By Michael Storm– Follow Michael on Twitter
Take a look at the following 1 hour chart and notice the downward sloping channel. In this chart I have circled a few good 1 hour sell setups. This setup occurs when a current candle is breaking through and or closes below the low of the last candle. We want to take a short when we see stuff like topping tails, which are seen in the narrow range candle bodies that have wicks to the upside. This shows us that prices have “tested” the range highs and prices are being REJECTED at those levels. The sell setup occurs, one can enter short and place a stop either above the current bars candle top or the previous one (depending on your risk tolerance). Please also note when studying this chart that once the lows are broken, around the 150.65ish area that we get a huge wide range bearish engulfing bar that shoots all the way down to a prior low area. This you see in the boxed in area (the square). This is why I strongly suggest locking in some profits and buying back a portion of the short into the weakness that developed. The next blue bar goes (basically) 50% of the way into the red bar. That is always a strong sign for me that the drop has temporarily stalled. Notice what happens in the next few hours we have a bottoming tail on the second red bar, followed by 2 bullish bars straight up TOWARDS the prior high, but NOT able to overcome it. Each area that I have circled with an oval represents a sell setup bar and each area with a line just above is where you would put your stop for protection. Remember this is a one hour chart and you cannot trade this without the 15, 5, and 1 for additional clues as to what is happening.
Now for superior information let us look toward the 15 minute chart. My favorite. Again a picture is worth a thousand words and you can see the areas circled where these bars broke the lows and became sell setups. Hopefully you can see why it is important to bank some partial profits on these trades as soon as you can. Some of these earlier ones were stopped out. What I always do is take a third profits and l let the rest go to greater gains or stop out. Keep this in mind: small and insignificant bars, (very narrow range tight bars) are just that, insignificant. It is not good enough really. I want to see a WIDE range bar, and if you look closely you can see the widest bars did have significant “follow through” (confirmation and continuation to the downside) in time to come. Now this current 15 min chart is called a triangle pattern and you can also see buy setups in this as well. This is wonderful for the astute trader, who is disciplined, to take trades in both directions. There is an amazing amount of pips in here. Even with one third losses through stop outs (losses must always be kept small) and 2 thirds gains (some of them being great) you would have had a wonderful day, focusing on this one pair.
And now for our last chart. Take a look at this 5 min chart. I use this and the one minute charts for my entries.
Now again, in this chart I have circled every area that was a decent sell setup and placed a line where the stop should be. As a trader who takes these setups short, we should look at ALL time frames together and carefully watch the close of each candle.
Did you just take a 5 min sell setup? Is it following through? Oh, you say it just dropped 4 bars in 20 minutes and is making bottoming tails? I would consider banking most of the profits and trailing the rest if I were you. Study this chart and see if you can see where you would get short, and bank profits.
After trading for 10 years I can honestly say that this is glaringly apparent to me and happens all day in abundance on every time frame and every currency pair. Now as an exercise, see if you can set up the four charts on one of your monitors and just give it a good long study. You should be able to see periods of consolidation that stretch out for a good length of time and then a break. Either down or up, once its set in motion it usually continues for a while, until it reaches a prior area of support or resistance. That is why I always say, Price has memory. Keep this in mind too: Nothing can just shoot up or down 5, 7, 9 bars without having some kind of pullback or retracement. Next time I will go over potential target areas. Thanks for reading and happy trading to all.
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