Category: Forex Strategy
When the market is more “emotional”, it tends to swiftly break through important levels, and this creates profit opportunities for calm and disciplined traders. For trade to be taken from the stand point of price overextension there are very distinctive factors to consider. In order to execute flawlessly this method, you need to possess reflective mental discipline. Price overextension is the quickest method to make profit, but it’s mentally challenging to keep your emptions under control.
Remember that people who are disciplined and patient are rewarded as they know how to take advantage of “emotional” market behaviour. It's highly rewarding to wait for clear signals instead of forcing trades when there is none. Don’t look for challenges and excitement there.
So here is the breakdown of Forex Price Volatility and Price Overextension:
Price must expend to the new territory and penetrate to fresh level. I'd be very cautious to look for a trade where price was already revisiting multiply times of the range of that significant level. Over 80 precent of volume is expected in trading environment, and as a result the market frequently overshoots and then corrects itself. In other words Price Volatility trading is related closely to volume spread factor vs time. The more price overextensions can be noticed, the more volume spread movement. As the price comes back to fill in the gap, it creates the balance and stabilizes towards equilibrium of spread liquidity.
The key here is volume. The real time information for FX market is not a magic indicator. You need to look at the chart and search for the answers there. There is another misconception taught out there, but anyways, to keep this post short and concise I want you to look at the Volume as not a number of positions traded, but number of price changes during a specific time period of time.
The major objective in Price Volatility method is to identify features of overextended price action that will cause retracement back to the fractals range. When observing price action regardless of currency pair it can be noticed that volatility within specific fractal range tends to exceed significantly from time to time. These events create price overextension. When price spikes rapidly from fractal range, penetrating through levels, the move is very vulnerable to pull back into range. It may happen immediately or at the later time, but the occurrence is very common.
During only one day you can notice 3 occurrences of price overextension. Note the Supply Zone which plays very important role here. Price spikes in the overall bullish trend leaving a gap. This price overextension is very vulnerable to pull back into the dealing range. Obviously I didn’t have to wait long that day to bank the profit. This occurrence is very highly probable and happens over and over again.
Another example this time on Daily charts. These gaps created by price overextension are almost guaranteed to get filled either immediately, or later in the future.
On this chart you can see very similar price action on different currency pair. The price is usually very parabolic, in fact the more parabolic the better. After when price hits significant technical level or exhaustion point, very often it can be seen price comes back to the range. In the second situation on the chart you can see price didn’t come back right away, as a matter of fact bounced off very important technical level on the fractal seeing on the left. That’s why is essential to scale out at the anticipated points of market natural reaction. Read on Scribd...
Although price may appear to be random, it does in fact follow a pattern in form of geometrical figures to a degree. Very powerful method which traders can determine such conditions is to utilize fractals. Fractals essentially break down larger trends into extremely simple and predictable reversal patterns.
When you stare at the charts long enough you can notice that market moves in characteristic patterns within higher patterns. The fundamental pattern which can be noted on all time frames, 1 min, 1 hour or weekly chart is called fractal. Price moves within dealing ranges which effectively creates fractals. Therefore fractals are critical to understand as they will guide you where to enter, exit, scale out or put stop. Price will range within define fractals turning points 80 precent of the time. As you know price never go straight up or down.
Even in strong trending market conditions the overall move will be comprised of smaller fractals. This is direct consequence of money flow through dealing desks. This is very useful weapon to extract money from the market. When price breaks a fractal range and spikes up to overextended levels, the Price usually returns and retests previous closest established fractal. It creates opportunity to trade retracement into the trading range.
In the trading markets this level may offer opportunities where you can make a trade. Look for the correlation of fractal to ZONE which I mentioned in my other posts. Fractals leave foot print in the market significant turning points which helps in determining ZONE’s. It will require practice to flawlessly execute trades based on fractal patterns and nothing will replace your time spent in front of the live market watching price behaviour.
Fractal formation patterns are very important levels not only for entry, but for trade management and profit targets. With respect to this, your initial profit target should be within nearest fractal as price will more likely bounce of it. There may be situations where price penetrates through these levels driven by important economic events.
Fractals recognition and its significance is one of the elements in your arsenal. In conjunction with other technical methods you will increase odds in your favour to very high level of accuracy.
On the following chart please observe behaviour of Fractal retest and think how you can implement it for the momentum trading method. The “stars” designate areas in which you can anticipate price reaction.
On the following chart look closely on the order flow and observe price movement from one level to another. Order flow is pushing price higher, but look how fractals determine dealing ranges of price increments of 20 pips. Although you can notice random spikes through levels, there is incredible similar pattern which repeats over and over again. Understanding how price move is the fundamental skill you need to master.
On this chart you can observe how price comes back to retest the fractal and move on to higher levels. Different currency pair, but so similar order flow. Pay attention how price react of the multiply of 20 pip value and 00 level. Read on Scribd...
London market is one of the biggest dealing centres in the world, one of the biggest and most volatile trading sessions in the Forex market. Trading Forex on London Open and Close is well known for it's predictable behaviour and it's good to know that London open may not always be the real one.
Very common occurrences, consistent in its nature can be observed on London open. I called it Asian Print Breakout. I've tested it on many other currency pair, but without a doubt most common pair affected by London session dealing desk transfer is GBP/USD.
Since U.K. banks are the primary market makers for the GBP, they have clear awareness of market supply/demand prints and where majority of orders are located. Interbank using their clients books to trigger stops and gain value differential. After these stops are taken and the books are cleared, the real directional move in the GBP/USD will take place. It is important to patiently wait for the first move of big Banks, where major orders are triggered and jump on the wave in the right direction, when market is free to make decisive move for the day. The purpose of this trade is to capture major directional move which could potentially be massive swing which could give you over 80 pips at a time. GBP moves really quickly when it’s on its way.
The anatomy looks more like this:
Firstly major trend needs to be determined on higher time frame which will define direction in which the trade will be placed. Then define the boundaries of the Tokyo session by the highest high and lowest low of the session. You can draw the line marking the boundary of Tokyo session and use them as a reference point. I'm looking for price to move out of the boundaries defined from previous day. At the London open, GBP/USD attempts to make fault breakout exceeding slightly Asia Higher High/Lower Low either direction depends of the trend. After that, it's very usual to see price coming back to the range and poke through to the other boundary of the Tokyo range followed by a bounce of the range border in the opposite direction. The opportunity I'm looking for is during the bounce of the Tokyo session boundary which is already defined. That works quite amazing as this is information we can determine before the move happens.
This chart illustrates typical London session open and close. Please observe diligently and study price action. Pay attention to opening and closing time and impact to the market.
With regards to London close scenario I usually look for opportunity to take a trade when price revisits the high of the London session. Very common scenario for GBP/USD is when the price comes for a retest. I’m trading right into bullish/bearish (depends of the direction) looking candle. Works very well, particularly where there is a very clearly define key resistance level. Figures marked on this chart demonstrate it very clearly.
On this chart you can notice confluence of three very important events. The first is spike causing price overextension second is price hitting 00 level and third London close. Those occurrences don’t happen very often, but when they do, you better be ready because this means gold for you. Read on Scribd...
Over the past few years, currencies have become one of the most popular products to trade. No other market can claim a 71 percent surge in volume over a three-year time frame. Many traders are also becoming more aware of the fact that stock and bond movements also impact the currency markets. Therefore, if currency traders want to make more educated trading decisions, it is important for them to follow the stocks, bonds, and commodities markets as well. I believe Equities Price Volatility has magnificent leading indication for currency direction and trading Forex with Equities price movement will help you to make safer trading decisions.
Very close relation can be seen between equities market and Forex. Often if the equities are running towards significant level of support or resistance the FX flow will ease/gain respectively.
On the periodical basis depending upon structural events in the country’s economy, it can be seen Equities lead FX market. When S&P or DOW is heading towards support or resistance, often the flow of FX market will ease of, approaching this level.
You can use this information to help you to determine positioning, entries, exits and management of the positions.
S&P is important index as it gives very good indication of the overall sentiment of what major stocks in US are doing. I believe S&P and DOW index deserves attention, as they implicate on good directional factor in relation the FX pairs, specifically AUD/JPY.
Bear in mind the relationship must be not a mirror reflection, but correlation with a "deviation" What I mean here is for example:
- Look at the EUR/USD and see that is very week comparing to the S&P. When the equity has a little bit of sell off, the EUR came down very strongly.
- When S&P went sideways, EUR went sideways too.
- When S&P rallied strongly EUR had a little bit of climb, but as soon as S&P showed any weakness EUR started to fall off. So when you see or anticipate great downtrend on S&P this currency pair will be very good opportunity to short.
The following charts illustrate what I’ve described above.
On the following charts you can compare 2 price action in the reverse direction in reference to want I’ve described earlier.
Another interesting pattern can be observed when equities drop lower and closes at the lows, you may see opportunity to buy major currency pairs sometimes during Tokyo session, on good spot near the support. Read on Scribd...
When people say that trading Forex is easy and I would agree with them. However we all have tendency to overcomplicate things. Therefore for some reason we may think, that we need a complicated solution to make it work, otherwise everyone else would achieve success trading if it would be easy.
Any of the mathematical indicators is just reflection of what price is doing and changes when price changes. If you focus on the indicator, you are increasing risk of failure as your decisions are delayed far behind order flow. Relying on indicators orders are executed in the past market behavior and not based on the current state.
The decision making process to enter a trade is to determine market key turning points, anticipate the move of the market and jump on it, before everyone else realize there is a trend. Technical indicators will always slow you down, as they will react after series of buying, formation of selling, or other meaningless pater formation.
The idea of indicators and mathematical formulas appears important because it makes it looks complicated therefore one may think will create better results. It couldn't be more far from the truth.
I remember at the beginning of my Forex career I was trading under illusion of indicators. My charts were so covered with all different kind of indicators that I couldn't even see the candlestick through it. It was like Christmas decoration. I went through extensive research and personally don't use any indicators anymore. I realized they don't provide any constructive value to trading strategy at all. They actually cause more harm, because instead of focus on price action they distract your attention and ability to clearly sense the market.
For beginner traders I’d suggest only plotting one of the Moving Averages on the chart just to have a hint which direction market is heading in the bigger picture. Once you get more experience and connect with the market on daily basis you will know all the levels like back of your hand and any of the lines coming from sky won’t be necessary anymore. Read on Scribd...