Price or Pattern?

By Michael Storm aka Robinhood

Greetings fellow traders, it’s that time once again for an article that I hope will be helpful to you. I get asked all the time, “What price will be good to short this euro now?” (or similar such questions). These types of questions usually come well after a decent sell setup is in place and we are down 20 to 50 pips from the proper entry, by the way).  I usually answer I don’t know what exact PRICE, but I can pick an AREA… and I follow that with a statement about the PATTERN.  We know what to look for don’t we?  When shorting, you want to look for a HIGH area to short, not a low one because you are sad you just missed a run.  You want to look for an area where a stall or rollover is about to occur or is occurring and you want some resistance (prior congestion, or a moving average that is weighing it down). Take a look at the following chart:

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You can see the first 2 circled areas are where prices fell from and this is prior congestion. A great area that, if revisited, provides a potential shorting opportunity. And of course we can see what happened as well. The 15 min reversal bar was a really great sign. Now look at the 5 min chart:

Here you can see in the circled area a lot of wicks and 3 VERY aggressive sell setups. Notice in time it finally collapsed below the shelf of 1.3522. Now, we do now KNOW how low it will go do we? So, we exercise the scale out approach and book profits in thirds or quarters. Holding the last third of quarter for the bigger move or stop at break even.

For some reason, people seem to be afraid to short the highs, but comfortable in shorting the lows. But think about it…. Where do you want to be shorting? Way up high and waiting for it to go down or do you want to short the lows and HOPE it will go lower??? In addition to this… THINK like a market maker. Don’t put your MAX position on all at once so that when it goes against you you can feel pain and fear. What if you get a GREAT price improvement and say, WOW ! That sure is a good deal now ! Oh, I am maxed out and 20 pips negative… can’t put anymore on 🙁 (that is NOT the way I think).

Here is an example I use often, If you were a purchasing agent for a womens clothing store and a manufacturer called one day with a GREAT deal on dresses that you could retail for 9.99 and they were only going to charge you 1.75… Let us say you ordered 25,000 of them. A month later they called and said we are closing out the rest of those, price is now 1.25 per, what do you do? Well, if your savvy you will buy the balance. See? It is like that with the markets. What if a beautiful sell or buy setup is presented to you and NEVER violated, but you were handed a price improvement? by the way… here is the one hour chart (notice the circled areas)

OK, enough said. Till next time, Happy trading!

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