II CAN’T SEE IT - in common wit h5% of the population I am red/green colourblind - you are showing me grey and grey. The “Candlesticks” on this site produce the same problem - Give them blue and yellow, or just leave them Black and White ! - Sorry can’t do that - Not "Politically correct " 
Let’s see if this works better…
Blue = resistance
Yellow = support
Right now, I am looking for price action to retrace down into the yellow zone as that would be keeping with the current trend on the AUDUSD 5 minute chart. If price action comes down into the yellow zone and bounces up I would be looking to get long with stops at the previous yellow zone and target 1 at a retest of the highs and then target 2 at a 127% extension of the overall leg.
Thoughts?
jseymore,
first i want to say i am really impressed by your approach. as i looked at your trade earlier i thought to myself, “there’s nothing wrong with identifying patterns and using indicators to
give you clues as to when to enter a trade - but without price action i think that the analysis is incomplete. the more confirmation you have, the better.” and then you came right up with this post and said it before i could.
So, I am going to analyze the GBPUSD charts (the way I would do it in price action - keeping in mind I am NOT claiming to be some kind of guru) and just walk you through my decision making process.
Okay, so the first thing I do is start with the monthly chart. Even if I am going to be trading off of the hourly chart, I start with the big picture.
Okay. So what I see in the monthly chart above is that GU has been on a downtrend between July 2014 to Oct 2016. So, what has been happening for the past year? You could say it has retraced back up to the level that I have marked. Or you could say that it reversed a year ago and is now on an uptrend, but at every S/R level, we have to ask ourselves - is the trend likely to continue or reverse?
So now we are at an S/R level. Let’s look a little deeper by analyzing the weekly chart.
In this weekly chart I have added a rising trendline and illustrated the higher highs and higher lows. You can still see the 3 s/r lines that i had previously demarcated. There was a flag pattern that price broke out of (in a bullish direction). Now we are currently at the intersection of the trendline and the s/r level above. Price had broken through this level and then dropped back in again. So what is it likely to do next?
We don’t know for sure, but it is looking bullish to me. If we saw sideways movement or tiny candles indicating that the bullish trend was losing steam (or more sellers were joining the market) - that would give us some indication that price may not move higher.
Let’s look at the daily chart:
I can’t draw a straight line to save my life on clip2net, but anywho - what I was trying to indicate is that price is not starting to go sideways and cut into the trend line - it’s actually ramping up away from it. I believe we will see this s/r line broken and the trend continue on for a little while. Now, what often happens is that it will break through the s/r line, then drop back down to the line and test it as support. If it holds and even better, drops a rejection candle, that would be a great time to get in a long trade.
Another clue that I am using in the back of my mind is that I am in two trades right now, both of them are shorting the USD. So, I feel that it’s bearish right now anyway. That’s just more confirmation to me.
On the 4 hr chart, we see two rejection candles from earlier today (and an indecision candle right right before those), these indicate price rejected going lower.
Personally, I only use the hourly chart to get a good entry sometimes. Such as, in this one below…we can see that as I type this price is pushing through that level that we’ve been looking at. One of three things is likely to happen. If price is very bullish, we’ll see a strong bull candle print off that line and maybe a sharp rally might occur. More likely though, price will break through, then come back down and retest the level. If it drops a rejection candle (like a pin bar or another bullish candle off of the s/r line) - that is a good sign that it will continue in the uptrend. The other possibility (and I think least likely) is that price will start to falter. It will go sideways, print small candles, an indecision candle, drop back down below the s/r, etc. In which case, we would be seeing a possible reversal.
That is a “top down price action analysis”. Let me know if you have any questions.
If I may, another thing about support and resistance levels is that they work best when they are identified on the higher time frames (weekly/monthly). You still use them on the lower frames, but there are many areas that look like support/resistance on lower time frames that are really just nothing. Price was consolidating for a bit before moving higher or lower, and so it went sideways - but that doesn’t mean that is was sitting on support or butting up against resistance.
Then again, the way I understand it is in reference to how it works with my type of trading. I don’t use the lower time frames - so I can’t say that what you’re discussing in your previous post isn’t valid or true. It’s just not a method I have experience with.
Thanks again for the wonderfully detailed posts @cndlstckchic!
I took a shot at doing some top down analysis myself on the USDJPY. Here is the weekly chart:
I see three major structure levels at 123.83, 112.24, and 101.10. Price to me seems to congregate around these levels for significant periods. I also see a period of declining highs and steady lows so that is telling me that the 108 level is being tested. The bears are pushing price down to that level while the bulls are stepping in and saying “No”. However, the bulls force the price back in subsequently smaller moves, which suggest to tme that they are running out of strength and we will see the 108 level violated to the downside.
If that happens, I am looking for price to drop to the 101 level. It can go either straight down in a sharp downward move, or it can step it’s way down. There is congruence with a harmonic price move and the 127 Fibonacci extension between the 107 and 106 levels, so I am guessing that price may find temporary support in there. I could get long there if I get a double bottom pattern to signal that the downward move is likely to be over and a retracement back to the upside begins.
Alternatively, I can wait until the price comes down to the 106/107 level and retraces back up, then look for a double top to get short and be with the overall market trend. Long story short I am bearish on the USDJPY.
The next image is the daily chart.
Here is it a bit clearer to see the retest of the 108 level and the weaker pushes by the bulls. The red diagonal lines are my prediction for how I think price is likely to fall to the 101 level and it’s just a series of harmonic moves. The green rectangle is my kill zone for getting into a counter-trend trade with a 1:1 risk/reward ratio with targets at 111.90 and stops at 101.03. The rationale for stops being down there is that if price goes straight down to there then it is not going to come back up to retest the lower highs being put in currently.
The rectangle is an area of congruence between a harmonic price move and a 127 Fibonacci extension off the move from around 113 to 107. Once price comes into this area, I would go down to the hourly chart to look for an entry signal such as a double bottom. If I get my entry then I would come back up to the daily chart to set my stops and targets.
The only downside is that trading the daily charts is a bit longer than I like to be in trades. I want to be in and out in a matter of a few days, 5-6 tops. Perhaps I need to spend time practicing analyzing price action starting at the daily, then hourly, then 15 minute charts for entry.
What do you think? Is what I posted here sensible?
Update on the GBPUSD trade I posted a day or two ago:
Market came up and stopped me out right before reversing down and hitting my first profit target, almost taking out the second profit target as well. I am still bearish on this pair as price as starting to come back up, but not seeing a trade opportunity yet.
So what did I learn from this trade?
The double top/bottom does seem to be a valid reversal pattern. As a standalone signal, I don’t think it is a very sound tool but when combined with structure analysis it could be a very good entry signal. In the future, I think I will place my stops at structure versus just taking a 113% Fibonacci extension of the previous impulse leg.
I will also be looking for profit targets to coincide with structure levels as well. I am thinking of eliminating the RSI indicator for now and just backtesting entries on double tops and bottoms that correspond with structure. For example, if a double top forms along a resistance line, then I will take that as a signal that resistance is holding and that I should be getting short with targets at support zones and a stop at the next higher resistance line. Also, if I cannot get at least a 2:1 risk reward ratio with stops and targets at structure then I will not enter the trade.
I know it’s generally not a good idea to modify my trading strategy based on one trade, but I wasn’t super confident in arbitrarily placing my stops and targets at Fibonacci levels. It seems the market respects structure a lot more than Fibonacci levels. Now if I can structure and Fibonacci at the same level that would give me a stronger entry signal.
Yes I agree with these as the important S/Rs for the time being. I also agree that price had been bearish, in fact I am in this USDJPY short as you may remember. However, with the Brexit stuff going on, apparently USD is strengthening. So, I’ll have to reevaluate based on what the charts continue to tell me. But so far, so good, on your analysis.
I also agree with your projected price movement, it is likely that the downward channel (trend) will continue. Pay attention when it is at the top or the bottom of the channel, watch out for breaks - in which case it is likely to be dramatic.
Many people feel that the daily chart trading is too slow, and I understand that. But if you take your signals and price action from the daily chart - you can use the 4hr or even 1hr charts to get in some smaller time frame trades (but while still using the more solid input from the daily charts).
Does that make sense? Your analysis is very good overall. Just give that top down analysis, then find your entry signals on the lower time frames when it is congruent with positive trade conditions on the higher time frames.
I can’t speak to the Fibonacci aspect of your trades because although I did research it a bit when I first started trading (and I know it is legitimate - many traders use it with great success) - I just learned to do without it I guess so it’s not something that I am very knowlegable about. Good luck! I’m enjoying watching your process…
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It makes a lot more sense now than it did a few days ago. I am actually quite excited to start demo trading based on what I have learned from you so far. Now I just need to learn how to use MetaTrader over NinjaTrader. Or find a broker with flexible position sizes that supports NinjaTrader…
When I get home from work tonight, my plan is to fire up a demo account for trading the EURUSD, GBPUSD, AUDUSD, and USDJPY pairs. I will be spending the first hour of my trade session down my top-down analysis and identifying the market structure and overall price bias, then dropping to the hourly chart to look for entry signals.
What sorts of entry signals do you typically look for? I feel pretty good with double tops and bottoms as entry signals, but those don’t happen all that often (my backtest on the EUR shows about maybe 30 double tops total over a year, and not all of them went with the higher time frame).
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Honestly, rejection candles are the easiest to spot - but they have to be on a key spot. For example, here is a pin bar rejection candle on a daily EURAUD chart that was reacting to a weekly resistance level.
As you can see, it dropped down to hit a 1:3 target. (I reprogrammed my Fibonacci tool to measure my risk reward for me instead since I don’t really use it…the “entry” point is set at 1/2 the size of the signal candle. That is generally what we shoot for - but it doesn’t always retrace back that far…as it did not in this case). In this example, if you had entered the day after (or after NY close) of the pin bar candle as you are supposed to, you would have hit target in 2-3 days.
So…you want to trade on the hourly chart. So, lets say you check your daily chart after NY close, and you saw that pin bar rejection candle. If you zoomed in to the hourly chart, it would look different (see below), but there are two logical points of entry to get in that trade.
Ignore the existing risk/reward tool on the above chart, because I want to show you how you could get in this trade and make your money faster - still using the daily chart as your trigger. So, you’ve seen the rejection candle off of the weekly level on the daily chart and you want to go for it. So, next you start watching the lower time frames like the 4hr or 1hr, and low and behold you had that excellent pinbar on the 1 hr…so here’s what your risk reward would look like on that chart:
You never get the chance for that 50% retracement entry, so you have to be a little fluid, maybe you jumped in at the first pullback on the hourly chart instead of waiting for the pinbar to develop - it’s your choice how you get in and when. But your outcome is much more likely to be successful if you are basing your decisions on the stronger data from the daily chart.
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Other examples of a possible entry signal:
On the USDCAD chart we have an indecision candle which touches the weekly resistance above, followed by a bullish candle that breaks through, followed by a bearish candle that brings price back under. So, there was indecision followed by an attempt to break above the level followed by an even stronger rejection. When you see something like that happen in an already existing downtrend, that’s a strong signal that the downtrend is likely to continue.
you could then after seeing that occur, go down to your lower time frames and look for an entry opportunity to go short.
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Thanks again @cndlstckchic!
There is a lot to digest here, but I think I have a good handle on it.
I think with this trading method that backtesting is probably not going to be as important for me anymore. I am going to start demo trading tonight when I get home, probably with a demo account from OANDA. I feel that I have the start of a trading plan in my head right now that I can use to demo trade.
My trading sessions run from 6:00 PM to 9:00 PM CDT Mon-Thu nights. Some days work is slow and I can check on my trades during the day, like today, and other times, I can’t. My original thinking was that because I am starting with a small account balance ($2,000) that I should look to trade lower time frames because with the smaller movements my stop loss would be smaller allowing me to trade a larger position size because of less exposure to risk.
I don’t plan on opening a real money account until closer to March, so I have a bit of time to play with a couple of demo accounts. I plan to have two demo accounts: one to trade the lower time frame (overall analysis of the daily, stops / targets in the hourly, and entry on the 15 minute if needed) and one to trade the higher time frames (weekly overall analysis, stops / targets in the daily, and entry on the 4 hour if needed). I guess whichever works the best over the next 5 months will be how I trade real money.
Now time to learn how to recognize rejection candles, indecision candles, and continuation candles 
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Now the fun and heart ache really begin 
best of luck to you…
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Hey J, I would like to recommend a trading exercise. Take all of your indicators off of the chart. then look at the following.
EUR/USD Daily
What do you see 5/23/17 - 6/26/17
Now what do you see 6/27/17 - 8/3/17
And finally 8/3/17 - 10/12/17
The Ever Cryptic VIPER
I always love exercises
EUR/USD Daily Chart
5/23/17 - 6/26/17 - In this segment, I see price bouncing around 1.1199 level. The market first breaks below that level, then bulls come in and reject that level on 5/26/17 followed by small rally consistent with the overall trend. The rally loses momentum and price retraces back below the 1.1199 level, then starts to climb back up.
At first glance, I would have called this consolidation, but when I look closer I see an upward rally, followed by a retracement, then another upward move into the 6/27/17 - 8/3/17 segment.
6/27/17 - 8/3/17 - This segment is a very strong upward rally. Huge amount of upward movement. Looking at this segment I wish I had been further along in my career and could have caught this move. A 701 pip move in a fairly painless trend continuation move - I am guessing that is what every trader fantasizes about in the shower.
8/13/17 - 10/12/17 - I see a continued move up followed by a rotation in trend. It almost looks like a head and shoulders pattern, which is a clue that the market is going to either retrace or rotate into a full bearish trend. We could look at the 10/6 to 10/12 move as being the second retracement in the bearish trend or as the completion of the head and shoulders pattern (not very confident in that call as I haven’t really studied that pattern). Otherwise, we could be seeing brief consolidation before another upward move. I don’t know that I have enough clues to really call it at this point, I would have to wait and see if price breaks above 1.2000 or below 1.1700.
Ok, now bear (that’s a pun) with an old dude for a bit. Now, look the three again, and describe them, one at a time without any whys, almost’s and wherefores, just what. Try three or four words max.
The Ever Sphinx Like VIPER
Ok, here we go 
Segment 1 - Sideways movement, slightly up
Segment 2 - Bullish trend
Segment 3 - Potential reversal, sideways movement
Now you are thinking like a trader and not a big fat overpriced anal ist. When we look at a chart, this is exactly how we should think. Once I started doing this, it helped keep me OUT of markets that would cause losses. I could identify right away, what market and what system to use, some times the system used is one that cannot be taught, it is the SOH system, and even some high payed pros cannot master it, but it does keep you out a of bad trades. Once I cut my nonprofitable trades, it really got easier.
The Ever Trading The SOH System VIPER
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Ok, so the KISS principle really applies here.
I do tend to over analyze things and make them much more complicated than they need to be.
So extending this exercise to actually executing trades I would have sat on my hands for the first segment and then looked to get long after the first bar of the second segment because that bar broke resistance to the upside.
That third segment I want nothing to do with because the market isn’t clearly sending a strong signal. I want to stay out of this market until I get a clear directional bias from the chart, or maybe look to drop down to a lower time frame to catch a few small trades here and there because there are still some decent sized swings in there. For example, I see a possible long trade on the 4h chart for EURUSD - price had just broken structure to the upside and is retracing back into previous resistance (resistance becomes support and all that). Or did I just overcomplicate it again?
I notice that my brain tends to overthink things… I guess I am going to need to work on that as well in my demo trading.
Yeeeeeeeeesssssss, there were folks who blew up, then they say well I got sick, had personal problems, my left eyeball fell out, etc. Then they will say, yup that trade is now coming back my way, hmmmmmmm 800 pip drawdown, and its coming back, ok buckeroo.
So the one hour deal, you need to find a way to trade within the 1 hour price/time, and not “the” 1 hour price/time. Sometimes 15min will do it, but more often than not you might end up 1min for trend and 5 sec entries and exits. But since you are on a sim. play around and see what you come up with. Look for 5 - 12 pip tp and 3-8 pip stop. Find the most volatile pair with the tightest spread, this can change from week to week. OANDA has tools for this so you don’t have to calculate it yourself.
The Ever Inscrutable VIPER
Sounds like these people can’t take responsibility for their trades.
Holy cats that seem very fast. 5 seconds in a trade? I’ll try it in sim, but on the surface, it seems like it would be too fast for me. I am sure once I get my skills practiced up it would be fine, but right now, that fast of decision making is a bit intimidating.
This doesn’t make a lot of sense to me. 12 tp and 6 stop makes sense, that’s 2:1 reward ratio. But with a 5 pip take and a 6 pip stop that would mean you are risking more than you lose… so you would have to be right more than 50-60% of them versus 40% with a 2:1 reward ratio.
I am guessing that if I want a better reward ratio or more time to make decisions I need to be more patient and take longer trades.
I am hoping I am not coming off as disrespectful or dismissive by asking questions. I just really, really want to make sure I don’t end up in the same group as 90% of all other forex traders.