In this post I use the most recent break out on EUR/USD as an example of how to trade using price action, momentum, and to reinforce that you should believe in the features of the market and use them to your advantage.
First of all, this is going to be a long post, so strap in. Secondly, the image we’ll be using is below (I was unable to shoot a video of this). Click on it to enlarge. There are a series of numbers on the charts so you can review it, and so we can walk through each aspect.
What do we know up to the point of the break out?
- Price is on an upward trend so the overall sentiment is to buy. We gather this information from using D1 and H1 charts. H1 is very helpful in that it is a great combination of information and time. REVIEW: How do we best establish price? Time. Time equals value so the more time we have the better we can establish the most influential prices and price ranges. The H1 chart is a good combination of time and information in order to establish these things. That’s why we don’t make longer term speculation off the most recent M5 chart.
- Since price is buy trending we want to make note of the areas where the price is “swinging” upward. If you are unfamiliar with this then you need to read my posts in the Charting For Beginners Section. This will explain in some basic detail the general price movement of the market as well as identifying HLs/HHs and LHs/LLs. The reason we mark where the price is swinging upward is because these become points of interest for buyers where the price is now inexpensive enough to buy again. This entices buyers to come in to the market and continue to buy. When these swing points are broken and as they continue to break, new swing low points will form telling traders the price is too expensive, thus enticing them to sell.
- Leading up to the break out we see selling on the D1 chart bringing the price back down to “inexpensive” areas.
- We also know that leading up to the break out we were facing news at 8:30am EST. We had two pieces of information. The first was a press conference being held by the ECB and the second was US unemployment claims (day before US NFPs and the US unemployment rate). We would estimate that the US unemployment claims would cause some action in itself, but coupled with the press release we would definitely expect something to happen. In this case the news becomes an important factor in the price movement now that the price has come down and is sitting at “inexpensive” prices. Normally, buyers would be waiting, but the fundamental influence becomes such a factor that the potential influences affects the whole day and sets the pace for the next 6-8 hours. If you look back 4 candles on the D1 chart below you’ll see that full day of selling followed by a full day of buying. That was a day of selling triggered by news. Once the selling is set in motion the day very often carries through and you don’t want to be trying to trade reversal bounces in that environment. You are much better off trading continuations and pullbacks with the price trend.
Let’s now take a look at the image below.
Upon the news release we are not trading. If you were watching the M5 chart you saw the price spike up quickly only to whipsaw back the other direction. When that happened price flew through the lows and swing points. The fundamentals are too strong. But we still don’t want to trade that action. It’s just too risky. So we put into action what we know about the market, and the first and foremost feature is that the market seeks to control price and regulate the action in order to establish points of entry. Most of the time this means that we get the pull back and test of highs/lows that we need in order to enter. But when price is moving too fast we just have to wait until we find that point to continue on and that is what we had to look for in this situation today.
Let’s follow the red numbers listed on your chart:
1. Price moves lower and breaks through swings on higher frames. We see continual lower closes on the M5 coupled with no pullbacks. So when you look at the highs of each candle the proceeding candle price (its high) does not pullback beyond the high of the preceding candle. Thus you have lower highs and lower closes (we are not AS concerned about lows on M5, just lower highs and lower closes). Notice how the highs will turn right at the price of the previous high and then continue the selling. The point is, we can’t trade this if we are not already in the market and you should not trade this type of action. You HAVE TO control your emotions during these times and wait. If you need to walk away for 10 – 20 minutes then do so. There is no getting around the issue of discipline. You MUST discipline yourself and refrain from entering.
2. At this point we see the price pull back. This is not buying in this case! This is sellers leaving the market and taking profit.
3. Sellers re-engage at this point. They already have a selling mindset. They are not considering buying AT ALL. They are only considering selling, they are just waiting for the profit taking to stop so they can come back in and take advantage of the pressure. When the market starts a direction like this, MOST OFTEN sellers will continue to sell into support and buyers will continue to buy into resistance. At this point the M5 chart gives them a reason to enter back in at this point. This is just price action being read off candle formations and closes….nothing more.
4. When Price hits 4 something happens! We see the features of the market start to take form. Up to this point the price movement is chaos in that it is just free falling and it is highly unpredictable, but now the market starts to fall back into line with price containment and manipulation. Now we have a chance for an entry somewhere. But the one thing we don’t want to do is buy!…at least not in the near future unless something dramatic happens. Note that price stalls at 4 (the previous swing low) and we see the next candle shoot up. Look at the features of the candle and it’s context. The candle’s open and low are almost identical and it’s high and its close are almost identical. That is a reversal candle at the low, but we are in a range and we don’t want to trade a reversal of any sort considering the environment we are in. So, what we’ll do is log that in our mind and if we see some further information that says price is going to die here we can save our sell orders for a potential entry when the price moves back higher. That way you don’t enter your sell position too quickly and have to sit through maybe 20-40 pips of draw before it comes back to you and moves lower. If this doesn’t make sense then just leave a comment below about this.
5. We see a price containment range form. At this point we do not want to buy a break higher or sell a break lower out of this range. We want more information first.
6. This candle shoots right down. It’s high and open are just about identical meaning there were only sellers here and nothing to move the price higher. But we are calm and cool at this point because we are just reading what the market is giving us. We see the price break just below the range and then close on the line. But we are still not going to enter because we know that the main feature of the market is first price containment. But this candle is a good sign for further selling to come.
7. Candle 7 breaks lower, but we still are not trading yet. Why? Because we know that the main feature of the market is first price containment. Look at the close of this candle. Yes it breaks low, but now you have a bull candle, nice and small, tucked away right at the bottom of that previous strong bear candle. This is another reversal signal. Pretend you don’t know the next two candles after this one so you can think about this as if it were happening in real time because that is how you have to do this in real life. So take the last 4 candles in context and we have one of two scenarios. We are going to stay out and let the price drift up and look for a better sell or we are going to trade the failed reversal. Price is trying to reverse at this point, and if the reversal fails we will most likely see more selling. We have our opportunity now! Now what we want to do is trade the break low of the failed reversal. Easy as pie.
8. The red line just below is my entry short as I can best display it in real time. I had to wait one more candle, but at that point there it’s all sellers. I picked up about 18 pips on the trade before I exited. Why not hold for more? Because we are trading M5 in a larger context and I don’t know where the bottom is and there is A LOT of room above me. If my entry was much higher at the swing or higher than that, then yes I would hold the trade in the context of the higher frame, but the low frame entry merits a different approach. This is what intraday trading is like and it’s the only way to protect your capital and make wise decisions. But in addition to these 18 pips I had a previous +10 trade and +25 trade about an hour before the news, and since I was not in the primary selling today when you string these trades together I would call 53 pips a good day.
9. and 10. I just put on the D1 chart to show areas of support on the higher frame that could be used for targets as the market starts laying out price boundaries of the next few hours.
Hope this was helpful to you. If you have questions or comments then leave then in the space below.
