Can I buy now?
Price Action Lesson #4
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So for getting long, we are looking for a higher short-term low, and to be short we need a lower high.
That’s great, but how to find it? How to know that this is the bottom and the market will go up?
“I am waiting for it to reach the support level and will buy then”
Stuff like supports, resistances or Fibonacci retracements can be useful, but those levels are everywhere! Wherever you draw a horizontal line and then scroll the chart back, you will find that the market had found support or resistance around that line. That is, of course, if we are not in a new all-time high/low situation.
It both cases this is not something we can solely rely on. We need more.
“When my favourite indicator goes oversold, this is the bottom, and I can buy”
Indicators are also nice but can they tell you where exactly to buy? Let’s check.
Here is the chart of Canadian Dollar futures. If you are a Forex trader the USDCAD will be the same, just inverted.
At point A, it stayed oversold for a lot of time. But point A is not a higher short-term low, right? That’s correct! At point B there is a higher short-term low, but the indicator is not giving a signal at all (it doesn’t reach the oversold zone). In C it signals too early. D is the same as C.
That’s right, nothing can match the effectiveness of the price action and chart reading.
Just one clarification. We are discussing here the buy scenario, but it is the same (inverted) and can be applied if we are searching for short signals.
Here is the signal.
More than a decade ago, that was my favourite price action signal.
It is a combination of three candlesticks. #1 is a down candlestick. The next day #2 moves down and breaks the Low of #1. That triggers a lot of selling. If after all that selling, the prices can come back up and Close higher than the Open, that should mean a reversal and the new direction is up. This pattern is completed if #3 breaks above the high of #2. That was when I was buying.
I did a lot of real trading and backtesting using this entry and Larry Williams’ bailout as exit (getting out on the first profitable Open price). In EURUSD the win rate was about 60-65%, but it was not making enough money. The risk-reward was not very good, falling below 1:1 most of the time.
But just look at how it is picking the bottoms on the same CAD chart.
But wait a minute, where is it?
Only the first bottom looks similar, but this is the ultimate bottom, and we need a higher one to buy. But all those higher bottoms do not show the same pattern. Some of them contain a lot of inside days between #2 and #3 while in others #2 is an outside day!
BTW, there is a good sell based on that combination. Can you find it?
Again something is not right. If we are using this pattern, we won’t be able to catch the higher lows because it won’t give us a signal.
That is because here we are facing some of the biggest truths in trading.
- The situation is different
- The market participants are different.
- In one bottom the public is buying, in the other, it is selling
- Some market bottoms are expected by market makers, and they are prepared, others are a surprise and mean an increased risk for them
- In some bottoms, there is a lot of positioning by the institutional players
- Buying (or selling) is not the same. Not the same amount. Not the same intensity.
and so on.
All this means that the market’s tops or bottoms are not the same all the time.
It is the reason why the above indicator is failing. Because the bottoms are not the same. One requires only two candlesticks to be formed while another time the market bottom consists of 10 candlesticks. Some might include a deep correction of the previous up move while other’s don’t.
Even that pattern from above is changing. Look at your checklist. Inside you’ll find different types of candlestick shapes. Now try to replace the candlesticks from the discussed pattern with those from your checklist or The Talking Chart bool. See how it is changing? Now you can go to your charts and try to find those new combinations. That is how you learn chart reading.
But can we use that pattern from above?
That was the pattern after which the K move had begun (see price action lesson #2). It was also the beginning of some of the other moves shown on that chart. So it is something. But waiting for only one pattern would mean missing a lot of opportunities, because as you can see it is not appearing that often.
The main takeaway, from this lesson, is that you can’t expect the next tops and bottoms to be the same as those you just saw. Have in mind that, when you are about to make your next trade.
On second thought, they are not same, but all of them have some things in common!
We are getting deeper into this in the next price action lesson.
I hope you liked this one and just to let you know that The Talking Chart book has a video upgrade. The chart reading techniques are explained in video format. Also, new stuff is included. This video upgrade is available for purchase at www.talkingchart.com
If you want to see some great examples of taking buys and sells on higher highs and lower lows, click here.
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