PRICE ACTION: ENGULFING PATTERNIn this post we will analyze the Price Action engulfing pattern, one of the main candlestick patterns, which traders appreciate for its reliability and high percentage of success rate. Confirmed by other factors (key levels, indicator signals, fundamental preconditions), the engulfing pattern can become an effective tool for gaining profit.
✴️ What Does This Pattern Tell Us?
The engulfing pattern (outside bar) is mostly a reversal pattern (although in most cases it can also indicate a trend continuation). It looks like two candles, the first of which is small in size, and the second is a large candle with a body larger than the entire previous candle and directed in the opposite direction.
From the point of view of the crowd movement, this pattern means that the strength of the current trend is running out (as evidenced by the small size of the first candle being engulfed). The crowd does not know in what direction to move and, figuratively speaking, is treading on the spot. The appearance of a powerful candle, which absorbed the previous one and closed in the opposite direction, marks the beginning of a new, strong trend.
The example above shows that the bears, having failed to find support, stopped the downward movement, after which the bulls, having organized an impulse in the price growth, collected stop losses of traders who opened positions on the downside, when the price was still moving downward by inertia at the beginning of the reversal candle formation. After the reversal and knocking these traders out of the market, the bulls finally strengthen and a powerful uptrend is formed.
There are several mandatory conditions that a pattern must meet in order for its signal to provide the maximum probability of working out:
1. There must be a downtrend or uptrend in the market before the pattern itself. The movement can be small, but its presence is necessary.
2. The body of the second candle must be of a different color and direction (bearish after bullish and bullish after bearish). Shadows may not be engulfed, but then the signal is considered weaker.
3. The body of the second candle should have a contrasting color to the body of the first candle. The exception is when the body of the first candle is very small (doji).
In addition to the basic rules of determining the pattern of the outside bar, there are other important nuances, taking into account which traders are more likely to increase the efficiency of their trading. It is worth avoiding trading in flat conditions. In a sideways movement, engulfing patterns are quite common, and if you trade each of them, you can get a lot of losing trades. A reversal pattern implies the presence of a trend. If you open a position on the signal of the outside bar only after a clear movement, the number of false entries into the market will be significantly reduced, respectively, the overall percentage of profitability of trading will increase. It is necessary to take into consideration the overall market situation before opening a trade, it is necessary to evaluate what happened to the price of the asset earlier.
✴️ Trading Engulfing Pattern
If all conditions are met and the signal is strong enough, you can enter the market. Let's consider how exactly trading on the outside bar is conducted. It is better to enter a trade on the engulfing pattern by a pending stop order. It is placed a few points above the maximum of the bullish signal candle, or a few points below the minimum of the bearish candle. The breakout of the signal candle will confirm the market reversal and the validity of the open position.
✴️ Setting Stop Loss
There are two ways of placing stop losses when trading the pattern. At the extreme of the signal candle (a few pips above the high of a bearish candle or below the low of a bullish candle). On the ATR indicator (the indicator value is multiplied by 2 and the stop loss is placed on the received number of points from the pending order). Setting a stop on the ATR is considered optimal, although it often coincides with the extremum of the signal candle.
✴️ Take Profit
There are also several variants of take profit setting:
By the ratio of 3:1 or more to the stop loss;
By key levels. The ratio of 3:1 provides a positive mathematical expectation, but this method has no connection to the real market situation, and therefore is less effective. Taking a take profits at levels is optimal, because in this case the probability of price reaching the target and profit fixation increases. When placing a TP on a key level, a take/stop ratio of less than 3:1, but not less than 1:1 is acceptable.
✴️ Examples of Trading by Engulfing Pattern
For an example, let's consider a trade on the 4-hourly chart of USDCHF. After a bullish trend, engulfing pattern was formed at the confluence level: a bullish candle engulfed the last small bearish candle, and the signal bar itself was larger than the previous ones. On this signal a buy stop order was placed to buy above the maximum of the engulfing candle. Stop Loss was set by ATR indicator (parameter 0.0010) at 20 pips from the order, TP was set near the key level at 30 pips from the order (the R:R ratio is almost 2:1). The pending order was activated by the next candle, and the price went up. A few hours later the trade was closed at take profit.
The next trade was opened to buy EURUSD, also on 4-hourly. All conditions were met: we had bullish trend, a powerful full-body bullish candle that engulfed and closed above previous candles. A pending buy stop order was placed couple of pips above the candles high. Stop Loss was set the candle low, take profit at the nearest psychological level. The R:R ratio turned out to be 2:1, which is good.
✴️ Conclusions
There are several factors to consider when trading Price Action. Candlestick patterns provide a guide to action, but the main trend and price levels should not be overlooked. The pattern itself should always have a support point. Such a comprehensive assessment will help to avoid knowingly false entries, and the habit of a calculated approach is only for the better.
Trading-signals
HOW TO EFFECTIVELY BACKTEST TRADING STRATEGYWhy Backtest Trading Strategies?
The idea of strategy backtesting is to view the performance of a trading strategy in past circumstances. This is an important point in building a profitable trading system. There are various techniques to change the performance of a strategy that affects the final results. A backtest shows the overall profitability of a trading method and compares different trading parameters to find out what may work better than others.
Backtesting on historical data increases trader's confidence and reduces emotional trading, because the series of losing and profitable trades is already known. If a trader has not backtested a strategy, he or she cannot know if the strategy is really profitable. It may be that the strategy used by the trader does not work in the new market conditions, thus destroying the trading psychology. Therefore, if the backtest gives unprofitable results, it is necessary to either change the settings or abandon the strategy.
Steps of Manual Backtesting:
1. Identify Your Trading Strategy: Clearly define the rules and conditions of your strategy as well as entry and exit points.
2. Historical Data: Collect as much data as possible for the asset you plan to trade. This must include direction, price, open and close times, stop losses, market conditions, etc.
3. Set Up Your Backtesting Tool: Once you have the data, you will need to set up the backtesting tool. Use simulation tools to backtest your strategy, like replay on the TradingView or any other tool.
4. Evaluate strategy performance. Evaluate your collected data. What is overall performance? What is an average drawdown? Maximum losing streak? Worst day of the week to trade? What session bring most profit or loss?
5. Optimize and tune up. Analyze the results of the backtest. You can now see what can be adjusted in your strategy. For example, it could be certain hours of the day that bring the most losses, and once you eliminate these hours, your strategy's performance will significantly improve.
6. Do it again. Keep backtesting until you find the optimal entry condition, time, and risk/reward ratio.
Tips For Testing Strategies
Be realistic, don't look only for profitable trades. On the contrary, look for as many bad trades as possible to get the reason for losses and to avoid them in the future.
Evaluate the result, taking into account a large number of trades.
The minimum number of trades is 100, or 5 years of data. What comes first.
Test your strategy under different market conditions. In trending market and a flat market.
Don't forget that after the backtest, you should switch to the forward test.
Conclusion
Backtesting is a key moment in trading. It is almost one of the main tools that helps traders with trading psychology. Most traders open impulsive trades that lead to capital loss because they do not know when and where to open trades. If you have a trading plan but it does not include a backtested strategy, this plan is basically worthless. In fact, most successful traders spend more time backtesting than trading the real markets. Once you have a backtested strategy, you can now build rules around it and create a solid trading plan. And you are one step closer to being a consistently profitable trader.
TRADING RULES FROM REAL MARKET GURUSAll beginner traders, having received their first losses in the market, start to scramble in search of "golden rules" of trading or proven solutions from recognized gurus of financial markets. Basically, having received basic knowledge of trading and having traded for a few days on a demo account, they open a real account and deposit, sometimes, quite large sums of money into it. In most cases, the money is either partially or completely lost in a short period of time. It should be understood that trading is a serious work. It requires not only desire, but also free time and emotional expenditures.
As in any job, young specialists turn to the experience of their professional colleagues, studying their experience and various effective techniques. Trading is no exception, where there are also plenty of professionals and real gurus whose experience should be studied. We will look at rules from world-famous traders.
Rule #1 from Warren Buffett
"The market is a device for transferring money from the impatient to the patient"
Great words, aren't they? In the market with profit remains the one who knows how to wait patiently. Before you open a trade, you need to do a thorough analysis. Study all the factors that influence the trading instrument at the current moment of time, what will influence in the short and medium term. Calculate the support and resistance levels, etc. Only after that, start searching for the most promising point of entry into a trade. Do not rush to open a trade if there is no signal to open a trade. Patience is also necessary when fixing profits. "Let profits grow" thee say.
Wait until the dynamics of movement does not begin to decrease, and the strategy does not begin to signal a change of trend. Only in this way you will be able to earn the maximum on each price movement. After making a profitable trade, take a break for rest. Those who rush in the market, sooner or later lose their capital.
Rule #2 from Larry Connors
"I get real, real concerned when I see trading strategies with too many rules"
Everything brilliant is simple! Each of us is probably familiar with this expression. It is also applicable to trading on financial markets. If, again, we pay attention to trading gurus, we can see an interesting fact - all of them mostly use very simple trading systems (TS). Some of them use their own author's TS, some of them use existing ones that have been tested for years. Take Alexander Elder, who is the author of the "Three Screens" strategy. His system is as simple as possible and uses several standard technical indicators built into any trading platform. Anyone can master Alexander Elder's system, and due to its effectiveness, the TS is used by tens of thousands of traders around the world.
Do not try to find or independently develop a mega-complex trading system. The more "elements", indicators, etc. in it, the more false signals it will produce. It will be quite difficult to find the only true signal among them. Your system should produce one or more signals, when they coincide, you open a trade. It is very important, as we pointed out in the first rule, to be patient and wait.
Rule #3 from Peter Lynch
“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”
Peter Lynch, a world-famous American investor, was also a follower of simple trading and market analysis techniques. What did the guru wanted to emphasize in his statement? First of all, a large number of beginner traders stay in a delusion for a long time. They think that it is possible to achieve such a level of analysis that will allow them to make 100% forecasts all the time. The market is volatile. Sometimes there are trading situations when the market goes against technical and fundamental analysis. It is impossible to predict such market behavior. Secondly, because of this misconception newbies try to achieve only profitable trades on the market. So that there was not a single losing one in their account history. As a result, they try different strategies, read tons of books on market analysis, but still lose money. As a result, someone "gets an idea" and starts to understand what Lynch was talking about, and someone just quits the market.
Rule #4 from Henrique M. Simoes
"In trading, the impossible happens about twice a year"
In the fourth rule, we will focus on market volatility. These market "impossible" situations do occur periodically. For example, a trading instrument has been growing for a long time, and analyses signal us about the trend reversal. However, the instrument is still growing, breaking all levels. It happens that even some fundamental event, which 100% should lead to a trend reversal, on the contrary, accelerates the current trend even more. There are also more unpredictable situations, when the currency can rise in price twice within a few seconds.
An example is the situation with the Swiss franc, which at the beginning of 2015 strengthened against the U.S. dollar by almost 3000 points. On that day, not only a large number of traders around the world went bankrupt, but also several large Western brokers. Yes, such situations are very rare, once in 5-10 years, but they happen. How to protect against them? If we consider the example with the Swiss franc, a stop-loss would not have saved you, because the price changed at once. The only thing that could really help is to open trades with a small volume that can withstand such a strong movement.
Rule #5 from Jesse Livermore
“There is time to go long, time to go short and time to go fishing”
If you don't enjoy fishing, play a sport or make a field trip outdoors. You should definitely take a break from the market. Especially if you have a series of losing trades. Beginners are not ready for such psychological pressure, so regular breaks should be mandatory. The market will not go anywhere and will not run away, you can always return to it and continue trading. Large and experienced investors are well aware of this, so they do not forget to allocate enough time for rest. The situation is completely different for beginner traders. These two categories of traders mainly trade intraday or use scalping, so they have to constantly monitor the market sitting behind the monitor. As a result, psychological fatigue accumulates, the trader's eye gets tired and he starts to make mistakes that lead to losses. Be sure to rest, it is a guarantee not only of your health, but also of potential profit in the future.
It is extremely important to study the experience of professional traders who have achieved outstanding success in the financial markets. As you can see, many quotes hide not only the entire trading experience collected in one phrase, but sometimes the entire life of the author.
4 BUYING OPPORTUNITIES1. Impulse Move Buying Opportunity
Impulse move buying is a trading strategy that involves buying when the price makes an impulse move from the key level. Price makes a higher high, breaking through the previous high—a break of structure. The market pulls back to 1/3 of the impulse move, and then traders can look for signals. Usually, price action doesn't make a deep pullback after an impulsive movement. A stop-loss may be placed at the 61.8% Fibonacci level.
2. Golden Zone Buying Opportunity
Golden zone buying is a trading strategy that involves buying at a 61.8% Fibonacci level. The price pulls back to the key level and bounces off. Price action breaks the structure by making higher highs and higher closes above the previous high. The market can potentially cause a complex pullback towards the golden zone. The 61.8% golden zone must line up with a significant level, forming a confluence zone. The stop-loss may be placed at the 88.6% Fibonacci level, which is near the key level.
3. Institutional-Level Buying Opportunity
Institutional-level buying occurs when large market participants collect liquidity at the key structure level. The price movement of the institutions may be recognized when prices make large moves like engulfing candles or pinbars. This zone creates supply and demand levels. As a general rule, the market breaks through the structure and pullbacks to the 78.6% discount zone, and at this point we can look for buying opportunities. A stop loss can be placed at the 113% Fibonacci inversion level of the leg that breaks the structure, which is HH-HL.
4. Stop Hunt Level Buying Opportunity
Stop hunting level Buying is a trading strategy that involves buying a security at a price level that is attractive to large traders. This type of buying opportunity is typically used when a price reaches a level that is seen as attractive by large traders. The strategy is often used to capitalize on market inefficiencies and take advantage of the momentum created by large traders. The price action after the breaking structure usually returns to the key level by making a deep pullback. Many traders at this point have closed their positions, thinking the price might continue to move down. However, large institutions that pushed prices out of this zone protected the level, and prices continue to trend in the primary direction. The entry point is usually 88.6% Fibonacci, which gives the best R/R. A Stop loss below the level at the Fibonacci inversion level.
Understanding the Elliott Waves The market always moves in waves. It is not surprising that for decades traders have been trying to find special market patterns that would help to predict the development of the wave structure of the market. Various systems were created, where the waves were based on theoretical and practical basis. Perhaps the most popular theory on this subject is called Elliott Waves.
Ralph Nelson Elliott was actually a professional accountant. He obviously had a lot of time to analyze charts for several decades, so he put all his observations in a tiny book "The Wave Principle", which was published in 1938. According to Elliot, everything in human civilization is in some rhythmic order, so this rhythm, these wave amplitudes can be " drawn" into the future, which allows you to predict the financial markets.
Elliot's theory seemed interesting to few people during his lifetime. Elliott passed away in 1948 and was immediately forgotten. His theory was used by just a few stock experts. Only thanks to Chalz Collins these waves were remembered on Wall Street. Then they were popularized by Hamilton Bolton in 1950-1960, publishing a book with a detailed description and practice of use.
Certainly, Robert Prechter also has done the most job here. It was thanks to him, that Elliott waves became universally popular, almost 50 years after the accountant Elliott wrote a book on them. Many technical systems have a similar fate. They are forgotten, the authors are not appreciated during their lifetime, and then suddenly they become popular when they are promoted by a fanatical follower. Preckter is still considered the main expert on Elliott waves, and his site elliottwave.com is the world's main resource on the subject. There are a lot of cool forecasts there, for example, Prekter's experts predicted the 2008 crisis several years before it occurred. In fact, the modern Elliott is Prechter and his school.
Elliott Waves, in their essence, have a fractal basis, and the goal of practice is to break down the waves into understandable elements. It is them that we will try to explore now.
Fractals or Impulse Waves ✳️
The basic principle of Elliott Waves is that any wave consists of 2 parts; impulse and correction. Each of them, in turn, is made up of several elements, which also resemble waves, only smaller in size. Such a property, when a part resembles the whole object as a whole, is called fractality. For example, the ocean is made up of countless drops, and yet each drop is a "mini-ocean" because it repeats its properties and composition. Similarly, all living organisms are made up of cells.
The concept is based on the Elliott Wave Law, according to which market movement can be described by a simple and visual model as shown above. It reflects the main principle of market behavior: the price does not move in a straight line, but in a wave-like manner. An asset starts moving (for example, price growth), after which a correction (downward pullback) is observed. Any wave consists of 2 parts:
Correction is a pullback in the opposite direction. Each wave has an amplitude (difference between the 2 most distant points - upper and lower). At the same time, the impulse amplitude is always larger than the correction amplitude. To put it simply, the impulse is the main movement, while the correction is only a pullback in the opposite direction, which is always smaller in amplitude. That is why it is easy to distinguish them visually.
Both parts make up a cycle, after completion of which the market can go sideways (flat) or go in the opposite direction. The ability to see an organized wave in the "disorderly" movement of the chart allows us to correctly determine the current location and make a correct forecast for the near future. After the correction is over, we can re-enter the market (BUY trade) and profit again on the price increase. Since each moving wave is accompanied by a pullback in the opposite direction, the concept is sometimes also called the Elliott Wave Correction Theory.
Correction ✳️
The Elliott Wave Correction Theory predicts the end of the impulse after the formation of the last (fifth) wave. And after that there are 3 possible alternatives. The trend is reversed (a new fifth wave will follow). There comes a moment of uncertainty in the market, when the price will move in a narrow corridor for a long time (flat). The trend is maintained, but a short-term pullback occurs. This is a smaller in amplitude wave, consisting of 3 sections (so it is also called a triple). Elliott labeled each of them with the letters A, B and C: The A and B-C sections show a counter-trend correction as shown above.
Now, if we combine all the elements into one picture, we can make a simplified wave analysis on the example of an uptrend. So we can see 2 large sections the impulse 1-5 and the correction A-C. The five consists of 5 sections with 3 trend movements and 2 small pullbacks. A 3 consists of 3 plots with 1 trend movement and 2 pullbacks.
Example of Impulse and Correction ✳️
WHAT IS IMBALANCE AND HOW TO USE IT?Imbalance is a market phenomenon that can lead a trader to significant profits or losses. Imbalance (IMB) is a gap in fair value during moments of inefficient pricing. The trading volume is tilted towards the bid or ask side, but too quickly, so there are still unexecuted orders in the market.
Simply put, imbalance occurs when there are many orders of the same type (buy, sell, limit) and a lack of liquidity (counter orders) in the market. For example, if there are many more buyers of a currency or stock than sellers, the balance tilts in favor of buyers. On the chart, imbalance looks like a price gap, within which only a part of the volume has been traded. The flow of new orders can be seen by the directional movement of long candles of the same color.
Imbalance is indicated on a long candlestick as a gap between the wicks of neighboring candlesticks. Very often the gap occurs on the candlestick pattern "Marubozu" candlestick with a long body, without shadows or with short wicks.
The IMB gap between the wicks of neighboring candles acts as a price magnet. It means that as liquidity fills, the price will close the imbalance. The speed of gap filling depends on the market makers, large traders and market factors. Market makers are organizations that maintain market liquidity by buying and selling currencies, securities.
There is partial and full IMB fill in the market. A partial fill of up to 50% means that interested bidders were unable to push the price to fill.
Full IMB fill is a rebalancing to 100%. Full filling indicates that buyers and sellers are ready to trade actively at an effective price.
✴️ Why do market imbalances occur?
The emergence of persistent imbalances after long periods of stable pricing in one direction indicates that institutions are accumulating a position. These institutions can be funds, banks and other financial institutions (so-called "smart money").
The market is influenced not only by institutions, but also by market makers, investors, and traders with large capitals. For example, market makers place many orders and then modify or cancel them to bring the market back to equilibrium. Market makers, smart money and investors can both oppose each other and act in the same direction.
Imbalance in Forex can occur after the release of economic and geopolitical news. Imbalances are seen when some countries run surpluses in their trade accounts while others run large external deficits. Imbalance in a security's exchange rate usually follows a dramatic event or publication. The news changes the market perception of the stock and causes a shift in the equilibrium price. This can be news affecting a single company or the economy as a whole.
• Publication of financial statements. For example, a positive quarterly report can lead to an imbalance toward buyers.
• Corporate announcements of bankruptcy, management changes, takeovers, business purchases, etc.
• Government and regulatory actions. U.S. Federal Reserve rate hike contributes to the fall of indices and securities.
• Geopolitical problems, natural disasters, etc.
As the price moves from the old equilibrium level to the new equilibrium level, order imbalances can occur.
✴️ How to use imbalance to make trading decisions?
Imbalance is a type of trading opportunity for intraday and swing traders. In trading, Imbalance is used to identify zones of interest. The zone from which the imbalance originated is characterized by a higher level of probability. The zone is suitable for analyzing and identifying entry points. Entry points are selected with the help of technical analysis within the selected trading methodology. In this case IMB acts as an additional factor.
Most imbalances represent price inefficiencies. Therefore, there is a high probability that the market will come back to fill the IMB. For example, if a large bidder manipulated the market, a correction occurs afterward. Typically, price tends to mitigate the imbalance or the area from which it originated. Therefore, traders trade in the direction of the imbalance to profit from the price movement. However, sometimes price continues to push back against IMBs that are forming in the market. Here recent example of using imbalance on EURUSD
✴️ Conclusion
Imbalances create "fuel" for trend price movement. However, you should not mindlessly enter a trade in any imbalance zone. It is necessary to monitor the context (economic news, indicators, patterns) and make decisions based on it.
CURRENCY CORRELATIONSCorrelation is a popular method for using one asset as a beacon for predicting another. Virtually all assets are influenced in one way or another by commodities. You can see it yourself right now, when a stunning increase in the price of gold led to the growth of the AUD. Thereby demonstrating an almost 100% correlation between gold and the AUD.
Examples of Correlations ❇️
We'll look at some examples, which will help you better understand the influence of different assets on each other. Australia (AUD = Australian dollar) is the third largest gold producer in the world by volume. Australia sells several billion dollars’ worth of gold every year. As a result, gold and AUD/USD have a positive correlation. Gold appreciates, but the Australian dollar strengthens against the U.S. dollar. Gold falls, so does the AUD. According to statistics, the correlation between these two assets is over 80%.
Gold and AUD/USD
Let's talk now about the black gold a.k.a oil. This is nothing else than the blood of the economy, which flows through the veins of the world industry, being the main source of energy. One of the largest oil exporters in the world is Canada. Canada sells more than 4 million barrels per day only to the U.S. as its main supplier. As a result, if the U.S. increases its demand for Canadian oil, so does the demand for the Canadian dollar.
Canada is an export-oriented economy, where 85% of exports go to the US as a major trading partner. The USD/CAD is therefore entirely dependent on how consumers in the US respond to changes in oil prices. If the demand for goods in the U.S. rises, industrialists need more oil to ride on economic growth. If oil prices rise in the meantime, the USD/CAD exchange rate begins to fall (because the CAD is strengthening).
Conversely, if oil is not needed and the U.S. economy is slowing, demand for the CAD falls. In other words, oil has a negative correlation to USD/CAD, an appreciation of one asset causes the other asset to fall and vice versa.
UKOIL and USDCAD
Bond Spread ❇️
The bond spread is the difference between the interest rates on the bonds of two countries. It is on a similar spread that the carry trade strategy is based, which strongly influences many currencies. By tracking bond spreads and expectations of how key rates will change, you can get key fundamental signs that affect the exchange rate. As the interest spread between the currencies in a currency pair widens, the currency of the country that has the higher interest on government bonds strengthens against the one that has the lower interest.
BONDS and AUDJPY
The chart above on AUD/JPY shows us this perfectly. It shows the spread between 10-year U.S. and Australian government bonds from start of 2023. When the spread rose the AUD/JPY exchange rate rose nearly 12% from the low.
When the bond spread between Australian and Japanese bonds widens, institutional traders bet on the AUD/JPY going higher, why? Because that's how a carry trade works. But when the Reserve Bank of Australia began to increase key rates and the spread sharply widened, traders began to go "long" positions on AUD/JPY and the price, logically, began to rise.
Dollar Index ❇️
The dollar index gives a general idea about the strength or weakness of the dollar, for it can be regarded as a universal indicator. It's important to remember that the euro makes up more than 50% of the index, so EUR/USD is the main subject here. If you need to assess the dollar's condition in all dollar pairs the index is the best for that. How similar are they really? EURUSD up and DXY down. Many traders continually check the DXY, not only for its correlations but also for its divergence with the EUR/USD.
DXY and EURUSD
If the dollar is the base currency (first in a currency pair, say, USD/*), then the dollar index and the currency pair will go in the same direction;
If the dollar is the quoted currency (*/USD), then the index and the currency pair will go in different directions.
Correlation analysis is fascinating. Everything in the world is correlated, so currencies, various economic indicators, government bonds and commodities. The essence of bonds is simple: everyone needs money, the government constantly borrows against its securities, and the greater the demand for those securities, the more desirable the national currency. However, if this pattern shows a negative correlation, and the increased demand for bonds does not lead to an increase in the currency, then other factors come into play, such as the state of the global and national economies, the discrepancy in key rates between countries .
FIBONACCI CLUSTER IN TRADINGHello traders! Today, we'll look at the basic application of Fibonacci levels to build cluster. Even a new trader will be able to fully understand this approach because of how simple it is. We will discuss Fibonacci clusters, including their definition and trading implications. We'll make use of the common Fibonacci retracement tool which reactions frequently occur at 38.2%, 50%, 61.8%, or 78.6%.
✴️ Bottom line
A collection of Fibonacci lines that are relatively near to one another is referred to as a cluster. We compile all traders' estimates by drawing Fibonacci lines relative to various market swing highs and lows. As a result, the concentration of lines in one area indicates the most likely position of a key level or, more accurately, a critical zone.
✴️ What Is Fibonacci Confluence?
Fibonacci confluence is a method that uses Fibonacci retracement and extension levels to identify potential areas where the price may find support or resistance (Or entry and exit points). To use Fibonacci confluence, traders take Fibonacci retracement and extension levels from multiple time frames and look for areas where two or more Fibonacci levels line up, which is called “confluence”. Then we can look for trade setups in these converged levels like engulfing candle or pinbar.
✴️ Fibonacci Retracements Cluster
Fibonacci clusters can be an incredibly useful tool to identifying significant zones. Fibonacci clusters are a type of technical indicator that provides us with a way to identify potential support and resistance levels in the market. By applying these clusters, we can identify entry and exit points which can help them to maximize mathematical expectancy of the trades.
Once you understand how Fibonacci clusters work, you can then begin to apply them to your trading. The first step is to identify a chart with a clear trend. Look at the chart and identify the market structure. Next, draw a series of Fibonacci retracement levels on the chart. These levels will help you identify potential support and resistance levels in the market. Generally, we can look for entry signal at 38.2%, 50.0% and 61.8% levels. If the price rejects either of these lines, then it may be a sign that the price is about to move in that direction.
✴️ How to Apply Them in Trading
It is easier to trade levels if there is a clear unidirectional movement. This way we will know where the price is likely to go and we will be able to enter the "stream" at the most profitable opportunity. So, first of all, we determine the direction of the main trend. In this case, the AUD/JPY uptrend is obvious.
Next, we use fibo on the chart. Our task is to find the nearest strong support level and set a buy pending order slightly above it. That is, we assume that the correction will end near this level and the price will then continue its upward movement.
Stop loss is set slightly below the next Fibonacci cluster. This way we secure ourselves in case of incorrect forecasts. Take Profit is set equal to the stop or more.
There are situations when one supercluster is formed on the chart. In such case, if the price is above the cluster zone, we set an order to buy just above the strongest level. We place Stop Loss after the supercluster, through which the price will almost certainly not return. Take profit is equal to the stop or more.
✴️ A quick and efficient technique to use Fibonacci in trading is through clusters. The key benefit of the strategy is that the clusters speak for themselves; you don't need to know which Fibonacci level the price should rise from. Additionally, clusters can reveal entire zones of resistance and support, or zones of uncertainty, where it is better to avoid entering the market.
How to Trade Wolfe Wave PatternI will try to explain to you about the Wolf pattern. I myself prefer to call this formation a Wolf pattern rather than a wave, because it will not always remind of a wave and has nothing to do with the Elliott Wave Analysis.
Before I get to the practical part, I want to note that this pattern is very easy to learn and often allows you to get a fantastic ratio (R:R). The flip side of the pattern is the art of determining its completion.
Bill Wolf is the discoverer of this formation. He likes to call his trading a wave trading and for some reason explains the work of the pattern as a demonstration of Newton's law. His real achievement is the numerous study of the well-known wedge pattern, which he was so fond of, and the finding of patterns in it.
All we have from the author is a little book. And the website wolfewave.com, the design of which has been preserved since '98. Bill's friendship with trader Linda Raschke is well known. In her book, Linda describes the Wolf wave as a quite profitable formation.
It should be noted that especially skillful traders can detect Wolf waves practically in all price movements. Indeed, this characteristic formation of "spreading" can be found constantly, even if it does not have all the expressed qualities that are characteristic of an ideal wave. In traditional trading, the Wolf will often look like the famous and beloved wedge, but our task will be to enter and exit the trade more precisely.
Formation
1. We determine point 2 as the top of the uptrend (a significant top).
2. Point 3 is the next minimum after point 2.
3. Point 4 is the next high after point 3 and is located below point 2.
4. Point 1 is insignificant, ideally it is the minimum before point 2, but sometimes point 1 is very weakly expressed. In this case, Bill Wolf himself recommends to draw a horizontal line to the left of point 3 and take the first bar opposite it as point 1.
5. The point 5 is on the line 1-3, or it often breaks through it, going to the sweet zone. The sweet zone is constructed by parallel transferring the line 2-4 to point 3.
6. Point 6 (target) is on the line 1-4 (EPA - Estimate Price at Arrival) and is determined by the vertical from the point of intersection 2-4 and 1-3 (ETA - Estimate Time on Arrival).
How to Trade the Wolf with Trend
For the purposes of this article, we will be looking at Wolf waves primarily on trend. I strongly recommend trading them this way. In this way, the pattern will be a correction, the end of which we are trading. In addition, a couple of alternative examples will be given (Wolf as a trend reversal, Wolf in a sideways trend).
Let's take a good trend, in this case the uptrend on CADJPY, and highlight the correction. Then let's move to H1 and see if there are any Wolf waves among these corrections:
Example 1
In the first case we have a great Wolf wave. I pay attention to the clear arrival time of the target (ETA). R:R = 3.0.
Example 2.
In the second case, we don't have the prettiest formation. Many would argue that it is a Wolf wave, but I assure you that it is.
The ETA also clearly worked and we got R:R = 3.5.
Note
Wolf waves are quite frequent formation. Their best working out is trend trading, there are plenty of them. Even more of them are in the sideways. It can be said that a sidewall is a constant succession of Woolf waves in different directions. Perhaps, someone may apply this style to a flat, but a sideways trend can be traded more traditionally. An ideal wave is not always found. There are traders who prefer to wait for them without considering other Woolf waves as such.
Practice
Perhaps, we have come to the most interesting part of the article. Here I will just try to outline the best possible way to enter a trade and the best way to get out of it. The advice given in this section is a subjective result of trading and is provided for general guidance. I am convinced that a practicing trader will find the optimal TS settings by himself.
Examples
Any TS has its disadvantages and if the speculator gets along with them, he makes the TS "his", otherwise he has to look for another instrument, picking it up like a puzzle that suits him psychologically. The problem of the Wolf wave, on the other hand, is the search for the point 5.
Recent example
We use Fibonacci extension tool to identify optimal entry point. Fibonacci extension level such as 1.13, 1.272, 1.141 and 1.618.
Conclusion
In this article I have tried to set forth my view of the Wolf wave. As I see it, this pattern is well underestimated by the mass of suffering traders.
TREND CONTINUATION PATTERNSChart pattern construction is an important part of any market analysis. Charting patterns are powerful indicators of potential market movements. These patterns appear on a chart and are used to predict when a trend is likely to continue or reverse. The three most common patterns are triangles, wedges, and flags. They are all typically seen as signs of a trend continuing, but their specific meaning varies depending on the trend they are associated with. For example, a triangle can signal a continuation of a trend, while a flag can signal a potential reversal.
✴️ Triangles
Triangles are formed when two trend lines converge, forming a pattern that resembles a triangle. These can be either symmetrical or asymmetrical, and are usually seen as a sign of a bullish or bearish trend continuing. Symmetrical triangles can be seen as a sign of consolidation before a breakout in either direction. Asymmetrical triangles are usually seen as a sign of a continuation of the existing trend.
✴️ How to trade triangles
Trading triangles can be a very profitable endeavor, but it can also be risky. There are three main types of triangles: ascending, descending, and symmetrical. Ascending and descending triangles are bullish or bearish, while symmetrical triangles can be bullish or bearish, depending on the trend.
Once you have identified a triangle pattern, you need to wait for a breakout. A breakout is when the price breaks out of the triangle pattern and continues in the direction of the trend. When trading triangles, it is important to wait for a confirmed breakout. A confirmed breakout is when there is a clear break of the triangle pattern and the price has moved in the desired direction.
There are a number of different signals you can look for to help you determine when a breakout is happening. These include candlestick patterns, moving averages, and volume.
✴️ Wedges
Wedges are similar to triangles in that they are formed by two converging trend lines. However, the difference is that wedges form a pattern that resembles a wedge shape. Wedges can be either rising or falling, and are usually seen as a sign of continuation for the existing trend. Rising wedges are generally seen as bearish, while falling wedges are seen as bullish. Wedges can be a useful signal if used correctly, but they are not always clear-cut. It is important to understand whether a wedge is rising or falling, and whether it is being viewed as bearish or bullish, in order to get the most out of this pattern.
✴️ How to Trade wedges
When trading wedges in the forex market, there are two main approaches – the breakout approach and the reversal approach.
The breakout approach involves trading the breakout of a falling wedge pattern. This type of pattern is typically seen during an uptrend and is seen as a potential sign of a reversal. When trading a falling wedge, traders will look for prices to break out of the wedge by either going above the resistance trend line or below the support trend line. If prices break out above the resistance trend line, it is seen as a sign that the uptrend will continue and traders can look to buy. On the other hand, if prices break out below the support trend line, it is seen as a sign that the uptrend is over and traders can look to sell.
The reversal approach involves trading the reversal of a rising wedge pattern. This type of pattern is typically seen during a downtrend and is seen as a potential sign of a reversal. When trading a rising wedge, traders will look for prices to break out of the wedge by either going above the resistance trend line or below the support trend line. If prices break out above the resistance trend line, it is seen as a sign that the downtrend is over and traders can look to buy. On the other hand, if prices break out below the support trend line, it is seen as a sign that the downtrend will continue and traders can look to sell.
✴️ Flags
Flags are formed when two parallel trend lines form a pattern that resembles a flag. They are usually seen as a sign of a continuation of the existing trend, although they can also signal a reversal. Bullish flags are typically seen as a sign that the trend will continue higher, while bearish flags are seen as a sign that the trend will continue lower.
In light of the recent market volatility, it is important to remember that chart continuation patterns such as triangles, wedges and flags can be a powerful tool for predicting potential market movements. They are usually seen as a sign of a trend continuing, although their individual meaning can depend on the trend they are associated with. As such, it is important to be familiar with these patterns to be able to accurately predict potential market movements.
✴️ How to trade flags
When looking for a flag pattern to trade, you should be on the lookout for two distinct highs or lows that form a trend line. The trend line should then be connected to a parallel line that is a few pips below the lower peak. If you identify a valid flag pattern, then you can move on to the next step. Once you have identified a valid flag pattern, you should then calculate your risk and reward. Your stop loss should be placed just below the lower parallel line of the flag pattern, and your target price should be placed at the upper parallel line.
Good luck, and happy trading!
TRANSPARENCY IN PROVIDING FOREX SIGNALSTransparency of forex signal providers is an important concept for making successful trading decisions. Transparency of forex signal providers means that an investor can view a signal provider's trading history, including results and statistics. This gives an investor the opportunity to evaluate the verified trading history and make a decision on whether to connect or disconnect a signal provider.
The advantage of forex signal provider transparency is simply invaluable. As every investor knows, there are many signal providers in the Forex market with bad reputations which can cause an investor great losses. This is why it is essential to have transparent information about signal providers, which gives the investor the advantage of making a more informed decision.
Fortunately, thanks to technology and global support from forex brokers, transparency of forex signal providers is becoming more and more accessible. Usually trading platforms provide detailed information about signal providers, including their trading history, results, win/loss percentages, types of trading strategies, etc. This gives investors confidence in their decision, which means they don't have to worry about the signal provider hiding information.
Forex signal providers are important to traders because they provide information that can help them make investment decisions. Therefore, it is very important for signal providers to be transparent. To have the right to be called transparent, forex signal providers should provide traders with complete and reliable information about their methods of analysis and trading. This way, traders can make an objective and informed decision on whether to use their services.
Here are a few signs of transparency that can help traders evaluate a forex signal provider:
1. Open price presentation: the forex provider should present transparent prices for currency pairs, including spreads, commissions and other fees.
2. Transparent pricing: Forex signal providers must provide traders with complete information about the rates and terms of their services. This will help traders avoid misunderstandings and miscommunication in trading.
3. Transparency in the process: Forex signal providers must also provide traders with detailed information about how they analyze and trade the markets. This way, traders can get more information about how the signal provider makes decisions.
4. Open risk policies: Transparent forex providers have a clear risk policy and provide information about their policies and precautions.
5. Openness about historical results: Forex providers must provide access to their historical results to show you how they operate.
Given the above signs of transparency, you will be able to choose a reliable forex provider and make the right decision about your trading actions. You will need to do your homework and study the market, but this will allow you to choose a transparent forex provider that will give you the opportunity to profit in forex trading.
Overall, the transparency of a forex signal provider is an essential part of successful trading. Traders should have access to complete and reliable information in order to make the most of their investment.
In conclusion, the transparency of forex signal providers plays a key role in successful trading. Thanks to the availability of information about signal providers, investors can properly assess their risks and make informed trading decisions.
WHAT IS CUP AND HANDLE FORMATIONIn the traders' job the chart patterns indicating price changes are of great importance. This includes the "Cup and Handle" formation. A cup and handle is a popular chart pattern among technicians that was developed by William O’Neil and introduced in 1998.
What does the pattern look like?
"Cup with handle" is the term chosen because of the undeniable similarity between this type of dishes and what the trader sees on the chart. It is hard to judge how much this pattern is in demand among traders, because there are more practical interest formations.
Cup
The formation of a bullish trend is considered as an important condition that leads to the formation of such a position. Although experts consider it to be a reversal. "Cup with a handle" is formed at the moment when the correction of the previous rising direction of the chart takes place. At the same time, the trader should definitely pay attention to the depth of the chart.
It is of interest if the formed slope does not exceed 80% of the trend that was before the formation of this specific pattern. The bottom of the formed bowl meets the period of price consolidation, upon its completion the ascent begins.
Handle
The handle on the chart means nothing else than the correction of prices in relation to those that were at the time when the right side of the cup was formed. Trades compare this section not so much to a pen as to a flag. Of interest is the situation when the flag begins to form immediately after the end of the formation of the right side of the cup. The length of the handle created by the chart should not exceed 50% of the size of the right side of the cup.
The formation of this part of the graph takes quite a long time. The long-time interval indicates the subsequent formation of the trend. This section of the chart becomes fully complete only after the resistance level is broken.
If we look at what we see on the chart from a practical point of view, we can say the following: when the left part of the cup is drawn, there is a gradual decline in prices, at the time of formation of the bottom they remain stably low, and during the creation of the right part there is a gradual increase in prices. At the moment of the breakdown a sharp increase in the number of trades is observed.
How to trade the chart pattern on Forex
Aggressive
Conservative
Regular
Each of them has its own positive and negative characteristics. Low demand among the used Forex methodologies is caused by the fact that it requires taking into account a large number of indicators, otherwise the probability of making a mistake is very high. Particular difficulties may occur in the analysis of the depth and width of the chart figure. The probability of missing a profit when working with this type of chart is rather high.
Aggressive method
It is considered riskier. It is based on the behavior of the handle. The orders should be started after the breakout of the handle or, using another terminology, the breakout of the flag. In this case the "stop" position is placed below the level that the breakout of the candle.
Regular Method
The regular approach to trade positions are opened immediately after the breakdown of the pattern line. Stop-loss should be placed below the handle, that is, below the line involved in the formation of resistance.
Conservative method
It is used most often. It is based on the classical traditions of trading. Attention is paid to the breakdown of the technical line. The ideal variant is entering after the retest of the breakout line. The stop-loss should be below the handle or below the "breakout" candle from the breakout line (at least if it is big enough).
WHAT IS ChoCH AND HOW TO USE ITChoCH in trading is a change of sentiment (change of character) in trading order blocks.
✴️ Definition
The ChoCh (change of character) is a change of sentiment in the market. That is, the change in the nature of the movement of the market from bullish to bearish or vice versa. This term is used in technical analysis strategies of order block trading.
It is used by traders in the forex market, as well as in the cryptocurrency market. Choch is also known as a reversal when the price fails to form a new higher high or lower low. It then breaks the pattern and starts moving in a different direction.
To form a Choch using the smart money concept on a chart in a downtrend, you must as shown above:
1.Gradually decreasing highs and lows of the bearish trend.
2. The last maximum price update. It is at this point that a change in sentiment is formed.
We will go over the basics of Choch trading and the main advantages of trading.
✴️ Combination of timeframes on Forex
The best entry points are formed when combining two timeframes:
Keep in mind that a change in structure does not always involve a global change in market trend.
1. On the higher timeframe the order block is formed as support or resistance level, in the zone of which the reversal is looked for. This is H1, H4 or D1 time frame.
2. The lower timeframe is used to identify the change of character and entry on the trade signal after the Order Block test. On the mt4 chart this looks like the example, where the order block is highlighted by a rectangular range below.
✴️ How to trade
Let's analyze EURUSD recent trading opportunity for the change of the market movement. The first one shows that a bos (break of structure) was formed after the choch.
The buy position took place when the chart returned to the order block area. The next reversal pattern is relevant in determining the liquidity zone, where there are the stop losses of the crowd of traders.
The difference between the previous pattern is that the price tends to break the liquidity zone after the bos. Buying is performed on the order block at the very minimum of the chart.
✴️ Conclusion
Choch in trading allows the trader to determine the best reversal point with a high-risk profit ratio. Often the values reach 1k5 or more.
The change of mood is easy to identify even for beginners in Forex trading on smart money. At the same time, its success rate reaches 60 percent.
MOST POWERFUL TRADING SETUPThe fakey setup is a powerful trading strategy that can be used to identify high-probability entries in the forex market. It combines three different chart patterns and requires the trader to be patient and wait for the right setup to form. With a bit of practice, traders can become very proficient at spotting fakey setups and taking advantage of them.
Fakey setup begins with an inside bar or false breakout pattern. This is when price breaks out of a range but quickly reverses and closes back inside the range. This shows that the breakout was false and signals a potential reversal. The false breakout is followed by a pin bar. This is a strong candlestick pattern that has a long tail and a short body. The long wick indicates a rejection of a certain price level.
Simply put, this setup is formed when a false breakout of the triangle pattern occurs. The inside bar is actually a triangle if you look at the small timeframe, and its false breakout forms this strong setup. On a bitcoin chart for example, you can find many such setups. This is another version of the fakey setup. Where a false breakout of the triangle leads to a strong bullish movement. In the forex market this setup is traded as usual.
Fakey setup in Forex market *️⃣
The main form occurs when one of the highs or lows of the mother bar breaks with a bar with a long tail.
IMPORTANT TO KNOW *️⃣
In the forex market the fakey setup is traded only on H4 timeframes, better on D1 only on the trend, it is very risky to catch reversals on its tops or lows. As in any Price Action pattern, there must be a confluence point, which can be support or resistance levels. Fibonacci levels or trend lines are right place to take trade if you find this setup. Trading is conducted by pending buy and sell orders. Take profit can be taken at a distance of "stop loss multiplied by n", where the recommended value of n = 2 (there can be more), or at the nearest horizontal level. But each trader's method of exiting a trade may be different.
You can trade fakey setup against the main trend, but like any other counter-trend setup, it must be absolutely obvious with a perfect shape and must be on an obvious and strong daily level. You should not trade fakey against the trend until you learn how to trade this setup with the trend on the daily charts. Keep in mind that fakey on hourly charts has almost no power. Only the breakout of the mother candle following the breakout of the inside bar is a is a signal to enter the trade. Because there was not a substantial breaking of the mother candle as in a significant fakeout, there is a need for further confirmation that the market is actually going in our favor. The fakey is a particularly successful setup since a false-break that developed in the opposite direction of the strong trend suggests that the trend is going to continue.
Even if false breakout of horizontal market support and resistance levels don't happen frequently. The price crosses the horizontal level in the example below, but the subsequent candle bounces rapidly and moves upward, indicating that the level was a false breakout and also forming Inside Bar setup:
A false triangle breakout can be found in any market. Bitcoin really likes this pattern, but in a slightly different form although the essence remains the same. How does it happen? The market essentially consolidates, after a trend movement forms a triangle, and a false breakout of this pattern leads to a continuation of the movement. This pattern can be found from 2014 on the BTC chart.
Fakey is one of the best sets of price action since it reveals market activity and predicts what is likely to occur in the near future. Because a strong trend has both technical and fundamental reasons to move in one direction or another, this setup works best in trend markets. A fake breakout happens when "amateurs" try to buy at the top or sell at the bottom because professional players enter the market and profit from the brief retreat brought on by the "amateurs'" greed and emotional trading.
SWING FAILURE PATTERNHello, fellow forex traders! Today we will talk about one of the most powerful Price Action setups, which is little known to the public. The Swing Failure Pattern(SFP)is a false-break of the maximum or the minimum level of the previous swing. The UK trader Tom Dante is mostly responsible for spreading this pattern. The effectiveness of SFP is such that after mastering the skills of identifying of this pattern many traders use it as a full-fledged trading system.
✴️ How and why is this SFP formed?
SFP occurs as a result of a failed attempt by market participants to form a new swing high or swing low. The failure is due to the desire of a pool of large traders or investors to take advantage of the accumulation of liquidity of pending breakout orders (Buy Stop, Sell Stop) and loss limit orders (Stop-loss) to enter the position.
The placing of a large number and large volume of pending orders in a relatively narrow price range leads to a swing, very similar to the classic trend. Traders are attracted by a "clean" move up or down and place orders virtually in one spot, just above the highs or lows, hoping that the trend will continue.
The described example in the growing trend is shown in the picture above. The evident upward movement of the currency pair leads to the desire to enter the market and place the order immediately after the nearest maximum. Stops of the traders who are in a counter-trend position will also be placed there, as it is obvious to them now.
✴️ The SFP pattern: The rules for the formation and entry points
SFP is formed on a swing high or a swing low of any timeframe, but the most preferable timeframes for its search are those starting from H1 and above. A false breakout is always preceded by a clear correction, leaving a "clear space" to the right of the previous maximum or minimum.
When looking for the SFP pattern, the main condition for its formation must be the evident trend and correction, as well as the breakout of the previous swing level (high or low). If there are several extreme levels, the pattern candlestick should ideally break all previous values, or at least the nearest extreme. The picture below shows the formation of low on the correction of a rising trend. The candlestick of the SFP-pattern should break of the swing low.
As in the first case considered, the entry in the pattern is made at the opening price of the next candle, the SFP candle itself can be of any configuration, shape and size, you should only pay attention to the mandatory high/low and the closing of the candle body above/below the extreme.
✴️ Stop Loss and Take Profit levels for the SFP pattern
The strategy is best utilized with a dynamic stop loss, the size of which can be determined using the ATR indicator, which measures the current volatility at the period specified by the trader.
If the trader is looking for a pattern on the hourly chart, then a stop loss should be set by the size of the daily volatility. Change the period of the ATR indicator to 24. On the daily timeframe you can leave the standard value of 14. Or set it to 20 (the average number of working days in a month). The pattern is not designed for a long-term or medium-term trading, the task of the trader is to catch the pullback. Set a take profit just below the nearest high or above the low, at the nearest level.
✴️ Key Features
The pattern can be detected on any time frame, but traders should look for SFPs starting with hourly candles. The liquidity of pending orders and stops, which attracts large players, is the key to the successful working out of the false breakout, which simply may not be present on small timeframes.
For the same reason, the visibility of a pullback from the swing-high and swing-low for all traders is important, you should not look for a pattern in the flat market, on the minimums and maximums of which there will not be the necessary number of pending orders.
When multiple lows are accumulated in a row (double, triple bottoms or tops), the SFP candlestick should ideally use its tail to break all previous extremes, but the closing price should be lower than the maximum (higher than the minimum).
The shape of the candle can be anything, it will often be similar to a pin bar, it's allowed to retest, if it occurs in the next working intervals (timeframes, chosen by the trader).
✴️ Conclusion
False breakout often leads to missed profits and an additional stop loss. The SFP pattern demonstrates how you can profit from it with high probability. The figure shows that traders should pay attention to it.
BASIC MARKET STRUCTUREMany traders use indicators these days in trading the markets and they certainly have their place. But the most effective method of market analysis remains the method of determining market structure. Trading based on the underlying market structure can be quite easy because the principle is very simple.
What is market structure?
We look for trading opportunities because of the market structure. We constantly search for opportunities to buy when the market is trending upward and sell when it is trending downward; in other words, sell high and buy low.
The fundamentals of market structure
As much as we all would like to see nice capital curve, especially if one has a trade in that direction, unfortunately that is not how the market works. In the trading world, one would like to see the market always reach its target after opening a trade. But in reality, the market is neutral and it has its own laws and principles. The market functions in another way. As a wave, the market movement has its ebbs and flows. The market moves up and down as it breathes in motion. The basic price movement, which consists of four points:
Higher High
Higher Low
Lower Low
Lower High
Equal high and lows
It is more complicated on a chart than in the illustration above. In between the major swing points, the price makes even smaller swings: a swing within a swing and this usually causes confusion for beginners. You can see it on the live chart below. Price moves in alternating swings between lower lows and lower highs. On the timeframe higher, though, the scene can be different: on the higher timeframe, price goes up, and on the lower timeframe, price can go down. This is the nature of the financial markets. Can we use basic market structure to predict potential trend changes? Of course, there are no tools that can identify trend changes in all cases. It is probable, but unrealistic!
Nevertheless, by using the basic principles of market structure shown, it is possible to identify exactly where the strength is. On the side of the sellers or buyers, which can lead to a reversal of the market trend.
A market that makes a series of higher highs and higher lows usually attracts buyers who want to join that bullish movement by pushing the price even higher. But when the price fails to make a new high and cannot support the rising move, going lower to form a lower low, it is an indication that a possible down-trend change may be underway.
And here on the live chart of the EURUSD:
Implementing the market structure in trading?
In a bull market, we expect price to roll back to the optimal trading zone in anticipation of the market eventually forming a higher low. Fibonacci levels allow us to identify these zones in the market. In the BTCUSD chart below we can see the association of support and resistance zones with the underlying market structure and Fibonacci points. We have clearly identified three potential buy zones based on the underlying market structure. We must remember that price should move smoothly and should look nice, no choppy moves.
LOGICAL PLACES TO ENTER THE MARKETFormations in price action trading include candlestick patterns, often known as triggers. They can, with a high degree of likelihood, identify the direction in which the price movement will occur if they have the right location on the chart. The important factor is not simply the patterns' use but also how they interact with the structure levels and trends. The apparently "right spots" are these. They may be misused by many traders. Therefore, where is the best place to enter the markets?
Support and Resistance 📊
Determining the trend is an important trading process. The correct step is to classically define higher highs and higher lows compared to lower lows and lower highs. But in practice there is a lot of room to interpret the trend at different timeframes, so it is very helpful and important to have clear principles and rules. It is quite logical, if there is a trend in the market, to be able to trade in its direction or apply reversal signals. If the market is trading in a range, then the trader is best off using a range trading tactic.
Once market structure has been identified, traders can look for entry points at these levels. Traders may look for price action signals, such as candlestick patterns, around the support or resistance level to indicate a possible entry point. Additionally, traders can use overbought/oversold conditions by using indicator and divergences.
Fibonacci Retracement 📈
Fibonacci levels are often used to confirm a market reversal, and they can be used to identify potential trading opportunities. For example, after a strong trend, if the market pulls back, this is the best place to open a trade. Fibonacci levels are 38.2%, 50.0%, and 61.8% where you should pay attention. If these levels are near psychological levels, or levels of support and resistance, this is a very good place to enter the market.
Trendline Breakouts 📉
A trendline reversal and breakout is a chart pattern that occurs when the price of an asset breaks through a trendline connecting the highs and lows of the asset over a period of time. This is usually seen as a sign that the current trend has reversed and the price of the asset will begin moving in the opposite direction. Traders usually watch for a trendline reversal and breakout to enter a position in the opposite direction, long or short. A trendline breakout is a good indicator that the current trend is fading. If a trendline breakout occurs in large candles, it means there is a supply or demand zone above or below, which pushes the price in the opposite direction.
Range Breakouts 📃
Markets often break out of ranges or other chart consolidation patterns like triangles or flags. Identifying breakouts and waiting for confirmation can help you enter a trade with a better risk/reward ratio. For example, if you are bullish, waiting for a breakout can help you enter a trade with a lower risk/reward ratio. The purpose of a range breakout is to capitalize on a sudden increase in the volatility of an asset. When the price of an asset moves out of its range, it means that there is strong pressure from buyers or sellers behind the move. Accumulation always leads to distribution and entering a trade when the price moves out of range, the trader can benefit as the price usually makes an impulse move after the breakout.
Best Qualities of a Signal Provider❇️ Finding the right signal provider for your trading journey can be a daunting task. With so many signal providers out there, it's hard to know which one to choose. But don’t worry—here, we’ll go over the best qualities of a signal provider so you can make an informed decision.
❇️ The first and the most important quality to look for in a signal provider is track record. A track record is important for signal providers because it gives potential clients an indication of their performance and reliability. A good track record shows that the signal provider is consistently able to generate reliable signals and generate profits for their clients, meaning that the provider has a good trading strategy. It also gives potential clients an idea of the provider's risk management practices and their ability to stay profitable in different market conditions. So before using any signal provider's services, you have to first check their track record.
❇️ The second quality to look for in a signal provider is transparency.
A good signal provider should be able to explain how their signals are generated and how they interpret the data.
This will allow you to assess whether their signals are suitable for your trading style. For example, if you're looking for signals for day trading, you'll want to make sure that the signal provider is generating their signals based on historical price data for that day. In order to succeed in the market, it is essential to have a comprehensive risk management strategy. See how the signal provider manages risks and takes losses in a responsible and timely manner.
❇️ The third quality to look for in a signal provider is customer service. You want to be sure that the provider is available to answer your questions and provide helpful advice. Make sure to check out the provider's customer support options before signing up. Is their customer service team responsive and helpful? Do they have a history of providing reliable signals? Also, it's important to make sure that the signal provider you choose offers a money back guarantee. This will ensure that you can get a full refund if you're not satisfied with their services. This way, you can feel confident in your decision and know that you'll be able to get in touch with support if you need it.
❇️ Cost of services. When it comes to choosing a signal provider, it's crucial to do your research and compare the cost of the signal to other providers to ensure you're getting the best value for your money. Additionally, some providers may offer discounts or other incentives to encourage the use of their services. It is best to contact the provider directly to get an accurate estimate of the cost of the signal.
❇️ This should include a step-by-step process for how they assess each signal, and how they decide whether to move forward with the investment. Additionally, you should find out whether the provider uses a computer algorithm or a team of experts to analyze the markets. Generally, larger providers will charge more for their services than smaller providers, as they have more resources and infrastructure to support the signal.
❇️ In conclusion, a good track record pretty much sums up any signal provider's trading performance and reliability. It shows you can really make good returns from them by using their services. If a signal provider doesn't have a track record, this is a bad sign and makes it hard to value their trading ability as well as signals. And eventually, it can lead to a loss of money.
HOW TO USE FIBONACCI EXTENSIONFibonacci is a technical tool, essentially an automatic tool for building support and resistance levels. They need to be supplemented by:
Standard support and resistance lines
Trend lines
Japanese candlesticks
and additional indicators
Then they will be a good assistant in your trading. This is how a trading strategy is created, based on the combined instruments and the study of their features in different market conditions.
The three most important Fibonacci retracement levels are:
0.382 (38.2%)
0.5 (50.0%)
0.618 (61.8%)
All other levels, say 0.236 or 0.764 are secondary.
And these are important expansion levels:
1.272 (127.2%)
1.414 (141.4%)
1.618 (161.8%)
It's not difficult to use Fibonacci. Swings (upper and lower), as the maximum and minimum price values, are taken. From them, a fibo is drawn, and its lines are used as hints for support and resistance levels. It is up to you to decide whether to use Fibonacci in your trading. As we know from self-fulfilling prophecy, the more traders use a certain tool, the more important it become to the markets. Also, Fibonacci is a very popular tool, which often pops up on the charts of professional currency traders as well. So, it's a prophecy that comes true quite often.
Now let's expand our Fibonacci tool by examining the uptrend. We see that the 1.272 and 1.414 levels work as resistance, and after a couple of unsuccessful breakout attempts, as we can see many pinbars, the price might just go down and make another pullback.
Now let's do the same thing with the downtrend. Let's pull the fibo extension tool.
And here's what's happened:
Price ran into support, then broke through it. It was the level that was held up before the price went down. Price action made a new low. Fibo extension level 1.414 lines up with psychological level 1.59000. From these examples we can see that Fibonacci extension level is logical and often (though not always) form temporary support and resistance levels.
Remember, there is no guaranteed way to tell when a Fibonacci level will work as resistance or support. However, by applying all of the technical analysis techniques you've learned so far, you'll significantly increase your ability to identify these situations.
Therefore, you should consider Fibonacci expansion and retracement levels as an auxiliary tool that may be useful in some cases. But don't expect the price to bounce off right away. Fibonacci levels are your area of interest. If any candlestick combinations are formed near these levels, if oscillators or other instruments show anything curious, it is time to be alert.
WHAT IS THE WYCKOFF METHOD?The Wyckoff Method is a trading strategy developed by Richard D. Wyckoff. It is based on the principles of supply and demand and is used to analyze price movements in financial markets. The Wyckoff method involves identifying support and resistance levels, analyzing volume and volatility, and studying the relative strength of different markets and uses these patterns to identify trading opportunities. The strategy is used by traders to identify trends and determine entry and exit points.
The four cycles defined by Wyckoff's model of market behavior are:
Accumulation
Impulse leg is an upward trending movement
Distribution
Downward movement
Three Wyckoff Principle 📜
The supply and demand law, the cause-and-effect link, and the connection between effort and results are the three rules that make up the Wyckoff trading strategy. The principle of supply and demand. If there is an increase in demand over supply, it leads to an increase in the value of a financial instrument. Prices rise because the quantity of an asset is limited and investors are willing to pay more when there is a shortage of the asset. If the demand for the asset falls relative to the supply, the asset loses in value. When supply and demand are in balance, the price is roughly in the same place, which causes the volatility in the market to decrease to a minimum.
According to Wyckoff, accumulation time correlates with an uptrend, while distribution, in contrast, leads to a downtrend in what is called a supply and demand imbalance. When an asset spends a lot of time in the accumulation or distribution zone, there are often strong impulsive moves to break through the zone. A bullish trend will continue upward if a higher price is accompanied by high volume. However, if prices are rising and volumes are high, the trend will shift downward. According to Wyckoff's method, the market should be viewed from the point of view of the main participants, or market makers.
Accumulation 📊
Market makers accumulate assets. Accumulation is when investors buy a lot of a certain asset over time. This makes their holdings bigger, which can lead to higher returns. Some investors believe a certain asset is undervalued and will go up in value. Also, some investors want to diversify their portfolio by adding a new asset.
Impulse move 📈
Market makers eventually start to trade more assets, which causes the price to rise. Investors are becoming greater in number and demand goes up. The volume rises and a trend quickly ascends to new highs. It is typically characterized by a sharp, sustained move in price. This type of movement is often seen during a bull or bear market, when investors are trying to capitalize on the sudden change in price.
Distribution 📉
Market makers distribute assets they have purchased by offering profitable positions to participants who just recently joined the market. Indicators of the cycle include sideways price movement and rising volumes. The demand is absorbed up until the point of exhaustion. A lot of securities or other financial instruments are sold in a short time. This is usually done by institutional investors, like mutual funds, hedge funds, and pension funds, to raise cash or to reduce their securities holdings.
Sell-off 📉
Supply exceeds demand. The market maker reduces the price to a certain level. As soon as the decline is completed, the market enters the next accumulation cycle. On the gold chart, we can see each of Wyckoff's cycles: accumulation, momentum, distribution and depreciation. The phases of accumulation and distribution may differ.
Conclusion 💡
The Wyckoff technique gives detailed principles and strategies, to assist traders in making reasoned decisions. His work explains the market's logic and psychology, which determine how decisions about buying and selling are made. Numerous oscillators are integrated with cluster analysis in the method.
SIX LESSONS FROM THE "TRADING IN THE ZONE"The book Trading in the Zone, written by Mark Douglas, is a financial trading classic. It explores the psychological aspects of trading and how they can be used to improve your trading performance. Douglas emphasizes the importance of having a clear understanding of the psychology of trading and how it affects your trading decisions. He also stresses the importance of having an edge in the markets and understanding the risks associated with trading.
Douglas argues that traders must also be prepared for the emotional roller coaster associated with trading. He encourages traders to remain calm and focused on the task at hand and not to give into emotional responses. Douglas also stresses the importance of having a plan and sticking to it, no matter what the markets are doing. He believes that having a plan allows traders to focus on the task at hand and reduce the risk of emotional trading.
Here 6 lessons from the book “Trading in the Zone”:
1. A trader's edge is the set of core beliefs and methods that he relies on to make decisions about when to enter and exit trades. Understanding your edge and following it with discipline is essential to successful trading. A trader's edge is the set of core beliefs and methods that he relies on to make decisions about when to enter and exit trades. Understanding your edge and following it with discipline is essential to successful trading.
2. Risk management is the key to success in trading. It involves understanding the risks associated with each trade, setting stops and limits accordingly to protect your capital, and limiting your trading exposure to the most optimal level. There are a number of different risk management strategies you can use when trading, including stop-loss orders, stop-limit orders, and position limits. You can also use risk management tools, such as risk gauge monitors and stop-loss calculators, to help you understand your trading risks and measure your success.
3. Managing your emotions is crucial to being a successful trader. Emotions can lead to poor decisions and increased risk-taking, and if you're not aware of this, you could end up losing trades and money. To be a successful trader, you must be able to control your emotions and make rational, objective decisions.
4. Focus on Process, Not Outcome: To be successful in trading, you must focus on the process of making good trading decisions, not on the outcome of the trade. This will help you remain consistent and disciplined, and it will also help you to optimize your chances of success.
5. It's crucial to accept responsibility for your own actions as a trader. You must be willing to take full responsibility for your decisions, no matter how good or how bad they may be. You need to constantly be learning and improving your trading skills in order to succeed as a trader.
6. Have a Plan and Stick to It: Developing a trading plan and following it with discipline is essential for success. A good trading plan should include your entry and exit points, money management rules, and risk management strategies. A trading plan is a roadmap that helps you stay on track by detailing your desired outcome and the steps you will take to get there.
In the end, Douglas' main message is that trading is a game of probabilities and that traders must learn to understand and manage the risks associated with trading. He encourages traders to remain disciplined, have a plan, and focus on the long-term. He also emphasizes the importance of controlling emotions and having an edge in the markets.
HEAD and SHOULDERS PATTERN Hello my friends!
The most famous figure of technical analysis in the world. It consists of three tops, where the middle one is the highest. Accordingly, two shoulders and one head. The neckline in this case connects the two minimum values of the extreme top.
✳️ Pattern Breakdown
The Head & Shoulders pattern is a common psychological pattern of market players that hasn't changed for decades. Each new price is the result of bulls and bears struggle, but on the relatively long-time interval this struggle gets the more correct recognizable form. Since all traders see the same chart, their behavior is synchronized when a familiar pattern is identified the emotion factor kicks in.
The pattern itself consists of three parts a high peak in the middle and two smaller peaks on the sides. Thus, the first and the second tops form shoulders of the pattern, while the peak in the middle is the head. Support line drawn on the pattern minimum is also a signal line. is also a signal line - its breakdown defines the change of the trend? The first small peak and the subsequent fall mean the weakening of the upward impulse the loss of the bulls' enthusiasm.
However, maintaining the momentum, the price continues to move upwards, forming a higher maximum. At this stage there is still the possibility of a continuation of the bullish movement. But as soon as the price goes down to the previous low, the future development is already predetermined. The bulls make one last attempt to go up, but the price usually only reaches the nearest resistance level, the level of the first peak, and then it has to wait for the support level to be broken down to enter the downside.
There is also an inverted Head & Shoulders pattern that creates a buy signal. In this case instead of three peaks we have three lows, with the lowest one in the middle. The pattern signals completion of the downtrend and formation of a new movement direction.
✳️ Application in practice
Having received a signal about the formation of a new pattern, the first thing we need to determine is the presence of a continuous unidirectional movement. Further, having determined that the trend is bullish, we wait for the formation of a pattern. At the beginning of formation of the second arm we draw a support line by the swing minimums. This will be a signal line, breakthrough of which will indicate a price reversal.
It is necessary to enter the market after breaking through the support level. Confirmation is the closing of the candle behind the level at the opening of the next one, we open a market order to sell. Stop loss is placed just above the peak of the second shoulder. In some cases, the price may try to test the nearest resistance level again, and this moment should be taken into account when setting a stop.
✳️ Conclusion
Head and Shoulders is a time-tested figure, which, if identified correctly, allows you to enter the market at the beginning of a long-term trend. All you have to do is analyze the set-up and make a final decision about entering the trade.
HOW TO TRADE 1-2-3 PATTERNHello everybody! 👋 🤗. Today we are going to learn about the 123 chart pattern. The 123 pattern is a typical reversal pattern that traders use to identify if an existing trend might change. These patterns can be a signal to enter the market. At the peaks or bottoms of the market trend, you can see 123-patterns, which signal a change in the trend. Sometimes they form after the completion of corrections in the current trend and may also occur in sideways markets.
The Pattern Formation 📈
1. The price makes a pullback following the rally
2. The price hardly shows a new maximum/minimum. No sign trend continuation
3. A breakout the previous high/low, shows a change in market trend
This happens as a result of traders opening positions when they anticipate the rally is going to continue. Furthermore, these traders will immediately close their trades and enter in the opposite direction if their stops are taken out.
How to Identify a Solid Pattern ✔️
1. The first step in trading the 123 pattern is to determine the existing trend by analyzing and identifying the highs and lows of the price action. The chart below shows one of the setups; it is labeled 1, 2 and 3. The trend was bullish. The market reached a peak. Then a pullback occurred. The result was point 2. Price then attempted to retest the high which was not successful. The price started a bearish movement and then reversed. We should not open the sell trade until we get confirmation of the breakout of line 2.
2. Look for a potential reversal. After identifying the existing trend, the next step is to look for a potential reversal point. This is done by looking for high or low points on the chart. Once a potential reversal point is identified, we can then look for signs that the reversal is actually happening. These signs can include things like a change in price momentum or candlestick patterns. The candlestick that represents the first point should have a wick, and the longer it is and if the wick is directed against the main price movement.
3. Once a potential reversal point has been identified, the we should wait for confirmation that the reversal is happening before taking any action. This confirmation can be provided by a subsequent candlestick close above or below the reversal point 2.
4. Finally, we should place stop-loss and take-profit orders to manage out risk and lock in profits. A breakout of the previous high (or low, depending on the context) is the area to place the orders. Depending on whether the pattern is bullish or bearish, the stop loss should be placed at level 1 below or above. Price should be given breathing room to avoid hitting the stop loss. Determine the distance between the low at point 3 and points 1 and 2 in this formation.
As you can see from the previous example, the price initially was in the bullish trend. After the pullback, the price breaks the support line of the trend, signaling a trend shift which indicates that price doesn’t have enough momentum to move above the previous high. Stops should be placed above point 1 of this formation. This illustration shows how easily the price exceeds price target, providing an opportunity to successfully open a sell trade with R:R ratio 1 to 1.
The 123 pattern can be a great tool for traders looking for a simple yet effective way to open trades in the markets. It is important to remember that no trading strategy is perfect, and traders should always use risk management to protect their capital. With practice and experience, traders can learn to identify the 123 pattern and use it to trade successfully in the forex market.
