This is a long term idea, but for the following reasons, I’m considering going short on EURUSD - once I’ve found a reasonable entry point.
Primarily, this is because price has recently responded to a long term downward trend line on the W1 chart. In addition to this, the .618 fib level is also providing resistance. This can be seen on the chart below:
In addition to this, a bearish divergence seems to be present on the D1 chart (though I’ve never really looked at divergence’s before). This can be seen here:
I think taking a short here is not the smartest play, especially if you’re seeking a longer term position.
To me, a FIB and a trendline are nothing more than lines on a chart - I honestly place zero value in them to provide trading opportunities, other than simply using them as a visual aide.
The price action and order flow is more important here.
Everyone can agree that 1.38 is an important level.
Look at what has happened the last three times prices have traded here.
10/28/2013 - 520 point sell off (5 consecutive bearish bars)
12/31/2013 - 340 point sell off (3 consecutive bearish bars)
2/28/2014 - 90 point sell off (2 weak bearish bars)
This should be communicating something critical.
The more times a significant level is touched, the less reliable it will become to place trades off of (simple supply/demand principles).
(Unless you have a central bank which institutes an artificial floor of course ).
There was a near-term opportunity to short @ 1.38 a few days ago, targeting 1.3750.
My radar is telling me that we’re on the verge of a breakout.
I’m relatively new to trading, so it’s easy to admit that I’m far from an expert. However, what you’ve just said contradicts much of what I’ve learned so far.
Firstly, you say that ‘a FIB and a trendline are nothing more than lines on a chart’. Could you elaborate as to why you feel this way? To me, support and resistance levels and trendlines are the most logical aspect of technical analysis. Furthermore, fib levels (and the .618 level in particular) are commonly used by traders when placing stoplosses or taking profit. This makes it reasonable to expect price to respond to these levels in one way or another. Again, I’d like to reiterate the fact that I’m still very much in the process of learning, and that therefore I’ve probably only been exposed to one side of the argument.
Secondly, you say that “The more times a significant level is touched, the less reliable it will become”. This is completely contradictory to what is taught in the BabyPips School, and what logic would (for me) dictate. Care to elaborate on this point also?
If you see such little value in trendlines and S/R levels, what do you base your analysis on?
The Euro can go higher it really depends on the market makers and central banks. They are testing higher levels and buying into it themselves suggesting they will move the market higher and sell off the last of those Euros before sending the market to the floor. Or the central bank’s will intervene to prevent a weakening of exports in which case they will absorb the buying pressure and create a massive spike and send the Euro to 1.35 areas and yonder.
The questions you should ask is are we at the ceiling?
What are the implications for Europe a high value Euro? (e.g. weaken exports)
What are the central bank’s thinking? That’s the ECB?
What’s the risk on either direction? I think high meaning risk small and set that stop above 1.3832. HOLD that trade because the ceiling is near. I guessed on the long side 1.4100 is a possibility but not for long and the fall will be mighty.
an ascending triangle is obviously implied, yet such failed patterns happen very often, sometimes it makes you think that the rule should be to short them instead of buying them…or that there is no rule at all.
which brings us to:
no one in euro-zone wants the shared currency in these highs, even Germany for the reasons aforementioned (exports), let alone other countries which would prefer -an unrealistic at the moment- exchange rate of 0.9 - 1.0 vs USD.
Personally been burnt enough times and have stopped trading this pair. In fact it is declared in my mind as the most unreliable pair to trade.
Just want to start by saying that this is the great thing about trading – no single method is gospel, and what works for one, may be confusing or impractical for another. And, that we can discuss it respectfully on an open forum like this just makes things even better. But, the bottom line is that if you can pull down consistent profits each month, who cares what you’re doing or what others have to say - [U]just keep on doing it[/U]!
Going to apologize in advance for the length here, but I really wanted to explain why I said what I said.
I just get a bit ‘passionate’ at times when I see traders focus so heavily on trendlines, FIBs, or indicators. Why? Because I once had the improper mindset that movements in price were dictated solely via interactions with these tools on our chart. Yes, most traders out there may take notice of a FIB level or a trendline and fulfill a prophecy to trade off some type of confluence, but I almost always can tie that exact level back out to the real reason why I feel the trade worked out. (Also - can usually find a more optimal entry which offered lower risk and higher reward).
To me, that reason is simply supply and demand. It’s the most basic economic theory, but one which I rarely hear talked about on most any forum. Just like buying any other type of item/commodity/resource in life, the underlying principles which drive price in mostly any market are exactly the same. The only reason why prices move away from a neutral or equilibrium state is because of an imbalance between buyers and sellers. If there wasn’t an imbalance from that first trade ever made on a pair, a price chart would just be a horizontal line.
Being able to identify where the greatest imbalances lie (whether high prices where there is supply to sell, or low prices where there is demand to buy) and trading off the zones, seems most logical and practical to me. S/D coupled w/ some basic price action theories is the strategy I employ. I don’t pay any attention to patterns, candlestick formations, indicators, or non-major news events.
Once you can identify these S/D zones, you can see that on every single timeframe all price does is bounce back and forth between the two. Institutions place orders at levels, not when they see a pin bar form. Chances are, by the time that Pinbar forms, they’ve already been filled and are in profit 50, 60, 70 pips ahead of where the novice wants to enter.
As far as traditional support/resistance and the more touches on a level the less reliable it becoming comment- think about this from a supply/demand viewpoint. Should have also added in my original sentence “…coupled w/ reading the underlying order flow”. We can use this EURUSD setup as an example.
On your weekly chart, the 2nd peak which makes that descending trendline to me is key. Price touched it the week of 4/23/2011, and the next day sold off 600 points, kicking off a massive bear run.
This trendline was revisited the week of 12/31/2013, yet, where was the major reaction by sellers? Since that touch, there was only a 400 point sell off, and now price is trading right back on that line. What does that communicate to me? Buyers were able to accumulate any sell orders, preventing prices from dropping any further.
This part of my original post illustrates what I’m trying to say further, using the D1 (if, we are in agreeance that 1.38 is a “resistance” confluence level):
10/28/2013 touch - 520 point sell off (5 consecutive bearish bars)
12/31/2013 touch - 340 point sell off (3 consecutive bearish bars)
2/28/2014 touch - 90 point sell off (2 weak bearish bars)
Can you see the trend? With each touch of that “resistance” level so much emphasis is placed on, sellers are unable to drive prices further down (520 / 340 / 90). This should convey a representation of the orders being placed off this level. Sellers are making less and less ground. From here, it can be assumed, based on simply reading the underlying price action, that less and less sell orders are being filled at/near this price. With that being said, we also know that retailers don’t move the market and need to trade in the direction of the much larger institutional players. Adding all of this together, I’d be looking for trade opportunities elsewhere and would not be comfortable exposing my equity to a short off a trendline/FIB confluence.
I have a non-related Babypips journal I run, in which I recently wrote about why I feel the EURUSD is poised to breakout soon. This analysis isn’t based on any news, indicators, economic reports- none of that. It’s solely based on reading the order flow and understanding the context of price within a supply/demand mindset. Each time price reaches that 1.38 level, there is less and less desire to sell (supply). The only way you can make money shorting a pair is by selling high, and buying low. When sellers see any attempt they make to hold (and push price further down) than that 1.38 level simply being absorbed by buyers, they give in. How do they give in- They need to cover their positions and, shortly thereafter you see a breakout. In which, the novice who tried to short is now trapped.
Or one can say buyers buying at the top are trapped into weak long positions, either way the market is at the top of a long bull trend. I don’t care if it even goes to 1.40, the only view is to sell it not buy it. At best the pair is in a correction (Buying climax). The market maker should have an empty warehouse very soon.
no one in euro-zone wants the shared currency in these highs, even Germany for the reasons aforementioned (exports), let alone other countries which would prefer -an unrealistic at the moment- exchange rate of 0.9 - 1.0 vs USD.
Personally been burnt enough times and have stopped trading this pair. In fact it is declared in my mind as the most unreliable pair to trade.
EUR/USD is the most manipulated pair by specialists, insiders, market makers and central banks, precisely because the USD is on a mission to devalue to keep exports alive and also the insane pegs to other nations means it has to keep printing money. The EURO is Europe’s answer to the USD as the currency of first reserve (will never happen) and Germany along with the ECB will continue to lie about its viability which is why there is always a Bullish bias as the longer term players know that for now it is EURO strength.
This pair will always be blighted with lots of manipulation by the media and central banks. As a result there will be blood on the streets as JP Morgan would say. The best way to stay in this pair is on long term bias and smaller position sizing to minimize risk and equity damage.
This is the same for most currency pairs apart from the exotic pairs.
Wow, thanks for the detailed response! I must admit that I don’t know an awful lot about about order flow or application of supply and demand principles. I do now intend to find out more about them though!
Two quick questions about your response though:
Firstly, what it the difference between an S/D zone and an area of support and resistance? Perhaps they differ in theory, but in practice are they not the same thing?
Secondly, you talked about the importance of “being able to identify where the greatest imbalances (between buyers and sellers) lie”. How do you attempt to do this? It makes perfect sense as an approach to trading, but I don’t understand what you’d rely on to signal such an imbalance. Would you use an “S/D zone”, candlestick patterns, price action or anything like that?
Again though, thanks for your advice, it’s certainly been insightful
For what it is worth, I have been shorting the EURUSD since 1.3800 and think we may see a correction down to 1.3720 and potentially a bit lower depending on the ECB in a bit. My profits are locked in so I am not too worried about which direction the Euro will take today.
Who would be buying at the “top”?
What’s your reference point for the long bull trend?
There is never only one view when trading - I feel that’s a dangerous line of thought. In the last 5 hours as of writing this, the pair rallied over 100 points after an intraday pullback. I got in @ 1.3725.
I’m sorry, but I don’t know what this means, may you please elaborate?
Glad to help. As you can tell, I’m indeed passionate about this topic. I take a more logical and simplistic approach, and hold the theory that every piece of information you’ll ever need to know about whether or not to take a position lies solely in price and it’s history. The only tool needed to make a trade is your mind and an ability to locate high probability, low risk / high reward setups.
I’ll send you a PM with some of my thoughts regarding S/D vs. traditional S/R.
As far as your second question - how about you tell me?
Here’s an hourly chart, in which I was explaining to another user whom was dedicated to short the EUR claiming that the only option right now was to sell, there are always options on both sides of the market.
Think about what an “imbalance” between buyers and sellers would look like on a price chart. You don’t need any indicator, volume information (which technically isn’t available on the spot market anyway), trendline, FIB - none of that.
I marked out 5 points on the chart (apologize if they’re a bit tough to see).
Points A, B, C, D and E all represent order flow.
How would a significant imbalance (another word for non-equilibrium or non-netural state of price) be represented graphically?
What does this non-neutral state indicate to you? Does this signify that there is a struggle between buyers and sellers? Or, does it communicate that one side - buyers or sellers - are heavily participating, are in control, and the other is not?
Candlestick patterns offer late entries, higher risk, and lower reward trade setups. I never understood the allure of trading patterns / single candlesticks, because in my experience you’ll rarely hear either talked about on the floor of a major brokerage (unless someone is trying to sell FX strategies and this is the easiest way to streamline a process). The only concern should be where prices are trading, and how the participants most recently reacted to that price (do they want to buy (demand)? or, do they want to sell (supply))?.
Think about a 100 pip pin bar. What are the entry rules for this singal, if all other requirements are met? Is it an x amount break of the low/high? Is it a retracement into the PBar? Let’s analyze both:
X amount break of the low/high:
Let’s say that we only enter with a 10 pip break of the pin bar. So, that means, that we would be entering 110 pips away from the tail origination. 110 pips.
X% retracement of the pinbar:
Let’s say that we only enter with a 40% retracement of the pin bar. 40% of 100 would put us @ 60 points in. 60 points away from the tail origination.
S/D zone coupled with some basic price action theory offers lower risk, higher reward setups.
Typically, price will simply trade in between these zones. Once a zone is broken, price will seek out the next historical level, whilst creating new levels to be traded off of.
It’s tough to put this all into words, because the concept is not one you can understand over night. It takes training, and a lot of chart time to watch how price is reacting for each pair.
Hope this helps.
Looking forward to your response.
The day is over and the Euro pushed 1.3860. In my opinion we are at the selling climax (said buying climax on my last post meant selling) by that I mean the Euro will eventually correct to 1.35 levels where it is comfortable after all the FED is playing a game of devalue the USD to protect local manufacturing so it is a race to the bottom. As a trend trader I can’t buy I pair that it is approaching a 3 year high. It may be too early to go short if you are not able to have a wide stop but short it is.
(The selling climax is what V/OI traders like myself call it when the market makers or liquidity providers ( have an extreme imbalance on the orderflow book (warehouse) and need to buy more inventory, of course they need to buy cheap so they tick the price lower and cause a panic sell off. It is usually a signal if you see a massive price spike or major move at the top of a bull trend after a serious congestion phase, this is just a last ditched attempt to push the market higher and lock in weak buyers this action allows the market maker to sell off the last of their stock at high prices and make a profit before crashing the price and the cycle repeats itself).
I never buy at this point but beware I don’t scalp I trade weekly and daily charts and look for signals at the lower time frames. Scalpers may still see an opportunity on the upside.
Remember: It takes effort to create a bull trend as buyers gradually enter the market as they overcome fear. A market that has been trending for a while suddenly makes a few massive leaps over a few days is a big signal to get out or wait on the side. No doubt at this point the media is reporting the instrument is on the move. Joe public is buying the news at this point, smart money is looking for the exits and already taking profits.
Hi, thanks again for the response (and sorry for the delay of mine). Whilst I really appreciate the logic behind your approach, I must admit that I’m struggling to grasp it fully, so forgive me if I make any foolish assertions in this post, or if I’ve misinterpreted any of the things you’ve said so far.
Firstly, is order flow about trying to work out where the majority of people are likely to have their buy/sell orders and stop losses placed? Assuming that this is the case (I had to search google for a definition) I’d make the following postulations:
<ul>
<li>Within the region labeled ‘A’, the strongly bullish move may be the result of a large number of buy orders placed just above the area of consolidation? </li>
<li>The fall in price at point B may be the result of traders who’ve taken profit following move A. </li>
<li>Within the area labeled ‘C’ there would appear to be an imbalance in favour of sellers, indicated by long upper candlestick shadows that suggest that where buyers have attempted to push prices higher, sellers have fought back.</li>
<li>Within area ‘D’ the longer lower shadows imply that where sellers have attempted to push price lower, buyers have fought back and driven them up again. Furthermore, price is at a similar level at the end of this period to where it was at the beginning and it would appear that it has failed to make a lower low. Combined, this would indicate that the downward trend is likely to be coming to an end.</li>
<li>The second sharp upward move labeled ‘E’ may be the result of buy orders placed just above period of consolidation following period ‘D’. Many traders (I would imagine) would start considering a long position following the retouch of the demand zone, but would wait for price to make a higher high (to confirm the end of the down trend) before entering. This appears to have been the case, move ‘E’ occurred shortly after price exceeded it’s lowest high (or where the downward trend line would have been broken)</li>
</ul>
I’m not sure whether these where the points I was supposed to pick up on, or whether they are correct. You’ll have to pardon me if my observations make no sense - I’ve never really analysed the market in this way before. Until now, I’ve only ever really seen price action as a line on a chart without considering the story it tells. My analysis has been very mechanical and objective; algorithmic almost.
Whether or not I’m understanding what you’ve said correctly, your posts have forced me to think in a way that will probably always influence the way I interpret the market. However, I’ve probably come away from this feeling more confused than before I asked the question! This because everyone seems to have very strong and vastly different opinions and every time I think I’m heading in the right direction, someone challenges the beliefs I’ve developed. The BabyPips School, though invaluable to my learning experience, does little to touch on this sort of mentality and (in my opinion) sets beginners up to trade with an algorithmic approach. I now find myself wandering what approach I should be taking. I’m not sure whether to now forget things like indicators - which seem to constitute the majority of the BabyPips school.
I must point out that I’ve always day traded and, with only one exception, close my positions within 6-7 hours. Do you feel that the approach you’ve discussed is more relevant to swing trading on higher time frames, or is it still just as relevant to me?
Finally, what exactly is your personal view when it comes to things like divergence trading, fibonacci, S/R levels, trend lines, harmonic price patterns, chart patterns, Elliott wave theory, Bollinger bands, and all the other approaches taught by the BabyPips school? Do you really feel that it holds no value what-so-ever? Does your trading plan (assuming you have one) make no reference to these at all? My keenness to use indicators basically stems from the fact that I’m a very mathematical person, and I love the idea of writing algorithms. I suppose that it’s not so easy to use an approach such as yours algorithmically?
Again, thanks for your help - I could’t appreciate it more.
P.S I went long on EURUSD earlier today, following a breakout, and made a few pips
Nice - good way to always be aware of opportunities on both sides of the market.
No worries. As far as the “struggling” – rightfully so. Whenever something new is presented, you’re probably just like me and want to know everything about it, inside and out, as quickly as possible so you’re overly harsh on yourself. That’s not a bad thing :).
No need to self-deprecate. My word is not the almighty word- it’s simply how I approach trading.
The term order flow is just a label used for a way to analyze movements in price. A price chart is a graphical representation of buy and sell orders. For every buyer there needs to be a seller and vice versa. Demand is representative of buyers / Supply is representative of sellers.
Here’s a basic example: At a certain price, if there are 100 buyers and 25 sellers, the price for whatever instrument is offered will rise because there is a non-equilibrium state of orders. If there were 100 people willing to buy @ $1.50 and 100 people willing to sell @ $1.50, then there would be no movement – i.e. equilibrium between supply and demand.
Now, if there were 100 people willing to buy @ $1.50, but only 25 people willing to sell @ $1.50, logically speaking, what would naturally happen to price? Demand > Supply. Whenever demand is greater than supply, prices will rise – this is a basic economic principle which cannot be refuted, and is clearly visible in any price chart. So, the exchange rate for a currency pair will need to seek out levels where there are additional sellers whom can “match up” with buyers. Just note- currency markets for most pairs are extremely deep in liquidity, so this example is to be taken with a grain of salt. It is very, very basic and crude in its approach to explain what I’m trying to say.
I recently put out a video talking about purchasing televisions as an example. Let’s say that you were offered a price chart for a specific model Samsung 1080p 120hz 42’’ HDTV. Now, let’s say the current price range for the last year was between $3,000 and $600. The commodity was purchasable @ $3,000 when the TV first came out, and rarely has gotten that expensive. It hit $600 around black Friday, in which everyone and their mother went to the store to buy one. How would these activities be represented graphically on a price chart?
Well, when price hits $3,000, there would be very few buyers- right? Would you buy the TV if it were priced @ $2,800? Anyone who would by @ that high of a price would be a sucker, because they know historically where prices were. Also, they’d almost always be willing to find someone who’d sell to them – make sense?
On the other end of that, let’s say that a few months after black Friday, when the TV was offered for $600, prices ended up falling back to that level. Would you be looking to buy or sell here? How would a buying frenzy on a price chart look @ /near that 600 level?
These are obviously two extreme levels – but, the point is made. The markets are fractal. So, within a D1 bar you’re going to have 6 H4 bars, 24 H1 bars, etc etc. These bars will “create” supply and demand zones which replicate the above basic principle. Zones where traders are interested in buying at a discount or selling at what Sam Seiden calls “retail” prices – a great term by the way.
That’s some good analysis.
Here’s what I was getting @:
Whenever I open a price chart, my eyes are trained to simply spot points A, B, and E. Why? Because this is where there is heavy participation from the institutional players in a single direction. That is key. Without getting too specific:
[ul]
[li]Point A- Very large imbalance between buyers & sellers. Where were the sellers here? What does this communicate to you about order flow? Price rapidly & violently moved away from 1.37 – 1.3725 zone. Very large demand.
[/li]
[li]Point B- Just above the 1.38 handle, there was interest to sell. Why? Because the last time prices traded @ this level (end of DEC 2013), bears were able to mount a 250+ point sell-off in a period of 88 consecutive trading hours – and held prices down for 150 hours afterward before even a 50% retracement of the initial sell-off could be mounted by buyers. So, revisiting this level for the first time since DEC 2013, the market presents a low risk, high reward entry to get short. From point B to point D is critical though- and was illustrated in my other post to the trader claiming that shorts were the only option on the EURO this week.
[/li]
(con’t.) Because, I had mentioned that sellers weren’t able to cover as much ground with each subsequent retest of 1.38, this should be illustrating that the supply is being “eaten up” at that level (speaking to why I feel S/R is less reliable). Just because price bounces off a level a few times doesn’t mean anything. You need to understand the context, and read the underlying order flow as mentioned above.
[li]Points C & D- This is price action which I have zero interest in, and waste no time trying to explain or pay attention too. Sideways activity can be indicative of many things- here’s how I see it. Neutrality. Buyers and sellers are cancelling one another out – price is moving horizontally. One side isn’t in clear control, there isn’t a significant imbalance. Because of that, I’m not interested in placing any trades around that type of action.
[/li]
[li]Point E- Again, another very large imbalance b/w buyers and sellers. Entry off 1.3725 was based off supply and demand principles + how the market reacted the most recent time prices traded @ this level. Very large demand.[/ul]
[/li]
Again no worries. I was only expecting you to pick up on the fact that points A, B, and E were indicative of significant imbalances b/w buyers and sellers, and that points C & D were not. There’s nothing wrong with using objective and/or algorithmic analysis to read a price chart – like I said a few days ago, if you’re consistently pulling profit down, keep doing what you’re doing and don’t listen to others.
It’s just odd to me that when someone tries to understand how to trade currencies, they’d rather use something which is a derivative of price, rather than price itself. Moving averages are really the only thing which makes sense to me, but I don’t bother with them. Even odder, using something like trendlines, Fibonacci- I’ve always deemed those as being super subjective and thus simply unreliable. Case-in-point , your first post in this thread asking for opinions to go short. WHICH, is why I posted lol :).
That’s great – I’m happy I’ve intrigued you. But, don’t abandon anything for you which has been working. That is not my intention. And yes, it is going to be confusing in the beginning b/c it’s a new concept, which you rarely ever hear talked about. Those challenges to your beliefs are going to be what builds character and discipline. Too many times novice traders develop a “system”, which can pull down profits for 12 days straight right. Then, they take a couple losses, get discouraged and abandon it seeking out something new, wandering from system to system perpetually. Sticking with something is crucial (unless it’s just draining your brokerage account).
I agree 100%, which is why I am the 2014 runner-up for the broken-record award. I constantly have to repeat myself when interacting with other traders on this very subject, because it simply is not talked about. I think at some point of the forex boom (when retail accounts became popular), a simple method had to be developed to try and help out those whom never traded before. How easy is it to draw a trendline, spot a pin bar, look at an oversold stochastic level, identify divergence with MACD – very, very easy. I can teach a 12 year old how to do it in 15 minutes. These are all selling points.
Love this question, especially in regards to harmonics. So let me start there. I spent so many irreplaceable hours scouring the internet to teach myself harmonics. Youtube, articles, webinars, images, etc etc – I found everything I possibly could. I also found the underlying principle kind of cool and interesting. And, I’m not going to lie, drawing a bat or crab pattern on a chart looks cool and professional haha.
However, I will say one thing about everything you just mentioned. I personally feel that each of those tools are simply more subjective than supply and demand. Divergence and Bollinger Bands could be argued to an extent, but FIB, trendlines, harmonics, patterns – all of that stuff is way too idiosyncratic. What is considered a swing point? Where is the low / high of a move truly considered to begin? To me, any indicator is just a derivative of price, and anything you draw on a chart is just an object. The real understanding comes from recognizing areas on a price chart where there is significant interest to buy and sell.
Now, no method is 100%. I’m not saying that my personal approach (which isn’t anything that hasn’t been used/talked about in one way or another before) is fail-proof – hell no it most definitely is not. I can’t stress both of the points enough- primarily that supply/demand trading is some “new” and “fresh” approach to trading, because it simply is not. But, I’ve found that the cleaner you keep your charts, the simpler you make reading them and understanding the market.
A quality post FX. I particularly like your reference to the markets being fractal in nature. If newb’s spent a little more time on that and less with indicators? :20:
EDIT: Oh… almost forgot… to the OP. I’d say EU @ 1.39 short is fair value on the weekly. Just my two cents. :8:
Carter, thanks for taking the time to review my post and comment.
Looks like we’re pretty much in agreement with the educational process, and where emphasis is potentially being incorrectly placed. However, I do subscribe to the theory that if something isn’t broken – don’t try to fix it. In other words, if one can pull money down from the markets consistently using whatever method they have, then why try something new ya know?
On the other hand though, I think there is an odd follow-the-leader mentality when it comes to learning. Whereas, the most prevalent and “talked about” methodologies will be perpetuated by the majority of educators because that is where the demand is. I know when I first started learning how to trade, mostly any type of educational service I could find was based on either indicators, candlestick signals, pure patterns, harmonics, or fundamentals.
It was late in my journey which I discovered the concept of supply/demand – which is quite ironic actually. Why? Because one of the first lessons taught in my ECON 101 course taken oh so many years ago, was this exact concept. Commerce markets are driven solely by the principles of supply and demand. Every purchase you’ve ever made, you’ve subconsciously (or consciously) employed the theories of S/D. Yet, when it came to trading, the notion was nowhere to be found.
This was confusing to me. So I did a bit more research, and had my Occam’s Razor moment. The simplest method was right in front of me, yet the majority of traders I interacted with had never even considered it.
As far as indicators, candlestick signals, pure patterns, harmonics, and/or fundamentals:
-Indicators are derivatives of price. In order for an indicator to fire-off a signal, you’ll need the most recent value of that indicator to confirm/negate – i.e. you need to wait for an overbought/oversold level on stochastic, RSI/MACD, Moving Average crossovers. So, what this equates to is the requirement to wait for the most recent candle to close. What if that candle is 60 pips and an H4 bar? So, you’re telling me that a trader will need to wait 4 hours to confirm/negate a trade setup and potentially give up an additional 60 pips of profit? This hurts my brain.
-Candlestick signals offer late entry, higher risk and lower reward setups. The infamous PinBar is indeed a powerful indication of order flow- there is no denying that. From another post I made:
Think about a 100 pip pin bar. What are the entry rules for this singal, if all other requirements are met? Is it an x amount break of the low/high? Is it a retracement into the PBar? Let’s analyze both:
X amount break of the low/high:
Let’s say that we only enter with a 10 pip break of the pin bar. So, that means, that we would be entering 110 pips away from the tail origination. 110 pips.
X% retracement of the pinbar:
Let’s say that we only enter with a 40% retracement of the pin bar. 40% of 100 would put us @ 60 points in. 60 points away from the tail origination.
Again, this illustrates the notion of higher risk, lower reward. I know this is repetitive, but this is something which I feel a lot of traders aren’t really aware of. I’m not saying that there is a method out there which can put you in a trade @ the origin of the tail – but, what I’m trying to convey is that there are other methods to find lower risk entries. Also, as I’m sure most of you are aware, candlestick signals have so many “odd” requirements on when they should be traded and when they shouldn’t.
-Pure Patterns are subjective and unreliable. Unreliable in the sense of truly describing the underlying buying/selling interest. Take any price chart, any time frame and zoom to capture 2 months of price data. You can most likely draw 3-5 patterns. Now, zoom out 2 more months, then, 2 more months, until you get out 2+ years. How many patterns within patterns within patterns within patterns within patters, within patterns do you see? Where is your reference point? I’ve seen 4 year old trendlines fail in a single day. I mean, a pattern is just lines on a chart, and will never provide anything more than a visual aide to a trader.
-Harmonics are even more subjective than patterns. Rarely does price ever trade in a fashion which sets up a near-perfect harmonic, leaving room for ambiguity. Do you consider the first pullback into XA to be point B or do you ignore it because it didn’t retrace to the 61.8 FIB? What about a long wick which bursts through the FIB level? Yes, your chart looks cool with a cypher pattern on it, but, all those markings do is cover up the real indicator in which every trader should solely be paying attention to – price itself.
-Fundamentals: I feel it is crucial to understand and be aware of event risk. Trading 30 minutes before an NFP Friday on the USDCAD, and being completely unaware of the impact the NFP figure has on the market is dangerous. But, other than major-market-moving economic releases: I pay almost no attention to what’s happening in the news. There are so many figures put out each day, which impact so many different pairs – It’s a daunting task to try and stay on top of everything. Regardless, any information which is released will be immediately reflected in price.
I feel that humans are ego-driven creatures of habit.
Seeing that, there were once traders out there whom attempted to describe the market through their own eyes, and in doing so gain praise from their peers for their ability to predict movements. It’s within this desire that the underlying theories of indicators, patterns, candlestick formations, etc were formulated.
With the initial success of the theories’ ability to foresee movements in price, others seeking education on how to trade simply fell in line like sheep. Again, I can’t stress enough the fact that I’m not saying the aforementioned methods of trading do not work – that is not the case. What I am saying, is that I feel they are novice-level lines of thought and over-simplified tactics.
Say you have a friend who wants to become a mechanic, working on cars.
He comes to you (a mechanic), knowing nothing about vehicles other than gas means go and brake means stop.
What would you recommend he does, in order to secure his future as a profitable auto-technician?
Would you:
a) Teach him everything about how to interact with the engine: how to use a torque wrench, where the coolant goes, how much oil to put in, where the spark plugs are, how to measure the tranny fluid etc
b) Or, loan him a book on internal combustion, explain what happens when the key is turned in the ignition, describe how the alternator interacts with the battery to supply power, show how low oil levels can lead to engine damage, illustrate how the different singular parts of the motor all interact with one another to create a single output - movement, etc
To me, trading with trendlines, FIBOs, indicators, and signals are nothing more than mere tools which interact with price on a chart. Supply/Demand coupled with basic price action principles are more like the latter – in which the trader has a deeper understanding of the underlying reasons behind a potential position he/she might open.
[QUOTE=“torulf39;610573”] FOREX unlimited Congratulations It’s not often one observes intelligent life on a forex forum … The problem when it occurs, so do not forum members appreciate it and they also do not have the ability to understand it. I will appreciate when you share your future observations of the market that you spend a lot of chart to your observations … Good luck[/QUOTE]
Haha, hey now be nice.
There is tons of intelligence out there, I think the problem is just that we as a society have become lazy and just want to be spoon-fed everything.
Approaching the markets with this method takes a bit of hard work on your end to analyze what is truly happening.
Rather than simply opening up your chart, dropping in a trend line, drawing a fibo, finding a simple Pinbar, or waiting for an oversold stochastic.
Appreciate the complement though, but don’t offend others (even if your speaking generally).
In all fairness to FOREX unlimited, his analysis was very sound and I have no idea why he didn’t take the trade on the upside, seems he understands the pair but is afraid to trade it.
I had this pair to mark at least 1.41 a few weeks back based on weekly price action but I also understand the fundamentals may not allow but this has been a good year for risky investors so money is flowing from safe havens into risky assets like stocks and away from safe havens like USD and AUD but if you look at the S&P 500 VIX it has been extremely low which suggests that investors will soon start panic selling meaning a flow back to safe havens like the USD and AUD.
So IMO the EURO is a victim of investor sentiment which is normally never sustainable. If the move is not guided by any fundamentals then it is a weak move. So I would be look for a swing opportunity into a new downtrend. If I am wrong they we are certainly seeing a significant fundamental change in the global economy not witnessed since the crash of 08.
THE BEGINNING OF THE END OF THE EURO…Which no doubt see Brussels desperately trying to save a high value currency in the face of deflation and worse a trade deficit in Germany. The Pound will no likely return to the days of 2 USD to the sterling and eventually the USD will do everything in its power to stay cheap and remain a safe haven for investors at the same time always signaling that this currency is going nowhere.
In the light of that. I will be always cautious about this pair…
It seems like FOREXunlimited knows his stuff and is surely a Zen master.
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