REVERSAL! That’s the name of the game for the week ahead for the Aussie dollar. The pair is currently in a corrective pattern as prices have overlapped into the previous price zones – touching the previous swing high of the previous trend but ending with a bearish pin bar soon after, as indicated by the horizontal purple line.
Many traders were worried about the potential development of a bullish hammer candle on Thursday, however that set up was nullified as the high of Friday failed to penetrate past the hammer’s high (as highlighted in the chart) and Friday prices closed lower to 0.89788. Stochastic also show a bearish trend reversal and hence a valid signal for a short here. Look for short entries using a lower time frame momentum reversal or other price entry strategies.
Our job as traders isn’t to impress others with our extensively drawn charts or complicated price pattern, but rather our job is to find high probability trading opportunities and make the most of them. Trading is simple as long as you have the patience and discipline to make these simple decisions through high stress situations. Similarly, here is a simple illustration of a high probability trade opportunity for everyone out there who have been patient. NZDUSD is currently in a horizontal ranging pattern which may make its final Wave – e of the correction – hence a high probability reversal opportunity; and for a conservative entry place short entries 10 pips below the low of the previous bar at 0.82390, and Stop loss 5 pips above the high of the previous bar at 0.83150, a conservative Take Profit at 0.81150. Your reward: risk ratio is approximately 1.63:1. Trailing stops past the TP level can be used for a potential trend breakthrough.
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Time to swing the bat! Because we are now in SWING play with USDCAD. After breaching the previous corrective high on the weekly time frame, we are now in trend play using trend trading strategies. As indicated by the ADX indicator crossing past 25, along with consistently higher prices sticking closely to the upper Bollinger band, prices are in a strong trending pattern. However, last week’s prices have failed to push past the 50% retracement level, and have tested and rejected the level twice. If we use traditional Elliot wave theory, there is a possible formation of wave 3 in a 5 wave move, and high probability price targets for the conclusion of wave 3 is highlighted in red in the chart below:
If we zoom in to the daily time frame, we can clearly see that there was consolidation within the last two weeks as prices retraced back into its previous price zones, and as with most corrective formations, we expect to see a three, or five wave move corrective wave sequence. If the bearish pin bar formation completes, we may begin the see the initiation of the C-wave of an ABC corrective pattern. If prices push past the previous swing high, then expect the bullish trend to continue! However, traders beware! As Monday is typically a day for Market Makers to position the markets in advance for the move ahead, hence there may be many false signals in the market. It should be noted to wait until the end of Monday’s trading session before entering a trade.
Focus of the week: EURCHF
As always, the first question to ask ourselves is this: is the market ranging or trending? Answering this question immediately eliminates half the trading methods which are ineffective, and allows us to focus on strategies which ARE effective. Why only trade one type of market when you can trade BOTH!
Looking at the daily chart may seem chaotic at first, but breaking it down step by step:
1) We know that prices zones have overlapped multiple times
2) Our ADX signal currently sits at 15.3500, significantly below the 25.00 level (a level indicative of a trending market)
3) Bollinger band widths have not expanded throughout this period, and has remained constant (this shows that variance has remained constant throughout, and thus prices have moved in a constant range)
Just from the three facts above, we can conclude that the market is in a ranging mode with high probability. The blue equidistant channel lines are drawn from past data, and helps to gives us a general sense of where the market may go. Channel lines should only serve as a general guidance, and are not an imperative requirement. Humans are lateral thinkers, we think in price levels.
So now knowing that the market is most likely in ranging mode, we can begin to select our trading strategies accordingly. In ranging scenarios, one may choose to use a dual time frame stochastics reversal strategy that is alerted (but not triggered) when the upper time frame (daily) stochastics reverses from an overbought/oversold zone. The trade is then triggered using a lower time frame (1 hour or 4 hour) stochastics reversal in the same direction from an overbought/oversold zone.
Hence, in the case of the above EURCHF pair, one should wait for daily stochastics to show a bullish reversal from an oversold zone and consult the 1hr or 4hr time frame entry.
As always; Stay hungry, and keep the pips rolling in.
This article was written by: Ming Wu
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