Hello all, first off I have to apologize for the long gap in time since my last blog post. I have been very busy with moving and many other things over the summer and as a result my blog has been somewhat neglected.
Now that the summer is over and the big money movers are back from their summer vacations and back in the market things are rolling again. In today’s post I would just like to walk you through a recent example of a very nice forex price action trade which occurred on the GbpUsd Daily chart.
As you can see from the chart above GbpUsd has generally been in an uptrend over the last couple of months. Personally I generally only stick to trade signals in the direction of the trend as there is less risk involved.
There is a fairly key support zone at the 1.5400 level that price retraced to on August 28, 2013. When we have a retrace to a recent support level in an uptrend we want to be on high alert for a possible trade opportunity. The GbpUsd provided us with such an opportunity.
As you can see from the chart a very prominent bullish pin bar developed off of this support level telling us that the support level was likely going to hold and the bears may be losing steam. The pin bar is one of the key price action signals that indicates price may be about to change direction. The pin bar occurring at a strong level of support or resistance which also occurs in the direction of the trend is a very powerful setup.
Generally there are two ways you can enter these types of trades. The conservative approach is to wait for price to break the top of the pin bar which confirms that the bulls are back in control and price is on its way up. Waiting for price to break the nose of the pin lowers the risk factor somewhat but the tradeoff is that your risk vs. reward on the trade will be lower.
The more aggressive approach is to enter at approximately the 50% retrace level on the pin bar. In the example above the entry long would have been at about the 1.5500 level. This is how I chose to enter the trade. Sometimes price will not retrace at all and will just shoot upward and those waiting for a retrace to enter will miss out on the trade.
As you can see above price has been climbing higher quite nicely over the last 5 or 6 days. I have marked two key levels of resistance on the chart. It is wise to mark out these levels even before you enter the trade because you need to plan exactly how you are going to manage the trade ahead of time. As price reaches these resistance levels it will likely stall or could even reverse on us. One technique to lower risk is to move your stop to break even as price approaches the 1st resistance level and even take some of your profit. That way you have taken some profit and now are in a risk free trade.
Now I have to be completely honest here. I did not stick to my trading plan and let price do its thing. When the two consecutive bearish pin bars formed on September 2nd and 3rd closed out my entire position with a small profit. I took the two bearish pin bars as a signal that price may reverse on me so I got out. It is important to plan your trade prior to entering the market and have the discipline to stick to your trading plan. Had I stuck to my trading plan I would have closed out half my position with more profit, and been in a risk free trade approaching my second take profit level of 1.5700.
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Well that’s all for now. If you enjoyed this post please comment share or like 🙂