One of our recent setups gave a great lesson in the fact that reading price action is crucial to developing as a trader.
The Forex setup I want to discuss took place the first week of October and breaking down this chart is a great way to hammer home some important things you should know.
The GBP had made a run up to an area that could act as resistance and it did so with momentum. Price then began to consolidate at highs which is actually more bullish than a bearish pattern. By all accounts, this was a bull flag taking place.
Why a bull flag?
Price is in an uptrend on this time frame and at the time, the notes said it was a weak pullback due to lack of momentum. One thing we don’t want to see in a pullback is aggressive price action. Slow and steady is the preferred pattern for a pullback trade.
What happened during that week violated the pattern: we call this a pattern failure.
The pullback in the GBPUSD went from calm to crazy as the week began.
The arrow is point to something we don’t want to see in a market in an uptrend that is going through a pullback. Once momentum steps in, the current pullback has failed and because of that momentum, we can look to position counter to the overall trend.
In order to capitalize on the failed pullback, we need some type of consolidation in order to take an entry. Just “jumping in”, something many traders do in fear of missing the move, is not the right move.
The green star shows us a potential entry. An order to short placed under this short term consolidation, especially with that green candlestick, is a good play.
Your stop loss would go above that consolidation because if price bounces the next day after the green candlestick, we could be looking at a trend resumption.
As for the profit target, we want to be conservative because this is counter to the overall trend. Taking a measured move from the consolidation just before the momentum push down to the consolidation area of entry and projecting that from the entry, gives you a measured move target of that leg.
I’ve said before, the failure of patterns are often times good for a trade. That is what happened in this currency pair.
Which brings us to this week GBPUSD trading setup.
After the move down, price had pulled into a potential area of support. Why potential? We never know if support or resistance will hold and admitting that can keep you from imposing your hopes and bias on your trading.
The setup that was posted in my free weekly Forex update was as follows:
- Momentum had helped push price to the downside since last September
- GBPUSD had just broken a resistance area that was put in place back in 2016
- Price had pulled back into an area of potential support
- A reversal candlestick was in place
It should go without saying, if you have read this blog and all the setups, that you need price action to show you if support will hold.
Price breaking above the reversal candlestick. An order to buy should have been placed above the high of the reversal candlestick – a simple “support holding” trade.
The trade has played out to just over 130 pips and this is a trade that was an easy trading setup.
I’ve had a few people ask about exact entries, stops and targets but that ignores one of the basic principles of markets: they are dynamic.
As price action develops, even with a simple breakout method, your original plans can change. Looking at this trade, what if we had an inside candlestick form? Is the entry still a break of the reversal candlestick or do you lower the entry price to just above the inside candlestick?
Even more in depth, what if a trader sees the setup and uses lower time frames for entry which I know some of you do (you people love to work!)?
The truth is that if exact entries/exits is something you need in order to trade, you should not be trading. Take these setups and learn what they mean; what kind of opportunity they present.
Then you exploit the opportunity.
You can even use one of the many trading strategies on this trading blog as price begins to move from these locations.
Hope this helps!