GBPCAD
This was a very high quality setup that introduces a new concept to this thread. That is the concept of repeating price action. In many cases you will have a PA reversal candle form. With each successive formation of that same pattern, it increases the quality and the probability of the trade. In this case when the first pin bar formed we had a good 3.5 start setup form. We had a few downsides such as the overhead minor resistance as well as the pin bar that formed being somewhat smaller than the previous bearish candle. What it had going for it was textbook trend, volume confirmation, and solid trend line & horizontal support levels. The next day we had another pin bar form, this increases the case for going long and the quality of the signal. The next day we had a doji, essentially a neutral candle. I had placed a retracement entry just above the 2 support levels that got trigger on the doji candle. At this point we easily had a 4 start setup. After the doji we had another very nice pin bar form. I didn’t do this myself, but an attentive trader could have added to their position on that 3rd pin bar as the trade was verified once again for the bulls and the quality of the setup increased. I gave it a 4 star because of the overhead resistance was more than just simple noise, and the pin bars were never very large. It is a solid 4 star and an argument could even be made for a 4.5. star.
I also wanted to introduce a new volume idea that can help determine the validity of a setup. The one method we have talked about here is looking for higher volume on the reversal candle. That means the pinbar, engulfing bar, 2 bar reversal should have higher volume. That tells us that there is volume behind the reversal. If there isn’t volume behind the reversal, it may no be a reversal. In this chart I introduce trend volume. Here we are looking at long term volume against it’s long term price trend. If you see a long term trend in play and are worried that if you get long, you may be getting on the train too late and the trend could reverse on you, one of the best ways to find out if a trend is losing steam is by looking at the volume. To get confidence that the trend still has plenty of strength left in it, you want to see steady or increasing volume with increasing price. If you have increasing price and falling volume, this is a tall tale sign that the trend is running out of steam and could be fixing to reverse. The same goes for downtrends, you want to see volume increase as price falls. If price is falling and so is volume, the downtrend may be running out of steam and a trend reversal could be near. This doesn’t mean don’t take a good price action trade, but you may need to treat those trades extra defensively to protect your capital.
You will not find a professional trader that see’s signs of weakness in price and just blindly treats that trade like every other trade. This is why naked trading really doesn’t work in the long run. Trading naked or ‘simple trading’ ignores all of the underlying factors of the market and treats every trade the same. Unfortunately the markets aren’t black and white, true or false, yes or no… you get my point. When the fighter enters the ring, he has already studied and considered his opponents ‘underlying factors’(strengths and weaknesses, tendencies), and will adjust his technique to exploit his opponent based on those underlying factors. It would be ridiculous for a fighter to think he will get through his entire career by using the same punch combination. If this is true for fighters in the ring, it is 10 times more true in the markets. It is “ok” to start with a 1-2-3-a-b-c rule set, “set it and forget it” mentality, but you eventually need to graduate from the elementary grade skills and come into high school and higher learning in the markets. There are times to trade very defensively and risk small. There are times to not set a take profit, play it by ear, and give your trade plenty of leeway. This specific trade is a perfect example where I have very little defense in this trade, I have big risk on it and am playing it very aggressively. I have been seriously considering removing my stop loss and letting the price action/volume tell me when the trend may be coming to an end.
For those who have believe that price action does work but who were told that naked charts are all you need, and have found that naked charts don’t work, I encourage you to stick around this thread and stop by frequently. Here we take a look at not only price itself, but the many other dynamics of the market such as trending, momentum and volume. I have a quite a few techniques in my hip pocket that I am going to be slowly introducing to the thread here over the next few months. They will fit perfectly on the foundation that I have been laying over the last 3 months.
