Resistance Becomes Support

Trade Setup: Buy one pip above candle A, or candle B.

Reason:

1. Price just broke above downtrend line.
2. Price is at a previous high.
3. It appears that Candle A is about to reverse and turn bearish. It has a low that is lower than the previous two candles. However, it turned around and closed near it’s high. Bears are thus trapped. We can enter one pip above candle A, as bulls have proven their strength and support has been found at the previous downtrend line.
4. Alternatively, a more conservation trader may choose to buy above the high of candle B, which is a pin bar. Contrary to what is expected of a pinbar, price merely dipped below the low of candle B,  but eventually closed positively. Again, bears lost the battle and bulls proved their strength.

Reading Price Action - The Analytical Approach

In the chart above, one can figure out that price will collapse after candle B, for the following reasons:

1. Prior to candle B, price showed weak attempts to rally above the upper channel line (red). Previous bull candles all have relatively long upper wicks.
2. Imagine how candle B looks like when price is at the high of the candle… At that moment, price probably looked very bullish… Unsuspecting bulls may jump onto the trade, believing that price is due to rally.
3. In fact, candle B is a nice bull trap… Its high is slightly above the high of candle A, and will thus trap bulls who buy on breakout.
4. Candle C is another confirmation that price is weak. A nice price to sell will be one pip below the low of candle C.

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I use it whenever my price action reading shortlists more than one possible pair for trading.. For instance, at 12:30pm (GMT) yesterday, I noticed that JPY is suddenly very strong… all three pairs (EURJPY, USDJPY, GBPJPY) formed a long bearish candle… I had to decide which pair, among the three, to trade… Using the currency strength meter, I can easily determine that EUR was strong, whereas USD was weak… Thus, trading USDJPY will be a much better choice than EURJPY… and indeed… USDJPY fell much more dramatically than EURJPY…

A really simple but useful application… and btw, did I mention that it’s free?  :-D

I’ve always wanted to trade with Oanda because of their narrow spreads… However, their trading platform is one of the most primitive I’ve seen… their mobile platform (browser based) is worse… it’s basically a joke… You cannot do anything (such as adjusting your stop loss) except entering new orders or closing existing positions….

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Oanda on Android

Trading with Horizontal Support/Resistance

Trade Setup: Sell one pip below candle A.

Reason for trade:

1. Green line is a resistance that became support
2. Price made a weak attempt to reverse upwards prior to candle A.
3. Candle A is a bearish outside bar, with a close near the low, indicating the strength of the bears.

Bull Trap

Candle A in the chart above is an excellent bull trap.

Firstly, candle A occurred near a bullish trendline and it seemed like price found support at the trendline. In addition, candle A is an outside bar and a strong bull candle. All these signals suggest that price might bounce off support and continue to rally.

However, that was not the case. Price moved up a bit, but then proceeded to fall.

One of the biggest clue to suggest that price will NOT rally and that candle A is merely a bull trap is the fact that previously, price failed to find support at the brown trendline. The brown trendline acted as a resistance initially. After price broke above the brown trendline, the line should change it’s role and function as a support. However, this did not happen in the chart above. Traders who were alert will probably detect that something is amiss, and will not be tricked into buying above candle A.

The Zigzag Pattern

The chart above shows a common pattern that leads to a trend continuation. I don’t know what is the actual name for this pattern, so I’ll just call it the zigzag pattern. This pattern starts with a strong uptrend, followed by a reversal that is significantly less steep. When the green downtrend line is breached, the previous uptrend resumes.

The pattern is stronger when it is combined with other price action. If we zoom into the chart above, we can see that a cup-with-handle pattern formed before the downtrend line is breached (refer to chart below). The shallow handle is further proof that bears were not strong enough to push the price down.

Cup with Handle

EURUSD 7 Jun

GBPJPY 7 Jun

In both charts above, candle A has a lower low than its previous candle. That means in both cases, bears were trapped. In addition, in both cases, price found support at a bullish trendline.

However, buying above candle A would have resulted in a nice profit for the first chart, but would have resulted in a loss for the second chart.

A more careful analysis would reveal that the price action in the second chart does not warrant a buy. This is because price failed to make a higher high prior to candle A, suggesting that bears may be gaining control.

USDCHF 1 Jun (Weekly Chart)

USDCHF 1 Jun (Hourly Chart)

Reason for Trade:

1. Resistance at a down sloping trendline (refer to Weekly Chart)
2. Fibo 23.6
3. Perfect Pin Bar (refer to Hourly Chart)