Misc.

GBP/JPY H4 Trade Scenarios

See attached image.  Image is GBP/JPY H4.

We have a short range falling wedge.  Normally this is considered a reversal pattern, but we need to take into account 1) what we know presently about the plight of Sterling and 2) the area we are in has no long term history.

Looking at the chart lets walk through the numbers.

1.  We have support here as the lowest point the price has ever been before.  We also have a downside trend line.  But this trend line is more in the guessing range since we don’t have much more to confirm than a couple of touches.  We will be looking for shorts below 188.86, but will need pay attention to the possible trend support though my guess is that it is weak if that is where it is.

2. Here we see topside trend line forming the bear move.  Note how we are seeing HLs (higher lows) posted as the price moves.  On Friday last there was a great short off this line when it converged with decent resistance.  That move ended up being 200 pips.  If you choose to trade the trend line I would proceed with caution based on the fact that we know that trend lines do not hold as much weight as support and resistance.  For the sake of learning let’s say that the attached picture shows the present price at the top side trend line and we choose to short.  Where would be the safest place for our stop?  Above the trend line or above resistance at the red 3 area?  The safest place would be at the red 3 area because that is the last line of defense for the current trend.  Remember that a trend is supported by LHs and LLs in a bear move and HHs and HLs in a bull move.  We would not want to put our stop above the trend line on a short in the example I’m giving because the price could easily move through the trend but will run into that area of resistance and then move back down and fall right back into the bear trend pattern.  If this happened the theory holds that the price did not technically post a lower high which means that the bear trend is still in effect.  This happens all the time so trading trend lines in between S/R requires you to remember that S/R trumps that trend line and has more influence.

3.  Here we are looking for longs over shorts.  Though this area has been a place where sellers have sold before, for the price to return here would require it to break the trend line so though the price was shorted here before and we would not rule out a short again we are taking into account that bulls were able to push the price beyond the boundaries of the trend line.  Through this zone we are looking to enter long with our stop on the other side of support.  The target off this H4 chart would be 123.93 and that is where we would be looking to exit.

4. If we are long at this point we would be looking to exit our position since this is an obstacle to continuation.  But we would want to hold if we suspect that a continuation is in order so that is a judgment call based on when the price would arrive at this location.  News may be coming out or maybe has come out in favor of your direction, etc. etc.  The goal is to get our profits to run when we can.  That’s when real profits are made.

Possible shorts may be here too but if you take a short here then you’ll need to be paying attention to bottom side trend lines that have formed since at this point sentiment would have changed from the previous trend and we should see now higher highs and higher lows being posted since it would now be a bull move, whereas before it was a bear move.

5. Through the red 4 we would be looking for longs

Use H1 and lower to help filter your H4 chart for entry/exits, but remember that if you are trading off an H4 frame with H4 S/R then you don’t want to exit on a M15 or lower chart.  You can use lower frames to monitor, but exiting an H4 chart on M5 is silly since your entry was designed for a longer target trade.

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This chart we are looking at is a good example of how we can see and mark where the market changes sentiment.

Note that the attached chart is GBP/JPY H1.

Remember that as we are establishing support and resistance we are also paying attention to the (HH) higher highs and (HL) higher lows of a bull market and the (LH) lower highs and (LL) lower lows of a bear market. As the market posts HH and HL or LH and LL it is helping us to establish where the real trend line is being established.

Look at the attached image.

The red circles mark where we are seeing higher lows. The blue circles mark where we are seeing higher highs. As long as HLs and HHs are posted then we can follow the bull sentiment of the market.

Let’s look at the green circle now. In this area we have a good example of why we always give more weight to support and resistance over trend lines. The trend area is broken, but see how it gives credence to the line of resistance. Knowing that support and resistance trumps trend lines keeps us from going long there and potentially buying into an area where selling is about to take place. I’m sure novice traders took longs in that area off what they thought was a break outside the trend area and then got stung when it reversed on them at resistance (140.82).

Now look at the highest point in this chart. We see that a new high is posted keeping in line with the present sentiment. But things are about to change and we can know that they are changing.

As sellers come in at the top the price begins to descend. When it reaches the 139.20 area we are at the bottom of trend. It’s a difficult decision at this point and evaluating other charts is important to help us trade this area if you choose. For example if you look at a D1 chart this may assist you in holding off a few more sessions to see what the price is going to do since it was starting to appear as though things might be changing.

We see that the price extends through this trend area, BUT we do not consider it a change in sentiment until it breaks the last HL. In this case it is about where that red line is located. As long as the price remains above this line we still consider the sentiment bullish. The price could have remained above this area, ranged and then resumed its bull move. Once the price broke this area we see that the sentiment is changing. A HL is not posted but now we see a new low posted. When buyers come in and push the price back up you see the orange circles take over and now we are posting LHs and LLs.

At the huge red ! mark we see a great trade signal. First note how we see the sentiment changing to a bear market. At the red ! mark there is a long shadow that extends upward, NOTE where it is in relation to the last highest point in this area (the previous orange circle). Though that shadow is pushing the limits of the trend it does not break higher than the last LH so we consider the bear sentiment to still be in effect and the price moves back down revealing to us an evening star and a good entry point.

The red NO area is a no trade zone (assuming you are not scalping off of M1 or M5 charts). If you missed the entry at the top, trading in this area is like sticking your hand in a blender that could turn on at any moment. The next best trade opportunity in my opinion was at 137.30. I shorted this area and made some decent pips and shorted it again on a pull back picking up the added momentum of the change in sentiment and the desire of the market to post a new low in order to keep the trend.

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If you are new to forex make sure you memorize at least 15 to 20 of the most used and noted candlestick formations. It would be highly beneficial for you to read one or both of the following books:
Amazon.com: Japanese Candlestick Charting Techniques, Second Edition: Steve Nison: Books
Amazon.com: Candlesticks Explained: Martin J. Pring: Books

As well it would be very helpful to memorize and be able to identify the most basic chart patterns and what they mean:
Chart Patterns – StockCharts.com

Read this so you’ll stop letting your losses run.

http://rapidshare.com/files/190966165/Fairy_God_Trader.pdf

Accurately finding support and resistance is unequivocally the first and most important step in trading.  If you are unwilling to make this a priority and work at mastering this skill you will be substantially handicapping your trading.

Step 1:
Open your platform and begin with a H4 chart and find areas that have been used as BOTH support and resistance. Remember that lines change polarity and at one point a line may serve as resistance and later as support. Often there is a range of S/R that could be a couple pips to 40 or so. Be as accurate as possible. Mark the top and bottom of this S/R range because in later steps you will look at lower time frames to help pin point in that range the line the banks will be watching. The reason we start with H4 has to do with economics. Value is determined over time. If you were to sell me your car and I was not allowed to look at any information other than information about that car on the day you were selling it to me I would have a hard time determining what the value of the car should be, and you would have a hard time giving me an accurate price. But, over time we can determine the value of the car based on past history of when it was made, what was it sold for before, past demand and supply of this car, etc. etc. The 4 hour time frame severs best in giving us a combination of the most current and reliable lines. A day chart is a tad too long and makes it a bit difficult to accurately determine levels, and an hourly a bit too short to be as reliable as we would like.

Step 2:
Taking the support and resistance range found on the H4 chart move to a lower frame (M15 to M5) and search this area for a more accurate assessment of support and resistance. The M5 or M15 frame serves as a microscope for each H4 session and will show you with detail what happened over each four hour period allowing you to see even more clearly where the price was finding the most S/R. Evaluate the last few times price used this level and buyers and sellers were in the market. Look for the place where the price has bounced the most (M5 will give you more detail). This point will hold the most significance in the S/R range you found on H4. Since people are entering and exiting the market at different points around support and resistance, often there will be more than one line choice on H4 (that is why we create a range) so by looking at lower frames you can more accurately determine value and find the price that is best. The more accurately you can determine value the more you can reduce the draw down on your trades. It will help you tighten your stop losses and risk less to gain more.

Step 3:
Now that you have your strongest areas of support mapped out you can begin to look for areas of support and resistance starting with a H1 or M30 chart that exist between your most significant S/R lines. There are many opportunities for trades between your H4 S/R lines and your D1 lines (step 4). Remember though, trades taken on S/R in smaller time frames means that your targets need to be smaller. If you are taking a trade off M5 S/R then you should not be targeting a 100 pip gain. This process of placing lines shows you how time frames should work together and how to properly use lower frames. And you should also be encouraged to know that you don’t have wait for trades to come to those H4 lines. You can trade lower level time frames off S/R, but PLEASE, PLEASE, note that the lower you go the riskier the trade becomes because S/R on lower frames (the S/R we find between your strongest support lines found on H4) becomes increasingly less reliable. The logic behind this is that in the lower frames the opinion of the field of traders begins to broaden. So if you have 20 groups of traders and they all have a different opinion you can see how crazy that could become. That is why I often call these areas “no trade zones” because the risk is so high. With H4 lines (higher frame lines) the opinion of the field of traders is far more unified. Your 20 groups of traders have the same opinion and will most likely react the same way, thus giving you easy gains and potentially substantial gains of 100 or more pips. The more unified the field, the higher the probability of success, and those trades are the ones that pay the most.

Step 4:
Go to your D1 chart and evaluate S/R levels there off what you found on your H4 chart. The D1, M1, and W1 charts will also give you lines for future trades with huge payouts, but start with H4 first and then compare with D1 and higher.

NOTE:
Do not use M5 – M30 to originate support and resistance levels. Use M5-M30 for precision, to determine the exact point of support or resistance AFTER your S/R ranges have been established on H4. Do realize though that once we find that line we don’t just throw out the range. Those small S/R ranges are there for a reason because people are exiting and entering the market at different times. Just make note of this so you don’t panic if you take a trade off a line and you have some draw down.

The easier that support and resistance is to spot increases the chances of that line being an area for the price to react so that we see previous buyers sell and people waiting to sell enter or where previous sellers buy and people waiting to buy enter. The easy to spot lines are the ones that most often pay the most and have a higher probability of success based on the fact that the majority of banks will stake larger positions in those areas.

If a line has become an area where the price has floundered back and forth then that area’s significance diminishes. The more the banks do not pay attention to a line the more we do not give it credence. We are insignificant so we follow their lead.

About trading against the trend: Your choice to trade against the trend should be determined be a ratio. The higher the time frame the safer it is the trade against the trend. The lower the time frame the more risky it becomes to trade against the trend. I would suggest that if you are taking trades off S/R on M5 or M15 that you never trade against the trend. Some people say never trade against the trend. I think this is ridiculous to say never, but just know that it does increase risk so you better have some experience under your belt. We can never be 100% positive. All we can do is reduce risk and increase probability.