Hello all, again I must apologize for the long absence since my last post. Things have been rather busy as of late, and when ever I do have spare time I am generally analyzing my charts for setups. So as a result posting on my blog has taken a bit of a back seat as of late, but I intend for that to change!
Anyhow, I just want to talk a bit more about price action trading. As you probably know if you have read any of my previous posts I am very partial to plain jane vanilla price action trading. Meaning my charts are not cluttered up with indicators. I use price as my indicator, which in my humble opinion is the best indicator in the world. With practice reading the charts, price will tell you a story, and provide very strong clues or hints as to where price is likely to head in the future.
Unlike indicators price does not lag. It tells you what you what is happening now, in real time.
The only indicator I am using on my chart these days is an indicator which draws support and resistance lines on my chart. This indicator does not replace good old fashioned chart analysis and I always double check the lines this indicator has drawn to ensure they match where I would have drawn major support and resistance, but it is a helpful tool.
Essentially what I look for first of all is the trend. I am not going to get into a long explanation in this post on how I determine the trend. I will save that one for a future post. But essentially I zoom out on the Daily chart or will look at the Weekly chart to determine if there is a trend at the moment. It is entirely possible that there is no trend. Price may be stuck in a sideways consolidation or range. If that is the case I generally stay away from that currency pair for the time being as I find trading currency in a range fairly difficult. But there are times when I will look for high probability set ups even if price is ranging.
Lets take a look at the USDJPY Daily.
The first thing that should jump out at you is that this currency pair is trending up big time. In these situations I am looking for buy trades only. In my opinion sell trades are just too risky when you have such a dominant trend to the north so why bother.
If you look to the right of the chart on February 26, 2013 there is a doji or spinning top candle near the daily support level 92.00 after a correction move down. The doji or spinning top candle is a very good indication that the bulls and bears are fighting for dominance, price has stalled and a change in direction may happen soon.
I don’t take a trade just because a doji candle has formed at support or resistance. I wait for a confirming candle. There are basically two other candles that confirm the resumption of the trend for me: 1) A Pin Bar, or 2) an Engulfing Bar. If you look at the candle on February 27 a nice bullish pin bar formed at support. I call it a bullish pin bar because the wick is pointing down. This indicates that the bears tried to make another push to break support and it failed. Again another strong indication that the bulls are back in control.
An engulfing bar would also be a nice confirming signal that the bullish trend may continue. A bullish engulfing bar occurs where the open and close engulf or cover the entire body (open and close) of the previous bar, and it is a bullish candle of course.
Based on the doji and bullish pin bar I went long at 92.43 setting my stop loss below the low of the doji and pin bar (90.95), and my take profit at the next major resistance area (93.95). This trade provides just slightly better than a 1:1 risk vs reward. Not fantastic, but not terrible. I personally need at least a 1:1 risk vs. reward before taking the trade, and preferrably 1:2 or 1:3 risk vs. reward.
The trade is currently looking good being 115 pips in profit.
Well that’s about it for now, I hope you enjoyed this post and please post a comment and share my blog using one of the social media links below!