Articles for Noobs

In the comments section of my previous blog there is a discussion I have with one of our traders here on using the H1 time frame. Below I have posted my response to him in light of this. Since most people will probably not go back and read through the comment section I thought I would cut and paste my response here as it might be helpful to others.

My response emphasizes what I want new traders to understand more than anything that there is an inherent economic reality that moves the market and that with some practice you can understand these movements and make money from them. I make no claims that you’ll be an expert trader in a year or two or that I have the power to make someone an expert trader, but I do believe that there are specific techniques that will give you the edge you are looking for if you are willing to put in the time and work hard at trading.

One other thing I would like for you to do is take some time maybe 20 or 30 minutes to think through the things I mention in this article. Maybe even mediate on them and think deeply about them as it will shape the way you filter information. Think about it deeply enough to become a part of the general way you view the market so that as you develop your skills it will be a foundation for you to fall back on when you start to drift and become overwhelmed with the information that is out there. A solid foundation is necessary when learning so that you have something to come back to from which everything else finds its source.

Here is a copy of my response:

Absolutely, you can take trades following the hourly. It is fairly close to the H4 in that it provides you with 4 candles for every 1 candles on the 4 hour chart. Look back on “part 4″ of my most recent post (http://www.forex4noobs.com/blogfet/pair-eurusd/eurusd-live-trade-041510-part-4/). Look at the point when I closed my short position and think about why. Though I am short there, I am closing because I know that buyers are potentially there based on where the current price is in relation to support. And what is the support there? It is a point of reference where traders will determine that the price is inexpensive enough to buy it here in order to make profit. When the hour closes in the manner that it does it becomes cause for potential buyers to sit up and take notice and for current sellers to do the same so that what you have is:

Step 1: Traders in shorts from 3520 and higher are now exiting their positions and taking profit. In order to exit they must buy and thus you have the price react the way that it does so that it starts forming candles that tell us sellers most likely are done here.

Step 2: New buyers come in when the market begins to establish that this is the new inexpensive price and thus a buy here will most likely return a profit.

Step 3: As more confirmation comes in that there is no supply below additional buyers come in also combined with additional sellers getting out (buying) causing buying to tip a little bit further, creating demand, which causes the price to rise.

Step 4: When price reaches the 3530 area buyers off the H1 support at the 3500 area are now considering getting out. Why? Because there is incentive to do so based on trending price and previous price setting which we call “resistance”. Could the price break through and continue? Absolutely, but it will initially struggle for sure. My video doesn’t cover the following price movement so you will have to look at it on your own charts, but you’ll see that the very next candle from the one I exited on saw buyers take the price to around 3540 and when the price got to that point:

Step 1: Traders in longs from 3510 and lower are now exiting their positions and taking profit. In order to exit they must sell and thus you have the price react the way that it does so that it starts forming candles that tell us buyers most likely are done here.

Step 2: New sellers come in when the market begins to establish that this is the new expensive price and thus a sell here will most likely return a profit. In this case it is a higher probability trade than the previous long position as it is with the current trend move.

Step 3: As more confirmation comes in that there is no demand above, additional sellers come in also combined with additional buyers getting out (selling) causing selling to tip a little bit further, creating more supply, which causes the price to fall.

What then is the difference between every price between 3510 and 3540? What’s the difference between 3510 as opposed to 3515 as opposed to 3520 or 3525 or 3530? Because traders want LOGICAL, REASONABLE, AND RELIABLE points of exit and LOGICAL, REASONABLE, AND RELIABLE points of entry. The difference between every price between 3510 and 3540 is NOTHING….THE DIFFERENCE IS NOTHING…………other than currently the market has marked for us a point of reference where potentially traders will determine that the price is too expensive at 3540 for further buying and so they sell. And that is why they sell in that area as opposed to any other price in between, and it would be the safest place for a sell as opposed to every price in between. But if you are not in at the bottom then you don’t want to get in until the next opportunity because at any other price in between you are increasing your risk. You are protecting yourself so that if the price does not get to 3540 area where resistance and trendline are then you don’t get stuck out in the middle if buyers can’t follow through and push the price up. If the buyers can’t follow through, at that point you can potentially get out of your trade at BE or with a very minimal loss. So if you entered at 3510 and the price runs to 3525 and you are looking for 3535 or 3540, but at 3525 for whatever reason buyers can’t continue and demand starts to fail you have opportunity to manage the trade better, but if you enter at 3525 in the middle of the move out in no man’s land where there is no s/r or trendline to support your entry then you are increasing your risk. So instead of being anxious and feeling like you are going to be left out it is better to wait for a SAFER place to enter. That’s what everyone else who is an intelligent trader is doing because they don’t want to put their capital at unnecessary greater risk. They would rather wait another 15 or 20 pips for a better price and a safer entry where they know buyers will be getting off the bus. If they don’t get that price then they have averted a larger loss so it is a win win all around.

So, after all that, yes you an trade the H1 frame and use it in conjunction with H4 and D1.

This is the last part of this series as we follow the current short position to it’s end. In this video we manage the trade around critical areas using multiple time frames. While watching, take note about how we are using multiple time frames together, especially the M5 and H1 frames. We use these together to help us determine whether to hold our position or to close.

If you have any questions or comments about the trade or analysis leave them in the space below.

[jwplayer config="YouTube" file="http://www.forex4noobs.com/wp-content/blogs.dir/3/vids/EURUSD041510Part4.flv"]

I know this is my third video this week and you are probably saying. “what the hell is going on?”, since I’m not too consistent, but I’m trying to string together a series here with the same pair to get a feel for planing trades and thinking about buying and selling and where and when and why, etc.

The trade in this video is still in process. The video was getting too damn long and was going to get longer so I just cut it short and will pick it up in the next part.

If you have comments or questions about the trade or analysis please leave them in the space below.

[jwplayer config="YouTube" file="http://www.forex4noobs.com/wp-content/blogs.dir/3/vids/EURUSD041510Part3.flv"]

This video contains analysis of a near term long position I took and then analysis of two possible trades coming up in the future. If you have not watched my previous blog post (EUR/USD Live Trade 04/15/10) then watch that first before this video as this presentation works some off that vid.

If you have any questions or comments please feel free to leave them below. I will try to answer any questions you have about the trade or analysis.

[jwplayer config="YouTube" file="http://www.forex4noobs.com/wp-content/blogs.dir/3/vids/EURUSD041510Part2.flv"]

In this video I tried to put together some more analysis before the trade so you can get an idea of what I’m looking for and thinking through. During the trade I decide to close out one position and take another in the opposite direction and you can see how it is important to move with what the market is giving you. The initial trade is a long position off the trendline and support as we know that price containment is more probable than break out (SEE HERE – http://www.forex4noobs.com/blogfet/charting-for-beginners/controlling-chaos-bounces-and-false-breakouts/) so initially when the price hits support and the previous trendline we went long, but in evaluating the bigger picture and seeing the current action we start to see that any demand above is most likely not there so as buyers exit and give up their positions the supply gradually opens up.

Hope the video is helpful to you and if you have questions or comments please leave them in the comments section below. I will try to answer any questions you might have about the analysis.

[jwplayer config="YouTube" file="http://www.forex4noobs.com/wp-content/blogs.dir/3/vids/EURUSD041510.flv"]

There was a problem of some sort with my blog. It has been fixed.

Due to the problem, if you did not receive notification of the previous video post (EUR/USD Live Trade 03.29.10) be sure to check out the EUR/USD live trade that covers smaller frame trading.

This is a video of a scalp and then second longer trade I took on EUR/USD. As I was cleaning up the video and watching it I think the audio lags a bit behind the video for some reason, so you may experience this when you are watching it.

If you have any questions or comments leave them below. Good luck trading!

[jwplayer config="YouTube" file="http://www.forex4noobs.com/wp-content/blogs.dir/3/vids/EURUSDBlogTrade032910.flv"]

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.

Sorry I have been long and late in getting up a new video. I’ve been busy with other projects.

This video is an example of how I try to monitor a trade using multiple frames and price action.

Please leave questions or comments below and I will try to answer as many as possible.

[jwplayer config="YouTube" file="http://www.forex4noobs.com/wp-content/blogs.dir/3/vids/GBPJPYBlogTrade031810.flv"]

This is a trade I took today on the EUR/USD. In this video I try closely record the monitoring of the trade so you can see what I’m thinking about as the trade is developing. You can apply these things to failing trades as well in order to protect your capital and get out of bad trades before you are in too deep.

If you have not already watched the GBP/AUD live trade video from my previous blog post be sure to do so as it captures a higher frame entry with an extended target.

[jwplayer config="YouTube" file="http://www.forex4noobs.com/wp-content/blogs.dir/3/vids/EURUSD021110.flv"]