Price Action 101: Example of the "First Break"...---- SUMMARY ----
This freeze-frame of the USDJPY 15m chart at the end of weekly trading is a near perfect example of a classic Price Action setup in progress...
This setup, according to Bob Volman, is called the "FIRST BREAK".
--- BACKGROUND ----
If you don't know... Bob Volman is a longtime Price Action trader and the author of two Excellent (yet very hard to read) books on the subject...
The "First Break" is one of seven setups detailed in his first book: " Forex Price Action Scalping ".
Although that book relies on tick-based charts, the concepts (and setups) apply to all timeframes.
--- THE SETUP ----
In a nutshell, the conditions of the Fist Break setup are:
#1) A steady and pronounced trend in price (...in this case, a BEARISH trend starting at "Point A") , and
#2) A steady but less-pronounced pullback - usually at a 30-45-degree angle (points B to C).
At this point in the setup (if the markets were open), one should be alert for a sharp break against the ongoing bullish momentum...
According to Bob V., a SIGNAL CANDLE (in this case, a strong bearish candle that closes below its previous candle ) should form at some point.
(NOTE: one should also look out for any doji candles that pre-signal a turn in momentum)
THEN... The ENTRY CANDLE is defined as the next candle that (even if it hasn't closed yet) falls below the signal candle's CLOSE or LOW.
That's where (in this situation) you can enter the market with a SHORT order.
More conservative traders may wait until the Entry candle actually completes (and even wait for another 1-2 bearish candles close) before jumping in...
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PLEASE NOTE: That Mr. Volman himself says that 1st Reversals are relatively rare because they are a sign of very strong momentum.
As such, Bob V. stresses that one should always consider the possibility of a "SECOND BREAK" setup as the true signal to enter the market.
(...Refer to Bob V.'s book for additional details on "Second Break" setup...)
---- ADDITIONAL NOTES ----
In this example, one can see a "tease" reversal that probably trapped a few aggressive scalpers...
Also... Bob stresses the importance of NOT expecting a turnaround until price runs into an established ceiling or floor (i.e. EMA lines or S/R lines)
Lastly... Since this particular setup was 'frozen' over the weekend, one should NOT assume that the strong bearish momentum on Friday will automatically continue on Sunday's opening...
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That's It... Now push the button and let's see what happens...!
And always, Trade Mindfully...
- $B -
