There’s been a few questions surrounding the trading setups that get posted every week that deserve their own blog post. Even though there is a post: How To Trade The Setups, some people are still a little confused.
These are not buy here and sell here setups. Trading is not that clear cut unless you are using a mechanical trading system. Those have problems of their own including the removal of discretion. Trading systems are generally made up of technical indicators that lag price.
- These indicators will not tell you there is consolidation in the market.
- They will not tell you there is a breakout underway
- They will not tell you there is structure that could cause your trade some grief
What these setups do is highlight areas on the chart where there is a probability of trade-able action. These are daily charts and unless there is obvious reversals such as the failure test, taking a trade in the direction of the trend on that time frame is the desired action
You can certainly take counter-trend trades on the failure of the pattern that we are looking at – example is looking for longs on support but taking a reversal trade if price action is clearly bearish.
Remember, these charts are looked at on the weekend. During the week, things evolve.
Our job as traders is not to predict – it is to react. React within some framework of discipline. It is far too easy to trade every strong move but that will cause you more harm than good in the long run.
Let’s take a look at a chart from this week. See the original chart here.
This is clearly an uptrend with momentum pushing to highs. The red candle at highs and failure to follow through at the point when the chart was posted, is still bullish in the context of previous price action.
As the week starts however, we see a break down from highs out of the consolidation pattern. Keep in mind that this pair on the weekly chart just broke out of a 10 month resistance level. That is bullish. Not bearish. Price may simply be retesting the former resistance.
What we don’t know on the weekend is where this will resolve. It has merits on both sides:
- Uptrend with momentum. Consolidation at highs and failure of bears to exert total control.
- For the downside, momentum pushes as the red candle shows, will often have one more leg to the downside after consolidation
The leg to the downside, using a measured move target, is around 146.70.
Multiple Setups On Each Chart
In this example, a break of the pattern to the upside could be as simple as trading the highs of the breakout candlestick. Not applicable to this chart but you can also position inside the consolidation if price action is showing bullish intent.
Traders who read the red candlestick at highs as bearish momentum, they may look to trade a simple trend line break strategy of lows for a trade to the downside.
The difference between getting suckered into the downside “just because” and having a plan are worlds apart!
The trade for me on this chart was simply:
- Bulls and bears evenly matched coming into the weekend
- Preferred upside break to follow the trend and momentum of that trend
- Consolidation breaking to downside is a playable short only because of the momentum candlestick at highs.
It is impossible to write out all potential developments of each chart.
The setups will point you towards potential trades with the overall intent of going in the direction of previous price.
Either way, the formation of price on that chart I posted on the weekend hinted that “something” was going to happen. You have to learn how to trade what happens – or to not trade what happens.
Read All The Trading Strategies
Traders who take the time to go through this entire trading website will learn trading strategies that they can use on all these setups. The chart discussed is a perfect example of that.
Even the very simple 1-2-3 trading strategy could have been used on this pair
You must do your homework and understand what you are trading. Expecting a “buy or sell here” approach does not serve you well as a developing trader.
Think of all these Forex setups as scans where price is in a position to “do something”. When it “does something”, it is your job to decide how to trade it.
Even the GBPUSD setup – where I preferred longs due to context of price, closed Monday fully bearish. It was a failure of support trade and if you missed that, there was a slight pullback on October 4 that retested the break of support.
More astute traders would have seen the strong rejection after break of resistance on the weekly chart near the end of September (you could see it on the daily chart on Sept 20).
That is a failure test:
- Price moves with strong momentum
- Breaks an obvious high/low
- Closes back inside the broken support/resistance level
- Sell or buy break of low/high
- Stop on the extreme
You can find this information on this website. There is no secret.
Price Action And Trends
I look for longer term trades for the main bulk of my trading. Trades that last a few days such as the one described here, are only taken when the setup fits the criteria for a counter trend trade.
Once you learn what a successful setup looks like, you will also learn what a failure of that setup looks like. From there, you can learn how to trade not only with the trend but be opportunistic when counter-trend sets up.