Below is a copy of an email response I gave to someone regarding EUR/USD (there are images to go with it so scroll down further). I thought maybe there was some content that might be of help to some of you.
Please note that this is not a typical response by me, so if you email me and you get one or two sentences, don’t be offended. I thought it would be a good opportunity to walk through a few things while reinforcing some basic ides. The email is long and it is somewhat stream of consciousness so you’ll have to do your best to distill the material and organize it yourself.
Copy of Email:
See attached images. The orange lines show a rounded pattern (channel) on the bottoms side. Though we can draw trend lines throughout this rounded pattern it is the rounded feature that is telling us something about the market and about supply and demand. It’s telling us that sellers are willing to give up their positions earlier and earlier and buyers are consistently coming in at critical points to keep the demand in the market. As this goes on you see the supply gradually tighten and the demand pick up accordingly. On my blog, about 3 posts ago, I took a GBP/AUD trade that had some similar features. In the case of the GBP/AUD trade the demand was diminishing and so the supply was opening up bringing in more sellers until finally it broke loose. With the EUR/USD we did not see that happen. Though the supply was gradually tightening, bulls were unable to keep buying, causing sellers to give up their positions even more, and bring in new buyers to increase the demand and push the price higher.
The gray line on the D1 chart is the first trend line drawn. It would be logical to put it there for obvious reasons. That line broke and it looked as though possibly bulls might be able to pull it out. But we found over the next several days that they could not as the price tried to climb to 3850. If you look at the last three D1 candles contained inside the orange lines you have a bull candle, then a bear candle, then a bull candle, and then the price pressed higher and tried for 3850, couldn’t get it and then closed back down about midway through the previous candle. This caused a reaction from sellers. If you look at the lower green trend line you will find that a redrawing of the top trend line is more in a channel formation (market default) to the lower line which was already well established before the gray line broke. It’s good to test parallel channels by moving around lines just to see where things line up. Parallel channels are a market default because they create consistently so traders fight to establish them and follow them since it keeps things orderly. Remember that the market is inherently chaotic so traders need to build in ways to control the price in order to make money and this is why price setting (s/r) and your patterns are important. They form not because it is natural, they form because of human convention. This doesn’t mean that the price is not authentic, it just means that it is part of the process of setting price and thus you have how technical analysis and fundamental analysis work together. But the reason we focus so heavily on technical analysis is because we are trading intraday and so technical analysis has more influence over the entry and exit points in that short period of time. If we were looking out 3-6 months then we’d see the affects of fundamentals.
Ok..we got a little side tracked there.
Continuing to look at the D1 chart you’ll see though that over all we have lower highs and lower lows. That is the current sentiment of the market. The red channel coming across is a counter trend move. You will always have counter trend moves because something has to guide the price back through the channel. These counter trend moves on the daily are what we see on H4 and H1. These lower time frames allow us to track the sentiment of the market in the near term as it moves across daily and weekly lines. So the price moves up and down in channels, and this again is part of the price control. The potential for chaos must be contained as much as possible. The counter trend move provides us with trades, but we must see that it is a move against the larger sentiment of the market. You have a larger sentiment and then smaller short term sentiments on lower frames. It is not uncommon to have “conflicting” sentiments though they technically are not conflicting sentiments, just sentiment based on different time periods. So, for example, you could have an over all daily sentiment that is bear, but on the H1 time frame you have a current bull sentiment UNTIL it reaches the top of the bear channel on the daily when the larger sentiment kicks in and then you find D1 and H1 lining up as the previous H1 bull sentiment shifts to a bear sentiment off the larger time frame.
Continuing with the D1 chart, so the break of the gray line says maybe sentiment is shifting, BUT the most important thing is to pay attention to the price action, candle closes, etc. in accordance with your levels of support and resistance (where buying and selling take place). If you look at where your s/r is you can see where the market is setting the price and you can see how the price is reacting to that level. When the counter trend move broke down it entices more selling and as short term sentiments continued to break it creates selling upon selling upon selling which then moves the market in the longer term, but it all starts on the lowest frame as things breakdown on M5/M15 which leads to break downs on H1/H4 which leads to break downs on D1/W1, and then just the reverse for a bull market where you have buying upon buying upon buying overall which then moves the price over a greater distance and through price levels as they continue to fall. So the red channel which was much more shallow than our previous move, when that breaks the supply opens up further as the demand in the market plummets.
Shifting to the H1 attached pic you see the red channel on a lower frame. Look where that pennant/flag is set up. It finds itself right on support, but again, watch how price is reacting to horizontal price levels first. Where are your opens and closes? What kinds of candles are you seeing. Is the price being rejected hard off the line? Is it pushing lower, but still closing above. Are you getting continual lower body closes or higher body closes (depending on if its buying or selling)? Body closes matter and continual lower/higher closes keeps buyers or sellers on the line. People are looking for a reason to hold their position or a sign they should dump it. Learn to look for those signs by asking some questions like the previous examples I gave. The point though is that the price’s reaction to the where the market it setting the price reference is important and you can follow these rules on all time frames depending on what you are trying to accomplish.
Continuing with H1 you also have a steep trend line descending on the price which again is working as a guide (reference point) for traders as they watch how price is reacting to an area.
Let’s look at the close up view of that pennant on the H1 and analyze what we are seeing. At the blue arrow you see a strong close as there was buying all through the session so that your high and your close were the same. BUT the very next candles is immediate selling so that your high and your open are the same meaning there was not continued buying to push the price, this drove the price back down as buyers are going to look at that and say “no way”, there is nothing there to immediately convince me buy further. The next candle closes back below the line and sellers continue back down to support where price does not move lower. At the orange candle you see the price halt at resistance and price is contained. Finally at the red candle the pennant breaks, price shoots down and the closes way back up there. That doesn’t mean buy because you have the long wick. The price closed below a critical point. The next candle is indecision but price is still contained below resistance and break of the near term pennant trend line. The next candle runs up to hit res at 1.3627 at which point you have a choice of entry here on the bounce as sellers will most likely be there. Notice I said MOST LIKELY. If you are doing this in real time (it’s easy to do what I’m doing which is in hindsight) then at some point you have to pull the trigger….but you have to have a reason to do so and in this case you do. You are hitting that steep trend line and top side res off the break of the pennant…you have to go with what you have. At that price it’s low risk of about 15 – 20 pips depending on entry as your stop will be above that line beyond the steep H1 descending trend line. If you lose you can always adjust, it’s not as though because you lose the principles of the market have changed, you chose a direction, the market is giving you another so do the same analysis process and trade the damn thing in the other direction if you see the set up. That’s what is nice about trading around buying and selling points (s/r) as it allows you to wait for optimal entries with low risk so that you can move in the other direction if necessary and make up for your loss. The problem is that most new traders WILL NOT WAIT. Back to the chart…If you don’t enter at the top then you have the break of counter trend line as another opportunity, but this requires a larger stop still back above the upper horizontal line at 3627. Now, in this case we are looking at hourly candles and so you have to wait for hourly closes to do this, but this same process can be done on lower frames for entries as you can see a tighter price action/reaction. It is a riskier process, but one that will allow you to obtain better entries. But trading strictly off H1 is not bad either and good to master, you will get most of your trades if you will just be patient. Finally, back to the H1 chart, the black arrow shows a retest of previous support and trend support and at that point becomes the new expensive price and in come sellers along with previous sellers, any long position stops are taken out and there is nothing but selling as the demand is near non-existent.
