Reading the price action would alert you that the bulls are in jeopardy and a long play could get painful.There is a time and place to use a reversal strategy and the key is to know when the move is failing.More often than not, the stronger trend will assert itself and if you are not using appropriate risk measures, you could be looking at a loss much greater than anticipated if the move fails with strength.It is vital to understand when a move is not playing out as expected and to take appropriate action to avoid an unplanned loss.
Bullish Bar Reversal in USDCAD This Forex pair has been in a steady downtrend for a year (time frame dependent) and after a strong push downwards of 14, price began to consolidate. After swings were registered, we were able to start a trend line (demand line) on the bottom of price. Solid Rejections at Levels Of Support Ive left out the top trend line that would form a trend channel to keep this example focused. Price puts in a clean double bottom pattern that starts the drive to take out the swing high on the left. The decent halts in the area of the previous double bottom and that is a fairly clean, albeit low volatility move away from the level. We are also able to connect two swing point for our demand line. After another clean rejection just to the right of the 2 label, price rallies and after putting in a higher high (uptrend pattern), price drops to reject off the previous low giving us a double bottom and an obvious bullish reversal candle. Price makes a tentative approach to the demand line (price action would point to low interest at this point and a probably hold of support) and 5 days of CAD gains are cleanly wiped out. In all of these cases, there was never a warning shot given as price approached support that wed lose the level. If there was a trend channel drawn, you can see that trading this range would not have been too difficult (although real time may have caused you some issues). Range Break and Price Action Signs Of Danger A great way to read price is to ask yourself what should happen if A happens. Breakout Reversal Thats a true sign of strength and something youd expect to see given the context of the play. What if the pin formed and price didnt move As price once again approached the demand line and previous low rejection with strength zone, price began to consolidate. Its a hard fought battle and the last highlighted candle breaks support. Not shown but on the one hour chart, you can see how that candle formed. It had bearish implications as price broke to the upside of the consolidation first then broke support. We get the obvious pin bar and what would you expect to happen Would you expect consolidation or would you expect clean rejections like the previous ones Would you expect to see the large bear candle if it was a strong arrow of support These are the types of questions you need to ask yourself in real time. Forget that Canada was set to release interest rate news the next day (they held on rates) but just looking at price would not point to strength.
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