Saturday, September 20, 2008

USD/CHF Trade 9-19 (Fractals and confirmation)

This trade confirmed to me that just because you miss the initial bounce at a level, does not mean you miss the trade. After speaking with other traders, I realized that letting price tell me what to do is of upmost importance. Too many times I try to get the first hit but don't realize that after that trade is over, price is not willing to give up and will come back to the area, or near it and fail once again and continue with the flow. I have come to a conclusion this week. I am of the opinion that there are key areas but there are key price points, which are much more precise. Many traders can define an area, but not the price point which leads them to more emotional decisions. If a trader can locate the key price point, even when wicks are poking through like tooth picks through plastic he can understand what price is doing. Well, needless to say, I have not been a savvy trader because I thought that once the first hit was over, the trade was done. I have seen otherwise just by observing price the last two weeks. It all comes down to fractals as Chris has shown in his course. Understanding price and the way price moves with the larger fractals is simple, yet so difficult to implement. I think there is support/resistance, which can be wicks or highs and lows, but I also have come to see that there is also "true" support/resistance which is like an axis. Price will either break on the other side and retest before continuation or it will hold and fall back into the range. Understanding this is of utmost importance to me now. By understanding what price is telling me, I am not only able to anticipate where we are likely to get a bounce, but after the bounce I can now observe with confidence, the likely next move it will make. I do this by locating TSR or true suppport resistance. TSR is profound and is like a magnet. price will be drawn to it with the bodies and certain wicks. The chart time I put in this week, just focusing on TSR has been like a light bulb turned on in a dark room. This trade I placed on the USD/CHF pair shows that just because you miss the intial bounce, does not mean the move is over. After viewing the 4 hr chart, I located a key "area". I did not trade the bounce, because I was not on the charts at the time. After looking, I saw that this pair had traveled quite a ways and was continuing to make new highs into some serious price obstacles. This was around 6am EST when I zoned into this pair. I did not know which way it was going to come out of this fractal, but was going to let price tell me. I also was not willing to buy, as I felt it had gone too far and the overall pattern on the longer time frames seem to be a bearish BBB (Bull Bear Battle) pattern. Many times the last leg of the BBB will be the one that will rally ( or in a bullish one fall) to 79% and then break in my anticipated direction with force. Knowing this, I really did anticipate one of two things. Either it will rally to a higher level of SR, which I had at 1.1310 or it would start to break down from here. The five minute chart gave me clues as it started a BBB pattern of it's on. I should not trade patterns on lower time frames unless they are setting up that way at a key area. This was the case here. The 5 min. made lower lows but could not break above the fractal and hold. I could have traded the top of the fractal but was not comfortable at this point to do so. Thus, after viewing the 1 hour chart on the candle close of the 7am EST candle, I traded the retest of the broken fractal. I never suffered drawdown. This had to be one of the best trades I have made because of the way I was able to put all my tools to use. Price had confirmed what it was going to do. Of course, it can do anything from this point, but the majority of the time, this type of trade will pay and as long as I manage properly, I will come out with profit in my account overall. The key to this is if this had been a fake, I could have likely cut my losses short because I would have been able to see price not willing to break out of this fractal. Fortunately for me and by waiting on the 1 hour close, it did what I anticipated and fell to a nice pip profit.