Hello all fellow forex traders I hope you are having a wonderful and restful weekend. I am sitting in my office this afternoon watching the beautiful sight of the last few remaining leaves on the trees fluttering in the wind and falling to the ground, wondering at the same time where the summer went.
While I am marvelling at the beauty outside my window I am also analyzing my charts, highlighting any potential upcoming trading opportunities, and planning my week. I thought I would share my thoughts on Gbpusd and EurGbp for what it is worth.
I like to use a top down analysis so lets start with GbpUsd on the Weekly Chart:
You will see that I have several moving averages on my chart and I also use heiken ashi candles versus regular candles. To be clear I do not really use these moving averages to make my trading decisions but they are a useful tool in determining a trending versus a ranging market. I have been following the work of Greek forex trader Nikos Mermigas lately and I really like the way he does his top down approach and uses these moving averages to offer some guidance but not to make his actual trading decisions. I would highly recommend that you do a search on YouTube for Nikos Mermigas’s videos, they are fantastic.
The brown line is a 633 ema, the white line is a 200 ema, the blue is a 36 ema, and the blue is a 12 ema. The brown and white ema indicators are simply on the chart because they do tend to act as dynamic support and resistance when viewed on the weekly or daily chart. These longer terms emas can be useful if price is in a trend and retracing to a known support or resistance level and at the same time butting up against one of these strong dynamic support or resistance levels. This type of confluence in the market can lead to a very high probability trade set up.
The red ema is basically the trend ema and if showing a nice downward or upward slope it is a great quick visual marker that price is trending and not ranging. Drawing the trend-lines is still key however.
The blue ema is what Mr. Mermigas refers to as the volatility line and is useful to determine the strength of the trend. If there is quite a bit of space between price and the volatility line as price flows to and fro in the direction of the trend it is an indication of a strong trend. In a strong trend price will often continually bounce off of the volatility line.
The heiken ashi are really great for visually cutting out some of the noise and showing the observer when there is a legitimate change in market sentiment from long to short or vice versa.
Now lets get to the analysis. Looking at the weekly GbpUsd anyone can tell we are in a strong down trend and have been for many weeks. Drawing your support and resistance lines (in yellow on my chart) on the weekly chart is also a great thing to do because those areas will be of great significance.
Moving down to the Daily chart will most of the actual trade decision will be made from:
Currently you can see price is in a bit of a consolidation and is actually retracing higher back up toward the volatility (blue) and trend (red) lines. Really what we would like to see is a move back up to at least the blue volatility line. Even better yet a retrace back to the red trend line. If such a retrace also happens to coincide with a known resistance level this can be a very powerful location for a high probability trade set up. Once we have a red closed daily heiken ashi candle after a nice retrace we may want to consider a trade in the direction of the downward trend.
Now in such a strong trend price might not retrace all the way to the red trend line, and it might not even retrace to the blue volatility line before making another large move down. This is a much more aggressive trading plan which carries more risk but you can also look to the lower 4hour time frame for potential entries in a strong trend and use what is known as a 1-2-3 entry method:
Again I have to stress this is a much more risky trade plan then basing your trading decisions from the Daily Chart because there is greater chance that you will be getting into the trade in the direction of the overall trend but at the beginning of a larger retrace. However, using the H4 chart does offer more potential opportunities to get into the overall trend move.
I have avoided drawing too many lines to keep the chart as clean as possible but essentially what the 1-2-3 entry method entails is watching for a retrace on the chart and taking a trade on the break of the retrace trend-line (aqua line). You would want to wait for a forceful break with a great deal of volatility and this is usually going to occur during the London session, U.S. session or London-US crossover session.
You can also use the 1-2-3 entry technique from the daily chart after the nice large retrace discussed above.
You will typically want to place your stop above the last swing high (or swing low) with at least a 10 – 15 pip buffer above (or below) the swing high (or swing low).
Well I hope that this post has been somewhat helpful, and if so please comment, like and share :). Again be sure to check out Nikos Mermigas on YouTube as his material is great and has been very helpful for me.
Again, as always this post is not to be taking as trading advice of any kind and is for informational purposes only.