Always happy to get questions from people who visit my free trading blog that are perfect for sharing with everybody.
On a recent free Forex setup I posted, someone asked the following question:
Would you have gone in with a buy following the small pullback on 23rd, or waited for a stronger signal?
Here is the chart that JM was referring to:
A few things can happen when price rockets to a level especially when it break from the bottom of a range as this one did.
- Traders jump into the momentum adding fuel to the move in price
- Price will test highs sucking in breakout traders
- Price will reverse making all the longs run for cover
Other events that can happen are:
- Price will consolidate around the level without a full on breakout move (these are often the time when you want a position on)
- Price will rocket through, price will pullback in a bull flag and begin the move again
- Price can just drop
I don’t generally play the actual breakout but will look for consolidation before the break or flags after the break
This is a four hour chart of the same currency pair and I’ve zoomed into the area of interest. Understanding price action would allow you to see that the higher lows on these individual candlesticks are giving a clue that the buyers have the edge.
You will also note that the green candlestick inside the consolidation (not the breakout candlestick) is the widest candlestick in that range.
That information, taken in the context of the previous momentum move, is good enough to look for a play long.
What if you are more conservative?
Right after the breakout, price consolidates and given the shadows on the green candlesticks and the failure of price to fall back inside, you can position inside of this consolidation.
You may opt to look at an hourly chart to see a higher level of structure in the consolidation level but don’t look for the perfect entry as they do not exist.
Confirmation? Should You Wait For It?
Another question that was asked was if I would wait for a stronger signal.
The answer is no.
When you wait for a stronger signal, you are already late to the party. A stronger signal will often run you the risk of mean reversion as the stronger signal gives over to a small reversal as some take profits and the ever persistent fade trader gets in on the action.
Again, it comes down to the perfect entry. Don’t look for it:
- Understand what price action is showing you in terms of the bull/bear balance or imbalance
- Attempt to find structure to trade against which usually means dropping to a lower time frame when price is at your level of interest
- Enter the trade…place your stop….and let price do the rest.
