Understanding Price Action by Chris Capre

tonyro44 · October 31, 2014, 3:11am

Yes i have USD/CAD long and i will be out by 1400 GMT , and week-nd here i come. :35:

brendad · October 31, 2014, 8:01am

I also like to trade USDCAD mate. Looks like pair may going down. Better to close the trade with + pips.

brendad · October 31, 2014, 8:04am

Ha ha Perry, Similar thing happened to me Cable. By the EU and GU may indicate reversal patter. I am not gonna long for the moment. Patience is the key. Have a lovely weekend guys.

tonyro44 · October 31, 2014, 9:56am

Thank you for the wake up call i will do brendad , and i will be i the plus.

Target_Trader_FX · November 1, 2014, 3:47am

Morning Guys! …it’s been a while since I last visited the forum… hope everyone has been positive … anyways yes I have 2 open orders and up about + 400 pips on USD/JPY ,just too bad I am using a small account with micro lots lol… I traded the breakout of the range (on the 1 H chart), right after the FOMC and I am still trailing my stop…I did not set any target for this trade…

Have a great week end!

brendad · November 3, 2014, 8:03am

Morning Guys,

HA HA. Look at the USDCAD now . Market never behave according to our thoughts. Going to try a EU short. Market not that bad today. Good luck for this week

brendad · November 3, 2014, 8:04am

Welcome mate. Well done with +400 pips. See you around

systematicfx · November 3, 2014, 8:43am

there is about 10 yard of euro expiring this week at 1.2500 so not too sure it s going to move much till Thursday.

2ndSkiesForex · November 3, 2014, 1:33pm

certainly possible. there is definitely a fight going on around 1.25. the push below looks like an attempt to flush some stops, but since then, not much follow through on the bear side

eddieb · November 3, 2014, 5:06pm

2ndSkiesForex:

This is a new post I’ve written to help you with identifying high probability breakouts using 3 simple price action clues.

Breakouts are some of the tougher environments for traders, and understandably so because they represent potential, but often fail.

I’ve already written an article for trading breakouts Post-Breakout, but what about the Pre-Breakout moments where you have to make that key decision to trade it or not? How do you identify them and what are the key elements that precede strong breakouts?

This is the key point of this article - to give you 3 tips for identifying a soon to be strong breakout so you don’t get trapped in a false breakout.

I will go over the three elements you will want to find before considering a breakout, then briefly highlight what is behind them from an order flow perspective. By learning to spot these clues, you can position yourself to trade higher probability breakouts and capture a larger portion of the upcoming move.

1) Well Defined Support/Resistance Level
The first pre-requisite to identifying a healthy pre-breakout situation is having a clearly defined barrier in the form of a support or resistance level. The classic case is when you have a trend in place (lets say uptrend) and then the price action runs into resistance at a key level.

Ideally, you want there to be at least two touches on this level before defining it. The more horizontal and neater this level is - the better. But it should be noted, this is just a pre-requisite and generally by itself not enough to identify a healthy breakout setup. The reason for the two touches is to identify a sticking point where players are parked and what level they are defending that the (bulls in this case) are unable to penetrate.

By finding both parties present, we have the environmental potential from an order flow perspective to create a healthy breakout. In this example, the sellers are clearly holding a price they want to defend and have stops just above it. By them staking their defense in a clear location, it communicates where their orders and stops are likely parked. It is tripping those stops, along with bringing in new buyers that is the goal of the bulls.

Below is an example of a clearly defined resistance level after a downtrend and consolidation period, communicating there are bears clearly defending a level.

Image 1.1

2) Pre-Breakout Pressure or Tension (Squeeze)
The second element you want present prior to a breakout is a pre-breakout pressure or tension that manifests as a squeeze. This pre-breakout tension is highly important because it creates a friction and pressure upon the defenders (in this case the bears). As the bears realize their rejections off a key level are getting smaller, while the bulls continue to gain more upside and territory, it causes a friction in their minds that forces them to make a critical decision (either stay in and defend, or exit the market).

As the room gets smaller and smaller for them to work with as the bulls squeeze the bears out, sellers defending a level will often exit early, leaving the defense to those who are not realizing the game is up. This further weakens the defenses at these levels until very few are left to carry the burden.

You can easily identify a price action squeeze and this pre-breakout pressure, or tension, by the price action forming higher lows in attacking a resistance level, or lower highs when attacking a support level. This is a combination of the current bulls willing to buy up the instrument at a worse price, along with new bulls wanting to get long before the breakout. A good example is presented in the same chart which I will zoom in on to highlight.

Image 1.2

3) 20EMA Carry
Another key element you will find prior to breakouts is the 20ema begins to carry price leading up to the key resistance or support level that is being defended. This is not so much that traders are placing orders there prior to the breakout (although many will), but also a visual representation of how the squeeze is taking place.

Just looking at the chart above, we can see in the beginning, after the first rejection off the key resistance level, price penetrated nicely below the 20ema. But as we get closer and closer towards the right where the squeeze is taking place, you see the market barely go below it for more than a single candle before resurfacing.

Also, you will notice how the first few times the rejection approaches the 20ema, it breaks through after one candle. But towards the end many candles start to float above it where some traders are entering in anticipation of the breakout.

Another really good example was one I traded and blogged about ahead of time with the AUD/USD on the 1hr time frame. The pair had been trending up for 110 pips over two days, but ran into a key resistance level that it got stuck on at 1.0081 (image below).

Image 1.3

Using the example above, notice how the 20ema in the middle of the chart is penetrated about 20pips, but then as we get closer and closer to the resistance level and the squeeze begins to happen, notice how the 20ema begins to carry the price action, and the penetrations get smaller and smaller?

This is a combination of very few sellers defending the level, while the bulls in anticipation of a breakout (realizing they have control) are likely entering new positions to get in ahead of the upcoming breakout (I was one such trader). Eventually the pre-breakout pressure and tension became too intense and the bears gave up when the bulls made their push, tripping stops and creating a large breakout bar with a strong close.

In Conclusion
Breakouts can offer highly profitable opportunities when you can position yourself well. But to do this, you must be able to identify highly probable breakouts with these 3 key elements which are;
1) Well Defined Support/Resistance Level
2) Pre-Breakout Pressure/Tension (Squeeze)
3) 20EMA Carry

If you can learn to spot these key elements prior to a breakout, along with reading various other price action clues, you will find yourself entering in higher probability breakouts, increasing your success and profitability. You will also find yourself not getting trapped by false breakouts which can wreak havoc on your account and confidence in trading them. Thus it is critical to read and identify the key elements prior to a breakout.

Great examples

Target_Trader_FX · November 4, 2014, 6:18am

Thanks mate …just closed my position today for + 480 pips after the market decided to retrace and took out my stop… I will wait for the retracement to be over and some pin bar to rejoin the trend … Also ,the 110 level on the daily is a major support now…

Target_Trader_FX · November 4, 2014, 6:54am

Hello,

Just noticed AUD/NZD has been ranging its been 3 days on the 1 hour chart ,and that exactly comes prior to important news events like NZD ‘Employement change’ today … The MAIN trend is up and there is also price action squeeze on the DAILY and it looks like it will breakout soon…I will only look to buy the pair if it breaks out the resistance of the range on the 1 H time frame … ENTRY should be at 1.13150 (Green line) , STOP : 1.12800 (Red line) , Target : 1.14000 … I will be trailing my stop of course along the way and move to BE after 50 or 60 pips profit

What do you guys think ?

perryfx · November 5, 2014, 8:57am

Hey mate,

What happened to the trade ? I trade only majors. Not good at other pairs.

perryfx · November 5, 2014, 9:03am

Trying a small long EU long trade with this very active market conditions

Target_Trader_FX · November 5, 2014, 3:43pm

Hey perryfx

I trade all pairs majors and crosses, and GBP/JPY is one of favorites because it when it trends ,it keeps going in the same direction and never looks back lol

About AUD/NZD setup , my BUY STOP entry did NOT trigger after Good employement reports for NZD ,which sent the AUD/NZD breaking out the other way! … But I did not take this breakout because it was simply against my rules trading against the main trend… anyways the market will always be there and there will be tons of similar setups … but I must say, had I took this counter trend breakout , I could have been positive by + 100 pips now … after all it is the news that move the market so I try not to trade the breakouts unless there is some force supporting it…

Also , to increase the chance and improve risk/reward ratio , I trade the breakout only when the 20 EMA carries the price in the direction I want it to go (EMA carry + Main trend Breakout), and then after the breakout occurs, I keep trailing my stop using the 20 EMA, which proved to be a very good strategy so far

perryfx · November 7, 2014, 6:18am

Target_Trader_FX:

Hey perryfx

I trade all pairs majors and crosses, and GBP/JPY is one of favorites because it when it trends ,it keeps going in the same direction and never looks back lol

About AUD/NZD setup , my BUY STOP entry did NOT trigger after Good employement reports for NZD ,which sent the AUD/NZD breaking out the other way! … But I did not take this breakout because it was simply against my rules trading against the main trend… anyways the market will always be there and there will be tons of similar setups … but I must say, had I took this counter trend breakout , I could have been positive by + 100 pips now … after all it is the news that move the market so I try not to trade the breakouts unless there is some force supporting it…

Also , to increase the chance and improve risk/reward ratio , I trade the breakout only when the 20 EMA carries the price in the direction I want it to go (EMA carry + Main trend Breakout), and then after the breakout occurs, I keep trailing my stop using the 20 EMA, which proved to be a very good strategy so far

Looks like you have a very good trading system. I also have a similar system based on the Chris’s learning materials. Glad to have you here. See your more activity in this thread

perryfx · November 7, 2014, 6:23am

My previous EU long didn’t work well. SL hit with 20 pips. But not bad for the week as Cable did the job for me with nearly 200 + pips. Closed 3/4 and gonna hold this trade till next week.

2ndSkiesForex · November 7, 2014, 9:00am

Hola Traders,

Babypips recently did a Q&A with me about my trading, what new traders need to know, mentoring students and more.

Click on the link below to see the interview:
Chris Capre Forex Trading Interview with Babypips

Kind Regards,
Chris Capre

Target_Trader_FX · November 7, 2014, 6:51pm

Bad luck for the Euro mate , it was crazy with news these 2 days especially with Mr Draghi’s speech ( ''Mr Trend changer ‘’) lol … and the NFP
And good job with the cable … anyways it has hit a resistance level at 1.58850 near the close of the market, and it seems like it is ready to go down again all the way to 1.58150 ,but maybe we should wait for more confirmation on Monday… until then have a great week end

brendad · November 11, 2014, 9:00am

Hello Guys,

Very boring market. Like to short EU. But don’t like the current PA.