Price Action And Other Quick Analysis (My thought proccess when taking a trade)

[NickB]

So yesterday we have a break of the 213.92 scalp line. Had you taken the trade you likely made some profit. However the trade could just have easily been a loss. This is why I traded it a little differently, here is how I did it........

At the beginning of this week my method suggested a possible trade to me. It was a long scalp trade to be taken on the break of the 213.92 scalp line. However the trade suggested and the trade I actually took were two very different trades. When the price came to my scalp line and was about to break I asked myself the 5 questions I mentioned in yesterdays post.



1) What happened last time it approached this line/area?
It encountered strong resistance and moved away so it is likely that next time it breaks the line it will gain momentum and make for a good trade. This is obviously a good sign and it suggested to me that I take the trade.

2) What does the candle movement leading up to this point suggest?
The candles suggest that there is a strong struggle between the bulls and the bears but whenever one side gains the upper hand they do not manage to keep it for long. The candles are all small and indicative of a undecided market. This is obviously a bad sign if the market has no clear favored direction taking a trade is not a great idea.

3) What does the current price movement suggest?
The overall price movement suggests that we are in a period of extremely low volatility. Looking at GBP/JPY’s average daily range of 280 pips the current movement is only 1/3 of the average daily movement. This obviously means the market is moving far below its normal range and that taking a trade targeting 50 pips would be dangerous. It does not seem at the moment like GBP/JPY is moving enough to meet my trade targets.

4) If triggered and entered what possible complications can this trade have?
The fact that we are in the Asian session which is the slower moving of the sessions suggests we could see even less movement than we saw in the London session. 60% of all trading happens in the London session if it only managed to range 100 pips in the London session there is little hope the Asian session will be better. The overall range in the last few days has been extremely tight so I could end up holding onto the position for days without reaching my targets. Furthermore the market has no clear direction, whenever it picks a direction it is quickly turned around.

5) Considering all these things should I take this trade?
No not at the moment. The low volatility and undecided direction make for an unstable market and taking a trade would be too risky.

This is all done very fast, I do not write any of it down it is all done in my head. At this point what are we left with though? The 213.92 area is very obviously a resistance area and I want to trade it but I am not going to take a risky trade because I want to get into the market, I know better. So what I do is I work out a game plan.

The main problems I had with the current GBP/JPY movements were:

1) Lack of direction
2) Low volatility

Lack of direction is easy to deal with you just need to wait until the market picks a direction. Low volatility however is a little tougher. By the time the market becomes volatile the trade is likely over. So you have to make an educated guess as to what needs to happen for the market to regain some volatility.

My first step was to replace the 213.92 scalp line with the 214.00 line. The 214.00 is a psychological level, and it is so close to the 213.92 that moving the line to that level will not make a huge difference, it's only 8 pips. The idea is that since it is a psychological level a break past the level could create some volatility. Also if it breaks the 214.00 it indicates that the market has picked a direction, so for me 214.00 was the perfect line to use at this point. Yes the 213.92 was my scalp line and I am not in the habit of changing my lines but every situation is unique and this situation called for it. The price was ranging so near to my scalp and it was ranging so weakly that if it broke the scalp line it could very possibly not have sustained the break. If the move was not sustained where would be the likely point that it would turn around? The psychological level of course! All psychological levels provide some support and resistance, when the price is already weak a psych level could very easily hold the price back. So my immediate thought was to wait for a break of the psych level instead, that would indicate that the bulls actually had some potential of making a bullish run.

Great so my trade was ready to go I would enter when it broke the 214.00. When the break came though I was still very cautious, the current market conditions were not the best for a trade. I had to play this one safe, I did not enter instantly instead I watched for signs of volatility. When it hit 214.10 I was ready to enter, at that point it had proved to me that it had picked a direction. Then all of a sudden it stalled and eventually came back down, I didn’t enter. After the mini reversal I reassessed the situation. I came up with 3 points:

- It is obvious the bulls are currently more powerful than the bears so that is a good sign.
- The market is ranging tightly so it wants to break, it is however the Asian session and low volatility is to be expected. As we near the London session if the bulls still have power the break is likely to come.
- The market has picked a direction and has displayed that it has some of the strength required to move in that direction.

So I said to myself if when we are near or in the London session if the new candle manages to break the previous candles high (214.10) I will enter. Breaking its previous high is a very clear indication that the pair has picked its direction and that it plans to make a bullish run. The fact that we are in or very near to the London session indicates that we will probably see increased volatility and that could give this move the energy it needs to hit my target.

About 30 min before the London session started GBP/JPY made its move, it broke my level, I entered and let it run up. I closed the trade out at about 214.75 for around 65 pips profit. I exited the trade because the MPC meeting minutes were due out in about 1.5 hours and I did not want to risk staying in. I had my 65 pips profit, so I took it and wrapped up another successful week of trading.

So there you have it my thought process for this trade. You can see this is not as simple as wait for a break and enter no questions asked. I ask myself questions and I consider all the factors before entering. This is what I believe makes the difference between a successful traders and failed traders. If you type ‘Forex’ into Google 99% of what comes up will be scams. They all advocate trading without using your brain, what bullshit. Your brain is your greatest asset and using it is what will make you a successful trader. So please don’t become a robot, be human and think your trades through logically. Remember this is a market in which 90% of traders fail, those 90% are the ones trading the ‘no thinking required’ systems. To succeed you need to separate yourself from those guys and start to think. Do not shut off your emotions; do not blindly follow a trading method.

Oh and all this may seem very hard to get the hang of and I won’t lie to you it is. If you’re afraid of a little hard work this is not the business for you.

Hope this helps guys.

[Christian K]

Just as your method evolves so does your teaching. This is very valuable information, and in essence is what will make a trader successful. I wonder how many traders will absorb this information and take it to heart. I'm going to reread this post again.

[NickB]

Thanks, I don't know if this stuff is too confusing and all over the place to make sense of or if its easy. I think maybe for newbies it may be a little hard to make sense of this but this but if you have a little experience it makes sense. It seems my trading is not as simple as I once though my method is simple but analyzing the price action is more complex.

I will probably make a video or two about me thinking process before.

[gtotrader]

the videos of you analyzing the market and your thought process right before taking the trade are really good. lets us get the best of you and your thoughts, thanks for all the help nick.

[wombles]

Great mind dump Nick. Priceless. It all made sense to me. In fact, post trade analysis on any of those trades that deviate slightly from the original plan would be extremely useful in the future.

Cheers again.

[invester100]

hi nick , great work , a lot of information and tricks , I think it's simple it requires a lot of practice and work , so you are done for this week with 65 pips ?
thank you

[NickB]

I was done but then I got that perfect reversal trade set-up and took it.

[flysei]

Originally Posted by NickB

I was done but then I got that perfect reversal trade set-up and took it.

Hey, Nick.

Did you stick to your 50 pips on the full position on a reversal, or did you let market conditions change your exit strategy. Just curious how many pips you ended up taking.

[NickB]

I actually just went for 35 pips to make it an even 100 for the week. I really did not want to push it since I had already wrapped up my trading for the week. Also the trade was not a proper trade as far as my trading method goes.

That trade made me realize something though, thanks in part to that trade this week I had a revelation. I see trading in a whole new light..... I am still trying to piece it all together but I know that my trading method will be undergoing some drastic changes. In fact I will not have an actual trading method anymore, I will still use the same concepts of price action, candles, and S+R lines but I will implement them in a whole different way.

[rasico]

Thanks Nick for the very helpful post. It is really great to be able to follow the thought process of a successful trader.