regarding volume or bar size and movement. However, occasionally a good trade or two present themselves. Having said that very little happened in this trade until the European market opened at 8 am. The UK opening at 9 am often more voluminous and, this morning, coupled with European economic news.
Our trade progresses south slow but sure.
Hold the line
As the trade tickles the target line we are watching closely for any ‘technical’ sign that we will not achieve our goal; this is an awkward moment for novice traders. Our rule is that we always hold until target unless we have a definite reason not to such as technical, resistance or reversal. To show how difficult this can be, price in this instance cleared target and spread by a pipette then headed north. Fortuitous for us, maybe.
Many advanced charts have an (x) ticks facility.A tick represents a transaction between a buyer and a seller at a given price (and volume, except in FOREX). In the (x) ticks chart each candlestick shows the price variation of x consecutive ticks.
The (x) tick chart is not time-based. Therefore, each currency pairing in our trade list will close at different times. Moreover, the bars in an (x) ticks view are representations of transactions, and their frequency is variable. For example, over one period we may have 50 bars, and in another period of the same timeline, we could have 75 bars.
Backtesting
Backtesting of multiple currency pairings is the best way to determine if (x) ticks provide suitable trade opportunities for the individual. The example below shows EUR/USD 30 minute bars with one trade entry opportunity in the leg shown.
30-minute bar, one trade opportunity.
The chart below uses the (x) trade setting with x being 3,000. In this leg example, two trade opportunities are available. However, this is not to say more trade entries exist with (x) ticks as it all depends on the timeline set (above) or the ticks set (below).
(x) ticks often provide more trades, particularly on a breakout.
How many (x) ticks
How do we select the (x) number of ticks to view? As with the classic intraday time-based view, this is a personal choice but one which must be mostly proportional to market spread and the mean of the bars traded being a suitable size. If we use 3000 ticks in EUR/USD for example, the leading price action of using 3010 or 2940 will not alter, but the trade opportunities could be significant.
Based on Bob Volman’s day trading with 70 ticks we backtested higher amounts divisible by 70. Some areas of the test are subjective as to whether we would or would not have entered a prospective trade.
Lower timeframe
In the lower timeframe (or tick frame), 1470 and 2940 ticks provided, for us, the best results over a wide range of tests. Tick bars do not correlate well to traditional time-based bars. However, our ticks above would at certain times of volume provide similar representation to 5-minute and 10-minute bars respectively.
Higher intraday
Our favoured higher (intraday) tick frame is 4410 ticks; this equates closely to the half-hour bars on a standard time-based chart. The image below is a 30-minute chart superimposed on a 4410 tick chart over the same period.
In the first half of the image, the ascending 30-minute bars are on the left and in the second half of the picture, the tick bars descend on the right. Those proficient in price action identification will notice a tick bar entry opportunity in both the ascent and descent that is not available to the 30-minute bars.
To Scale-in is an excellent technique if used correctly.
A few moments ago we exited our USD/CHF trade in profit. See the last blog post.
We all make poor trade entries from time to time; often they are not poor but merely a bet admission that goes against us for no particular reason that we can determine.
Our priority is to protect our account and to let any profits take care of themselves. Our last trade warranted, to us, a scale-in trade. To do so correctly takes some practice as to get it wrong compounds any loss.
However, to get it right provides a trader with options. Either to minimise loss or ambitiously take a reasonable profit.
From our previous blog post, we entered short yesterday afternoon from a reasonable trend entry bar. Unfortunately, this was not correct, and the trade went against us and back to the top of the trading range.
However, the head of the trading range provided an opportunity to scale-into the trade. Our aim here was not to breakeven but achieve a satisfactory reward to risk return.
A consideration was the USD interest rate decision later this evening (UK time). With that pressing, we would not want to be delayed in the trade allowing a pullback as we would typically do.
Scale-in to minimise loss or maybe achieve a profit.
Trading range management, a lesson as it happens live.
As we write we do not know the outcome of our trade in USD/CHF that we started yesterday.
We’re hopeful that this trade will become a suitable lesson in trade management. Having entered our bet short in the chart below at the red circle price quickly goes against us. (the second chart is the same but zoomed-in).
My initial entry of the bar (lower chart) within the red circle was a reasonable bet short; however, lower wicks to the left reduce the probability and what quickly became apparent was that the entry was against a trading range of which we’d taken the worst position!
Having established the trading range, the many lines on the chart attempt to do this, we now ensure that our stop is at least ‘a measured’ move above the trading range.
We see that we have two possible trading range top lines of which we scale-into the trade at each. We are now at maximum risk for this trade, and with a turn in our favour, we may still achieve a successful reward to risk return.
However, any further assent in price will necessitate the management of a breakeven (and therefore, overall, an unsuccessful reward/risk trade).
We have one additional consideration. At 7 pm UK time this evening we have a USD interest rate decision. We do not want to have any trades open, based on hourly bars, at this point as price volatility with such an announcement can exceed our stop positions.
Chart perspective of trend and channel lines.Bar by bar perspective of price action and the traded channel lines.
Accurate measurement of bars and the like. Not appreciated by many retail traders, but accuracy provides the clue.
We are continually looking for that measure. It may be an explicit support or resistance level, or one that is not so obvious.
It may be within a channel, or a trading range may define the boundaries.
My favoured measuring tools are a simple mirror rule and an edited version of the Fibonacci retracement to provide a quick way to find the middle of something.
Below is an example from yesterday and this morning. Although we show only one measure per chart, in reality, many tests would be performed to find, what we think is, the best clue.
Our point of interest is the last significant bear bar (seven bars from the end). We feel this bar strongly supports the probability of a further reduction in price.
The question is at what point do we enter the trade? The bear-bar we are measuring is a trend bar but has a prominent tail; this indicates either buyers below or, and more likely that sellers are buying back their trades – taking profits.
It provides some uncertainty and a stop immediately above our measured bar would be vulnerable. We, therefore, look for the workable trade solution that the majority of ‘institutional’ computers will employ.
We consider that the next premise point (marked by the red arrow) is a candidate. To provide a traders equation of reward and risk, we measure the halfway point between stop and target and determine our entry level; this we have marked with a yellow arrow.
Contextually it makes sense. In other words, we like what we see if we stand back and take in the bigger picture.
Below is how the trade developed over several hours.
From this morning we have an early, but a viable consideration. In this example, we are against the trend but contextually a probable scalp of 26.9 pips.
After the close of the third of the last four bull bars, we take our entry as marked by the yellow arrow.
Our measure is from the third bull bar, from the bottom of its tail to the close providing a measured extension above.
However, as before we feel that a viable stop position is the base of the recent low. Again our reward/risk is satisfied if we enter at the yellow arrow.
The trade concludes as shown below.
A point on the spread. As retail traders, we have to consider spread in our bets. That is, we allow for half spread on trade entry – if we had not in the last example we would not have been successful with our entry.
Our measurements, however, are a determination of what the institutional computers are taking, and they, by-and-large, do not have to deal with anything as distracting as spreads!
Trend indicators are useful but are in lag? Our method is systematic price action with trend identified through context.
Price action is a good fit for the methodical approach to trading. Relatively easy to establish, back-test and edit. Based on the close of a bar and that bar relative to as many prior bars as is necessary.
Trading range or trend?
The market spends most of its time in a trading range. Trends take up only a small proportion of the demand. Our systematic approach must, therefore, work in both markets. To do otherwise, as many trend-following systems do, is to miss the majority of trade opportunities.
The problem with price action and a systematic approach is the identification or confirmation of a trend. To help, many traders rely on trend indicators. For example, the MACD is a valid trend indicator when employed in the correct time frame.
Moreover, there are many ‘to buy’ trend systems available that claim to provide a reliable trend identification system; this may be. However, all indicators take their cue from price, and the price has to change sufficiently to give the trend.
A pure price action trader, on the other hand, will read the context of the chart to indicate a trend; this is made to sound natural to achieve by established price action traders. But as with anything after many hours of practice and once mastered will always seem easy from that point.
Let’s take a look at a trending opportunity this week with Sterling.
We can see from the yellow box that we have three bear bars. Our system took the close of the first of the bars within the yellow box short. But we are now flat waiting for more information. We know that the more significant trend supports a sell short but in our timeframe, an hourly chart in this instance, we are at the bottom of a trading range indicated by the red arrow. A reversal is 50/50.
The two bull pull-back bars, however, are weak and support an early entry short at this point, or if uncertain we can wait for an entry bar, which comes next. We sell short for a target equal to a measured move of the yellow box.
Not yet a trend but the last two pull-back bars are weak.
It is the second move down (the second yellow box) that established the trend short for at least three to four times the distance of the first yellow box.
Trend short, at least for another measured move, is probable.
We can either hold our second trade (most advisable for intermediate traders) or exit with profit and re-enter for the final leg.
We say most advisable above as many traders once out with profit would not get back into the trade quickly enough to take advantage of the trend.
Exit at the measured move or hold until price action says otherwise?
To finish our point about trend identification. The remainder of the day, as shown by the chart below, are tradable pull-back bars. As we are reactive and not predictive, we can trade each appropriate bar or sequence of bars relative to context.
Context does not support a trend long, therefore scalp only.
Notice there are three possible pushes long with the final bar being an extension driven, probably, by the welcome UK financial news released at the time.
We do not consider this a trend due to the context to the left, the identifiable three pushes already and the news-driven extension or possible exhaustion bar.
We only traded the close of the bull bar, the fifth bar after bar 1, long for a scalp. The imminent release of financial news of significance at about bar 3 kept us flat.
To be the active trader, always preferable to the defensive trader.
More on Hans Zimmers idea of questions and answers and how it relates to financial trading.
We need to be on the watch for the smallest of hints that something isn’t quite as it seems.
A question or three
The currency markets we trade have been in a bear trend for some time. Meaning that all the ‘answers’ are short trades and all the ‘questions’ are long trades.
We want to be going short where possible. However, this ought not to make us blind to the detail. If we get the detail wrong, this is not necessarily a losing trade if our stop is sufficiently distant.
But getting it wrong can concentrate our efforts on managing the loss which in turn creates missed scalp questions and lost entries to better-placed answers.
Short entry price action but context says different
A couple of days ago from early morning each of the markets provided short entry price action opportunities. Each was answers. Therefore they had swing potential.
However, if we take a closer look at the conversation prior (the context of the chart), we notice a wedge or three pushes.
If we had missed this observation, we would have been distracted, mainly Euro and Ozzie dollar, for some 30 hours managing an out of the money trade.
The pictures below are the same stories for the EUR and AUD. GBP has a similar connotation but is in a trading range and therefore only provides questions.
What kept us as an active trader
AUD/USD wedge probability long.EUR/USD wedge probability is long, but we wait for an entry bar.GBP/USD wedge and a trading range.
It is unusual that all three screenshots provide the same clue. A pullback is now probable. In all cases, the ‘actual’ pullback was a 100 pips or so. We wait, however, as these pullbacks are questions and we need an entry bar first to trade a question.
Active trader in EUR/USD
If we look at the EUR/USD in more detail, we see that we have a possible expanded wedge, being three pushes, as well as the embedded wedge; and adds confluence to a low probability short.
Notice the pullback, marked by the green circle, closed slightly above the resistance level of the past half dozen bars; this improves the odds of at least a measured move (a scalp) up to the green horizontal mark.
Three pushes big picture and embedded gives confluence.
The next screenshot is four hours later. It follows our analysis and more importantly, we are not distracted managing an out of the money trade – we have a win and are viewing price with an active rather than a defensive perspective.
Context is the thing. The financial markets are often seemingly bipolar. Why did it not do what we expected?
Many times we can find the answer from the bars to the left within our timeframe.
Context example
The chart below shows AUD/USD hourly bars. Bar 4 is a definite trend bar short and an excellent bar to take. Why did it not work?
Many websites overly concentrate on price action. That is the shape of the single entry bar. Often this will work if it has the power of a trend behind it, but not in this case.
A single bar is secondary to context. All the bars to the left. To take advantage of this, we need to understand the market cycle as this changes how we trade.
In our example, bars 1 and 2, not apparent at the time, are a breakout. It is after we get all the bars between bar 2 and 3 can we see a channel; a channel that measures the same price difference as the combination of the breakout bars.
Bar 4
What has this got to do with bar 4? We know that more often than not on the achievement of a measured move of a channel price regresses to the end of the breakout point. From there it usually develops into a trading range.
Therefore the probability at the close of bar 4, even though it is a trend bar, is not for a continuation of the trend but a pullback to the top of the channel and a possible trading range.
Market cycle
The problem with not taking market cycle, the context or the bars to the left into consideration, is that a mistake here would have resulted in a hefty loss.
Most stops would have been positioned slightly above bar 3, and the market provided no pullback breakeven opportunity.
Context overrules price action
Another example below this time shows the US 500 SPTRD. Again we have the breakout bars followed by a channel that extends to a similar distance to the sum of the breakout bars.
As before we have a dramatic pullback to the start of the channel. The pullback will put many traders in to go short. But those traders that read the context will know that the probability is for the price to reverse and form a trading range.
In this case, the development of the trading range was interrupted by the weekend.
