Hello Forex Traders,
The title of this article almost sounds like a sequel to a second part of a movie. This time it is not a second part of a movie but of trade setup 🙂
First of all, FOMC meeting minutes will be released later on Wednesday – yet again. The previous release does not seem so long ago… In any case, you know the drill… The markets tend to slow down in their movements before FOMC and have the potential of spiking up and down after the release.
I received an excellent comment on yesterday’s article and I highly encourage others do the same and voice their questions and opinions. The comment suggested the following:
a) a reversal on the GBPAUD is not yet confirmed before price breaks the daily and weekly support levels
b) price make the retracement by going sideways and then continuing with the trend instead of making a bigger reversal
That last point is absolutely vital and very important.
a) A currency can correct a trend or impulse by going sideways. I call this a passive retracement. In these cases a Forex trader will see a triangle, wedge, flag, range, etc.
b) A currency can correct a trend or impulse by actively retracing against the main direction. I call this an active retracement. In these cases a Forex trader will price move a lot more in terms of pips.
c) Most often the difference between active and passive retracements can be identified by whether price can break through the major support (uptrend) or resistance (downtrend) levels.
The GBPAUD certainly has that key daily and weekly level to deal with and the jury is still out on this currency pair. Depending on how the Forex traders draws the trend line, a break of the support could be taking place this morning. In that case the odds of a reversal taking place have certainly increased. Forex traders could then expect a reversal back down to the 382 / 500 / 618 Fibonacci retracement levels. At a minimum, the chances of the currency pair building a triangle or wedge has disappeared and the risk of a passive retracement are lower. One of the reasons why I did think that a reversal will occur now is due to time factor analysis (explained in yesterday’s article). BUT let’s see: 1.6870-80 is key as it’s the daily bottom.
Once we Forex traders see a confirmation of the reversal, a deeper retracement will most likely take place down to any of the Fib levels (of the entire upmove). In that case the GBPAUD certainly does look a potential Gartley pattern, a deep crab pattern to be exact. The 886 Fibonacci clearly stood in the way of upside continuation. The 886 Fib stood in the way of the downside as well. That is a potential deep crab chart pattern and the targets of the pattern neatly matches and aligns with the Fibonacci retracement percentages. Take a look at the screenshot to see how that pattern would look like. In theory any Fib from the 382 down to the 886 Fib could all be bouncing spots for the next move up to 1.92-1.94, which adds up to another 3,000 pip move.
There are various entries we can use depending on the time frames, our trading philosophy (reversal, range, trend), and our entry methodology. With the trend traders will wait for the break of the weekly and daily support, but reversal traders already entered shorts earlier.
Here are some entry ideas:
1) In case of a bounce – short the currency close to the top
2) In case of a break – various entries:
3) Direct entry order – short the currency upon a 3 wave correction at 618 and 786 Fibonacci retracement levels
4) Price confirmation at Fib levels – short upon a price action confirmation signal such as engulfing twins and a pinbar on 1 hour chart, which occur at the Fib levels
5) Price confirmation at Fib levels – short upon a price action confirmation signal such as engulfing twins and a pinbar on 4 hour chart, which occur at the Fib levels
6) Confirmation of turn at Fib levels – short upon the first break of the hourly support fractal which indicates the first lower low on the 1 hour chart
7) Confirmation of turn at Fib levels – short upon the first break of the 4 hour support fractal which indicates the first lower low on the 4 hour chart
8) Trend line break – short the currency as soon as the upward sloping 1hour trend line breaks
9) Trend line break – short the currency as soon as the upward sloping 4hour trend line breaks
10) Hook back – short the currency as soon as the currency pullbacks after the 1st break on 1hour
11) Hook back – short the currency as soon as the currency pullbacks after the 1st break on 4hour
This example shows how a trader can split their position in multiple smaller parts. No trader needs to risk everything and anything on particular spot. Forex traders can risk smaller units and add risk as soon as they get more confirmation. That is the great thing of scaling in and scaling out: Forex traders loss small when they lose and win big when they win. And that is the essence of trading. Using 2 different time frames for entries and various strategies for entries, a Forex trader can achieve this.
What is your favourite method of entering a trade? Let us know your opinion down below!
Thanks for sharing this article and Good Trading!
Winner’s Edge Trading, as seen on: