This is a great example which shows the importance of patience where we will have to wait for a nice pattern to form which will allow us to capitalise on the market's move. In essence, quality trades will usually be better taking multiples trade (i.e. quantity) since the more times we are in the market, the more risk will involved. Therefore, in the recent months, I have switched over to looking for quality trades which have greater potential and higher probability of success. With this, it makes trading less stress and fun.
Having reflected on my recent trading style, the following will be the analysis for GBPUSD and the reasons why this trade was taken. Similar to the example of the EURUSD example posted yesterday, this trade also highlights the importance of multiple time frame reconciliation.
W1 Chart
With reference made to the attached chart, the pair made a new high close last week above the 1.63995 region. With some basic knowledge of technical analysis, one will look to buy on dip this week since the new high close of the previous week will most likely indicate that the bullish momentum of this pair will continue this week.
In addition, the pair is moving along a rising trendline with higher highs and higher lows formed along the way since the middle of 2010.
Since price has broke above its box range, the likely resistance will probably be around the 1.68760 to 1.70412 region.
D1 Chart
On the D1 Chart, it seems that the pair was having a short term retracement which might indicate a short term breather for this pair. In technical analysis, this pair might be having a bullish flag forming and traders may look to buy on a bounce of the rising trendline though.
Currently, the road map for this week will still be up since the pair is forming higher highs and higher lows.
H4 Chart
This is where the analysis of this pair gets interesting.
After closing above the resistance at 1.64263, price went through a short term rally which then retraced to test this level. In technical analysis, this is also known as the "Change of Polarity" where previous resistance becomes support. With the, the trading range became a box range for this period of time as the market takes a break and then probably make its move again.
With this, the Bullish Bat Pattern was seen forming at the bottom of the box range and this is when the setup comes for me to go long on this pair.
The above chart shows the "Change of Polarity" where the previous resistance was acting as a very nice support for this pair.
The following 2 charts attached will show where the pattern was formed in the box range and since the pattern was drawn on the M15 Chart, things will look cluttered but nonetheless, they show where the pattern was formed in relation to the box range and how the trading opportunity presented itself.
M15 Chart (Entry)
With reference to the chart attached below, the Terminal Price Bar was also the Setup Bar to go long in this case. The Setup Bar was a Bullish Engulfing Pattern which prompted me to go long on the open of the next candle after the PRZ was completely tested. I will usually prefer the PRZ to be tested completely before considering taking up a trade though. This will inevitably mean missing out on some trades but then again, this is trading and I just got to stick to my rules. And if I miss out on an opportunity, I will just have to wait for another opportunity to come. This is sometimes frustrating and thus to keep our emotions in check is one of the most important thing we should do when we are trading.
In addition to the confluence of the 3 Fibonacci Ratios which validated the Bullish Bat Pattern, the presence of a support derived from the H4 Chart at 1.64263 ("Change of Polarity") gave added confidence for me to take this trade.
Trade Details
Date & Time: 27 Apr 11, GMT 08:15
Entry Price: 1.64583
S/L: 1.64230 (35.3 pips)
T/P: 1.68500 (391.7 pips)
The reason for the ambitious target was on the basis that the trade was done in the direction of the predominant trend. The target might or might not be reached, but the rationale of this approach is to reap as much profit as possible for the 3rd batch of this trade once I have covered the first 2 batches of the trade, while having a trailing stop such as the 0.382 trailer in place to cover the trade when the price retraces more than 0.382 of the reversal. Another check in place would be to cover the trade on a reversal trendline break.
Trade Management
I was initially looking to cover the 1st batch of the trade at the 0.618 AD swing at 1.64882 region but on a news release, price shot up and my 1st batch was closed at 1.65013 on 27 Apr 11, GMT 08:30, netting a profit of 43.0 pips while the 2nd batch was closed at 1.65301 on 27 Apr 11, GMT 08:35, netting a profit of 71.8 pips. (The blue zones in the chart attached were the areas where I covered my 1st and 2nd batches of the trade).
The move was very fast for the first 2 batches and once they were covered, the 3rd batch was left to maximise my profits while having a protective stop at 1.64900, protecting 31.7 pips and allowing the 0.382 trailer to trail the stop. This is a very nice trade done and there will be more to come.
Seeing that there is an upside potential for this pair and when price broke the reversal trendline, I decided to divide the last batch in 2 separate batches while protecting my profits.
The 3rd batch was closed when price broke below the rising reversal trendline. The 3rd batch was closed on 27 Apr 11, GMT 11:18 at 1.65615, netting a profit of 103.2 pips.
On added, a nice reversal should usually posses a steep reversal trend line and this trade exemplifies the reversal characteristic. In addition, since the reversal is relatively steep, we should expect it to be broken quite fast since the market will not be able to sustain such a steep move. With this in mind, this was one of the reasons why I divided the last batch in 2 batches to squeeze more profits out of the market. It is important to know what you are doing and react accordingly when you have a valid reason behind your trade management.
As for the last batch left running, the trade will be closed when price closes below the 0.382 trailer.
An update for the last batch running for this pair. Apparently, this pair was taken out when price closed below the 0.382 trailer before resuming its rally. Then again, with a trading plan and rule in place, there is no regret when the trailing stop was triggered. I will just have to respect the market. Having said so, this is not a bad trade after all since I have managed to farm quite a fair amount of pips from this trade.
The last batch was closed on 27 Apr 11, GMT 15:00 at 1.65194, netting a profit of 61.1 pips when price closed below the 0.382 trailer.
Note: I have mentioned a "close" below the 0.382 trailer and there is a meaning to it. If price tested the 0.382 trailer and did not close under it, it would not mean much to me since the shadow will only mean a test but not a breach. From my experience, a close above or below a resistance or a support will mean more to mean than a shadow above or below a resistance or support as a close will indicate a breach of support or resistance to mean whereas a shadow is just a test and a rejection above a resistance or a support. In fact, when a shadow tests a support or resistance and failed to close above a resistance or below a support, it is usually a nice signal to go short when price failed to close above a resistance or long when price failed to close below a support. This technique is however a rough guide and it will have greater importance if this is supported by other signals, such as a Harmonic Pattern. The example on EURUSD and the setup on the GBPUSD showed this methodology combined with Harmonic Trading.
