Rick Wright
Online Trading Academy
Hello traders! In last week's Lessons From the Pros newsletter, we discussed how learning to trade is like learning to drive a car - Learning to Trade is Like Learning to Drive. This week we will continue the driving theme while we look at charts to help us determine high probability/low risk trades.
When you pull up to an intersection, very often we have a couple of choices to make be it to turn left, right, or go straight. In trading, our choices are buy, sell or wait. In the following EURUSD chart, we have an intersection of a previous demand/supply zone and a pair of trendlines. When we come to this intersection, what is the higher probability trade, long or short?
While we are in this yellow shaded supply and demand zone near the intersection of the two trendlines, we have a choice to make. Go left or right? Long or short? Or should we wait? When I teach one of our Online Trading Academy classes, this question comes up every trading day. If your answer to the buy sell or wait question is "wait," you have to ask yourself the next question. "Wait for what?" In this example, we are waiting to see which trendline is going to win at this intersection/decision point in our trading road. The general rule of thumb is that the trendline that has been valid the longest is the trendline that will win. Looking to the left on our supply demand zone area, there isn't a very compelling or high quality level we would have drawn here. Using the two trendlines and the intersection of all three can give us a trade. In this case, selling in the minor supply zone because of the longer term downward sloping trendline (#1) would have been the proper trade.
In the following EURUSD chart, we only have an intersection of a trendline and a supply demand zone. As the price action falls quickly into the yellow demand zone near the red arrow, there isn't really a clear downward trendline that we can draw into that zone.
However, the longer term upward sloping trendline is very obvious. Coming into this intersection, we only have two choices, buy or wait. (You could make the case for planning a short trade, but not until the yellow demand zone had been broken or even broken and then re-tested.) Why on earth would you sell IN the yellow demand zone? No reason at this intersection. If price drops through the demand zone, there would be a potential sell. But at this time, the better choice is to hit the buy button. If your answer to the question buy, sell or wait was to wait, what on earth are you waiting for? A traffic cop to point at you and tell you to go? I hope you don't need that!
Let's explore this topic a bit more. Leaving our driving analogies for a moment, what kind of trades are these - reversal or trend – following? Most people will answer trend - following. Guess what? Every trade is BOTH. On these two charts they are obvious trend followers, but when you zoom in on a smaller time frame –for example a 10 minute chart-you will notice very often a reversal trade.
What are we looking for in a reversal trade? Usually, some type of reversal pattern like a double top/bottom, head and shoulders, etc. The plan of action is then to do the following: In a larger time frame chart, look for an intersection of a trendline (or two!) and a supply demand zone. Look for a smaller time frame reversal pattern in the intersection. This should give you the direction to trade with a higher probability of being right.
Practice this technique like you practiced driving, and make sure you look both ways before turning!
This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms
Editors’ Picks
EUR/USD struggles for direction amid USD gains
EUR/USD is trimming part of its earlier gains, coming under some mild downside pressure near 1.1730 as the US Dollar edges higher. Markets are still digesting the Fed’s latest rate decision, while also looking ahead to more commentary from Fed officials in the sessions ahead.
GBP/USD drops to daily lows near 1.3360
Disappointing UK data weighed on the Sterling towards the end of the week, triggering a pullback in GBP/USD to fresh daily lows near 1.3360. Looking ahead, the next key event across the Channel is the BoE meeting on December 18.
Japanese Yen bulls have the upper hand as hawkish BoJ outlook offsets risk-on mood
The Japanese Yen remains on the back foot through the early European session on Friday, though it lacks bearish conviction amid hawkish Bank of Japan expectations. Traders have been pricing in the possibility that the BoJ will hike interest rates as early as next week.
Editors’ Picks
EUR/USD struggles for direction amid USD gains
EUR/USD is trimming part of its earlier gains, coming under some mild downside pressure near 1.1730 as the US Dollar edges higher. Markets are still digesting the Fed’s latest rate decision, while also looking ahead to more commentary from Fed officials in the sessions ahead.
GBP/USD drops to daily lows near 1.3360
Disappointing UK data weighed on the Sterling towards the end of the week, triggering a pullback in GBP/USD to fresh daily lows near 1.3360. Looking ahead, the next key event across the Channel is the BoE meeting on December 18.
Gold losses momentum, challenges $4,300
Gold now gives away some gains and disputes the key $4,300 zone per troy ounce following earlier multi-week highs. The move is being driven by expectations that the Fed will deliver further rate cuts next year, with the yellow metal climbing despite a firmer Greenback and rising US Treasury yields across the board.
Litecoin Price Forecast: LTC struggles to extend gains, bullish bets at risk
Litecoin (LTC) price steadies above $80 at press time on Friday, following a reversal from the $87 resistance level on Wednesday. Derivatives data suggests a bullish positional buildup while the LTC futures Open Interest declines, flashing a long squeeze risk.
Big week ends with big doubts
The S&P 500 continued to push higher yesterday as the US 2-year yield wavered around the 3.50% mark following a Federal Reserve (Fed) rate cut earlier this week that was ultimately perceived as not that hawkish after all. The cut is especially boosting the non-tech pockets of the market.
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