So today I am going to continue where we left off last post. As I was saying, I truly believe the more you can strip down and simplify your trading the more success you will ultimately find.
In my humble opinion I would also say that watching previous support and resistance levels or zones on the higher time frames (4 Hour / Daily) to see how price reacts at those levels can be an extremely powerful and simple strategy when it comes to forex trading.
In my last post I expressed that price can really only do one of three things when it reaches these levels if you think about it. 1. It can push through and keep on going, 2. It can bounce and reverse back the other way, or 3. It can stall out and consolidate for a while (sideways) before continuing in the same direction or reversing.
Take a look at the chart below which shows the UsdChf currency pair from last week on the 4 Hour chart.
The 4 Hour chart is my personal favorite to trade from. As you can see from the chart above I mark support and resistance levels (ie. bounces). Once the recent support and resistance levels are marked out you simply wait until price approaches one of the levels. I usually check my charts twice per day for potential trading opportunities, (once in the morning and once in the evening), which is usually often enough if you are working from the 4 Hour chart.
As you can see from the chart above the UsdChf has been in a bit of an uptrend lately. There was a recent bounce (support) at about the 0.9135 level on August 26th before it kept going bullish. Price then retraced back toward this support level on August 28th. What did price do? As you can see price temporarily broke through the support level, but then quickly reversed with a nice bullish engulfing bar. What did this price action tell us? Well to me, this was a big clue that this support level was likely to hold, and price was likely to continue going bullish.
What did price do next? Well it did pull back slightly toward the support level again, but then pushed nicely upwards about 45 pips toward a recent resistance level before the market closed for the weekend.
At these key levels I am typically looking for one of several candle patterns as a clue that the level may hold. One is an engulfing bar that engulfs one or more of the previous bars, and is going in the opposite direction. This is what happened in the chart above.
Another candle pattern to look out for is known as a “pin bar” or shooting star shown below.
This candle pattern forms with a long tail and a small head. The pin bar on the left is what is known as a bearish pin bar, and the pin bar on the right is known as a bullish pin bar. A bearish pin bar may indicate that price may continue dropping (bearish) and a bullish pin bar may indicate that price may continue rising (bullish). Why this pattern is significant is that it also shows that price is moving in one direction, but then quickly rejects that level and moves in the opposite direction.
The final pattern that I watch out for is basically the same as the pin bar, but instead of the reversal action happening during one candle it is spread out over two candles. This is known as the ‘2 candle reversal” shown below.
The 2 candle reversal patter on the left would be a bearish signal as price moved up but rejected the upper level and moved back down. The 2 candle reversal patter on the right would be a bullish signal as price moved down but rejected the lower level and moved back up.
Just one more comment about the UsdChf above. Personally I usually only enter a trade if I can get a 1:2 risk vs reward from the trade. Most often you will need to wait for a bit of a pull back toward your support or resistance level before entering in order to get in at a good enough price. In my next post I will talk more about good ways to choose your stop loss and take profit values even before you enter the trade, so that you can get a 1:2 risk vs. reward if the trade is successful.
I also believe that choosing your stop loss and take profit levels before you even enter the trade is very very important, because it takes much of the emotion, decision making and objectiveness out of the trade once you are in. Believe it or not, but your thinking and decision making process is at its clearest and most objective before you enter the trade and have money on the line. As soon as you are in the trade your objectivity goes down, and emotions such as fear and greed often begin to take over! Getting a handle on these emotions can be one of the most difficult aspects of trading. Well more on these issues in the next post.
I hope you enjoyed this post and if you did I kindly ask that you share, like, or comment. Have a great day 🙂
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