Chapter 9 I Fig 9.92a I wwwProRealTime.com eurlusd 5·minute July [&2012 �P,oReeIline.com oioo l' .. Thin Asian ranges are bound to get broken in the EU or UK Open The setup here wasn't very powerful, but good enough to go. Should this show up in a round number level, then it is probab¥ best to skip. 06:00 07;00 Consecutive Intra day Charts -July When a reversal exit comes awful¥ close to the level of the original stop, in some cases it may be wise to let the trade be, particularly When prices are pushing in resistance. In the situation below, they had clearly broken through. I EU Open 08:00 10:00 Market is bracing itse� for the report later in the session. Stay out. o ProRel!llTIrne.com 09:00 10;00 11:00 1200 13;00 1":00 I Fig 9 92c I 'i " tO�O., l+f't�+I;: ... t�.DI�6., " 'rll 1200 13:00 14:00 15:00 16:00 17:00 18:00 341 1,235 1 .24 1,235 1,235 1 ,23
Understanding Price Aaion I Fig 9.93a I _.ProRealTime.com eUf/usd 50minute July 09-2012 o ProRearrme.com 04:00 06:00 07:00 08:00 10:00 I Fig 9.93b I ·1 ,235 .... I skip longs I ---Wt/ --- skip 10 ProRea/Time .com 0 00 09:00 10:00 11:00 13:00 14:00 I Fig 9.93c I ,1 ,235 �o����� �� ______ � ________ � ________ � ____________________ __________ � ______ 1,235 12:00 13:00 14:00 15:00 16:00 17:00 18:00 1S:00 342
Chapter 9 I Fig 9.94a I www.P.oR •• lTime.com eu,fusd 5-minule July 10-2012 Consecutive Intraday Charts -July In cases like this, an alternative entry technique could be to wait for prices to take out the little pattern line first, instead of entering on the break of the small signal bar with the perforation yet to take place. ·� ... -t<=' • .,.......,.o-o F 1,235 ,1,23 I nice false low in signal bar I �o���rn���� ______ � __________ � ________ � ________ � ________ �==========::==:: ____ �I� 04;'00 05;00 06;00 07;00 I Fig 994b I OProReGiTirne.com OS:oo Q9;00 11:00 6> ProRealTine.com 1200 13;00 14:00 15;00 08;00 12;00 +, 09;00 10:00 False high in squeeze confilTnS failure to undo the bear break, demoralizing bulls. 13:00 14:00 I Fig S.94c I 1.235 1 ,23 1 ,23 '., I s� P shorts I 1fY. ++ ,225 16:00 17:00 18:00 343
Understanding Price Aaion I Fig 9.95a I WIWi.ProReamme.com eurfusd 5-minuto July 11·2012 ()"OO I Fig 9.95b I 08:00 oa'oo I Fig 9.95c I @>ProReamme.com 12:00 344 0Sc00 0000 07:00 11:00 ,100 14:00 15:00 tlfl pbc tr -on -g tri Ie--:-botto -m -ele -m -e -nt l oa'OO 09:00 '0:00 1200 BOO 14:00 This M-pa tern break is a likely candidate to get shorted. These are interesting setups to consider should you want to hrow in some contrarian tactics at some point Apply with care. 16:00 ,.:00 15:00 ,,23 11:00 .,,23
Chapter 9 Consecutive Intraday Charts -July I Fig 9.96a I www. ProRe.lTime.com eurlusd 5-minute July 12·2012 This short anticipates the bottom barrier to crack; so watch closety the activity in the UK Open for signs of adverse buildup. 00;00 04;00 0&00 I Fig 9.96b I 06:00 '0:00 Bulls give it another shot, but again fail to break through. Demoralization is bound to ;��Tt;;;�&!;;::;�;;f;;';;::':= kick in sooner or later. Keep an &{e out for ___ -.., _____ -l- a beari: signal bar to set up a short. OProRealTime.COITI 07;00 '200 08;00 t 10:00 11:00 1200 ,�oo This bottoming pattern took no less than five hours to set up. Good enough to take a shot at an upside break. Considering the eartier bearish climate. however. and not to mention the aO·level overhead and the fact that the US lunch hours were coming up shortty, this is one such offer best accepted onty with the reversal exit as part of operating tactics. If you accept, monitor closety the OO-Ievel response. \ ------------ Ww-variant 13:00 14:00 15:00 16:00 17:00 16:00 345 1 .225 ',22 1 .225 1 ,22 1 ,22S ' ,22
Understanding Price Aaion I Fig 9.97a I _.P,oRe.mme.com eur/usd 5-minute July 13-2012 T • ProReelllne.com oioo 04:00 05:00 I Fig 9.97b I 0000 These weak squeezes are known to trap traders into a premature break. Not pleasant also was the timing (UK Open) plus the fact that both the 25ema and the 00 level stood to work as adverse magnets. UK Open 07:00 09:00 The range lacks a clear bottom barrier, making it more difficu� for the bears to decide where exactly to short. -----------------------------.--��-------------------- This could resu� in less follow-through. --------4 o ProRealTime.com 0000 09:00 10:00 11:00 I Fig 9.97c I 12:00 13:00 14:00 - I-:-M t if" 'I'�i n skip V Do not trade this ral� for continuation. 15:00 1,225 1 ,215 1 ,22 1 ,215 1,225 1 ,22 �.����n�_����--------�---------- --------�-----L----,-----------r--------- -------- ,215 1 00 13:00 14:00 15:00 16:00 17:00 18:00 346
Chapter 9 I Fig 9.98a I www ProR •• ITim •. com eurlusd 5-minute July 16-2012 o ProReafTine.can 0<:00 • o ProRealTirne.com - II ProResiTIne,COI'I'\ , 08:00 12:00 05:00 06:00 07:00 , moo 1�OO 13;00 14;00 , 11:00 15:00 08:00 + Consecutive Intraday Charts -July moo I both are very fi ne entn es I pb pbp !-!- 10:00 11:00 An understandable short at first glance, but this was the second pullback to the 25ema (generally not the best trade·for-failure candidate) and the entry suffered risk of the DO·level adverse magnet Plus there was a US news release coming up at 14:30 CET . EU lunch hours 12:00 News rallies are best not traded for continuation, particularly when they start out from a false low. 16:00 17:00 J 14;00 16;00 347 '1,225 1,225 1 ,22 1 ,225 ,1 ,22
Understanding Price Action I Fig 9.99a I """"'.ProR •• lTime.com eur/usd 5-minUlo July 17-2012 @>PrcReGlfme.com 03:00 04:00 05c00 Looks like the bulls are about to gun for the 00 level, but the long does not really set up well. Shady situations in the UK Open can lead to powerful contrarian attacks. Best SI2f out, and await a better setup 01:00 08:00 I Let others fight it out in the 00 level I skip 1 ,235 1 ,215 1,235 1.23 .!! (I)nProReolT!!.!! !!!!O.!i !!!! om!.-.,-____ � _____ ____ � ____ _____ � ____ ...,- __ -" m 06:00 1ioo ®ProReGlrme.com 11:00 12:00 348 10:00 11:00 Market looks to be stalling In antiCipation of the news report at 16 00. Exit the short before the news comes out. 13000 14:00 13:00 14:00 I Fig 9.99c I 1,23 I ski P shorts I ·1 ,225 16:00 17:00
Chapter 9 Consecutive Intra day Charts -July I Fig 9.100a I www.ProReaITime.com aur/usd 5·minut. July 18·2012 I Fig 9 100b I Failure of the bulls 10 break back -- second time around leads to =--- Mm-- Iff demoralizati on r---- . '1'O • .y. � . * .JA' l' '.;;;;t.ff0 *"*. 'i<: .. . .. ,, . . aw+ •• r¢O� -r � .', � . .. .... ...... . . . Rev elOl lf nol yel . . +."'* .' .. , shaken out of the ...,.. long. I. '�oOQ�tJO '. ;----;tf"'"'filii;; 'ia:d 10 '1' Co ProRealTime.com 06:00 12:00 13:00 1,23 1 ,225 1 ,23 1 ,225 !l.1i>�P, l!!! ime!!£"'"'� ___ ---' ____ � ___ �T=�=�==;� ___ ____ .,-- __ -----1 ,22 12:00 13:00 14:00 15:00 16:00 17:00 18:00 349
Understanding Price Action I Fig 9.101 a I www.ProReaITime.com eur/u3d 5-minute July 19-2012 OProRealrrne.ccm 04:00 05000 06:00 I Fig 9 101b I 07:00 08:00 10:00 .!!!.!!!!! eProReoi�rl1\O=comL,-06;00 , -----,- 00 10;00 -�-__ 11:00 12: ,�00 13:00 �, _-,...-- 1 OO -----I f,m I Fig 9 101c I . U 1'6bD .--'=-..r --NJ=b-J.t:=I:;: "; � · .... O.l.6+ ¢ Round number tug-a-war slowly resoMng in ++tl __ �:: E;:n4-JJi ;;�_.:::::::::: U __ favor of the bears. AtwfJyS remain panem, • 'i' but ready to strike. r �� f � Skip longs I ] o Prc::ReSfrne.com 12:00 13:00 1�:OO 15:00 16:00 17:00 350 I skip longs I 18:00 19:00 '1 ,23 1 ,225
Chapter 9 I Fig 9.102a I _.ProReaITim •. com .ur/usd 5-minute July 20·2012 Consecutive Intraday Charts -July Not a great chart to play from ttle long side. Should prices start to stall in the highs, the 50 level magnet is likety to pull them right back. 1 ,23 ��R������ ______ � __________ ________ � ____________________ � ________ � ________ � I� 04:00 05.:00 06:00 01:00 08:00 09:00 10:00 I Fig 9 102b I OProRe8lTIme.com 07:00 08:00 11;00 12:00 09:00 . 10:00 13:00 11;00 15;00 12;00 13:00 Strong adVerse magnets of the 25ema and ttle round number. 1�00 I skip shorts I 17;00 14:00 I Fig 9 102c I 1 ,225 · 1 ,22 18:00 351
Understanding Price Action I Fig 9.1038 I WWN.ProR •• lTime.com eurlusd 5-minul. July 23-2012 4& ProRealTine.com 04:00 j Fig 9 103c I 12:00 352 .... 06:00 07:00 This is probably doable, but the small w in the Ww-panem lacks a bit of substance. The following trade set up better, with more hanmony in the Ww relation. And more buildup. 10:00 ,":00 1S:00 I skip shorts I 08:00 09:00 1Qoo An understandable short into the 00 magnet. but could easily backfire because of the rather thin buildup (nice false high, though). 12:00 I skip longs I 1 7:00 19:00 1 ,215 1 ,215 1 ;21
Chapter 9 Consecutive Intraday Charts -July I Fig 9.104a I www.ProReaITime.com .urlusd 5-mlnute July 24·2012 1 ,215 03:00 04:00 flSOO 00:00 07:00 08;00 09:00 10:00 ", O""",", .. :!! r ... ""com",-� ____ � __________ � ____ ,-- _________ _ 1,205 06:00 09:00 ·10;00 I Fig 9 104c 1 12:00 1100 14:00 11:00 1200 --M-T 13:00 A few extra bars of buildup would have been nice here, so as to really tighten up the squeeze. 15:00 1froo 17:00 14:00 1 ,21 1,205 18:00 353
Understanding Price Action I Fig 9.105a I """". ProRealTime. com eur/usd 5-minule July 25-2012 03:00 05:00 0000 I Fig 9.105b I 10:00 11:00 12:00 I Fig 9.105cl I lower highs, but be careful with shorts I @I: ProRealfrrte.COrt'l 1200 ,�oo 14:00 15:00 354 ' .2'5 pr/pbc 13: ' 00 14:00 15:00 ·',215 1,21 16:00 17:00 16:00 19:00
Chapter 9 Consecutive Intraday Charts -July I Fig 9.106a I -..-. ProReaITime.com eur/usd 5-minut9 July 26-2012 @I ProRealTlme ,com 04:00 05:00 OProReefTirne.tom 07:00 06:00 09:00 4) ProRealTime.com 12:00 14:00 When deciding whether to accept an entlY on the break of a tall signal bar, at least monitor the position of the 25ema. If your stop resides beyond it, the trade has more merit Note also how the entlY bar put in a pattem line test If that happened prior to gener. ating the short enny, that is another element favoring participation oioo 08:00 10:00 Bears still in position should exit above this bar (rev. exit). 11:00 I Best to let it ride I 15:00 16:00 09:00 �� / � � this rally was induced n tJy scheduled news then T enny was best skipped. magnet � 12:00 13;00 14:00 17:00 16:00 355 1 ,21 1 ,22 1 ,215 1,23 1 ,225
Understanding Price Action I Fig 9.107a I www.ProReaITime.com eurfusd 5-minute July 27·2012 " ProReemne.com 03:00 04:00 I Fig 9.107b I 08:00 I Fig 9 107c I T 1". Annotated as aggressive because of the relative� shallow pullback and the double adverse magnet of the round number and the ceiling test level. Conservative bears should skip this one. OHIO 1000 Prices are back in the high of range. Best �. "m� '�:::� ��)U.I i skip ----- SHS with Wwithin ----- 10:00 , 11:00 skip 12:00 13:00 , 14:00 1 ,23 1 ,225 1 ,225 1 ,235 1 ,23 An understandable long, 1 ,225 �����========�== ___ �_Lb_ill�e��a gg e�s_s_ve_�_� _ __ �� ___ �� __ � 1200 1 400 15;00 1 6:00 1 700 1600 356
Chapter 9 I Fig 9.108a I www.ProR •• ITime.com eu,fusd 5-minute July 30-2012 � ProRealTime .com 03:00 I Fig 9 l08b I o ProReeiTime.eom I Fig g lOBe I 04:00 05:00 Rev. exits on a di agonal pullback (more or less) will often trap you out of your trade. Not all can be avoided, though. --w -- 06:00 09:00 . 10:00 06:00 Consecutive Intraday Charts -July Quite a tall signal bar, and ahead of the UK Open as well. Not a very strong setup arryw�. Best I� low for the moment. 01:00 06:00 A classic development : neckline of head-and-shoulders pattem breaks false� (T) and then a fourth arch is added (squeeze) to set up the short in high-odds fashion. T 11:00 1�00 13:00 14:00 357 1,23 10'00 1,23
Understanding Price Action I Fig 9.109a I www.ProRealTime.com eur/usd 5-minute July 31·2012 04:00 05;00 +.� o ProReaITime .COIt'I 08:00 I Fig 9 109c I 1200 358 07:00 09:00 10:00 13:00 14:00 08;00 11:00 I ski p shorts I 10:00 EU lunch hour tries to put in a pullback reversal. Action is not very cOnvincing, but holds up well in pattern Ii ne suppon. • 12;00 13:00 --w-- 15:00 16:00 JJ� i== pr @ 1,23 1.225 1,23 ·1.225 ,1,225
Chapter 9 Consecutive Intraday Charts -July/August I Fig 9.1 10a I www.P",ReaITime.com eur/usd 5·minut. August 01·JJ12 OH>l 05:00 06:00 I Fi99.1 10bl @ProReftlTime.com 06:00 09:00 10:00 I Fig 9 1 10c I 12:00 1�00 14:00 Both are annotated as aggressive because they are continuation wagers in a market that has not really been put to the test by the bears. Strong adverse magnet of 1.23 also. 07'00 06:00 Powerful pullback in support of round number. Go eas.; on the short side. 11:00 12:00 09:00 13:00 An understandable scalp to rake in some pip on the Wf1{ to the 00 level magnet, but this did not set up well for our purposes. 15:00 16;00 17:00 1 (:00 18:00 359 ,1 ,225 1 ,235 1 ,235
Understanding Price Action I Fig 9.111a I _.ProReamme.com eur/usd 5-minute August 02·2Ot2 OProReafTme.COtn 04;00 ()5;00 06 ;00 07;00 I Fig 9.1 1 1 b I 0600 -M- ��!)- ! .� CI ProRealTme,eom 06;00 09;00 10:00 11:00 12:00 <;>� � ��(iilfDjoll+tl,.oj I Just stay out. I • ProReaiTine.com 1200 13;00 14:00 15:00 16;00 360 1 ,23 09;00 1();00 J�� ,1,23 1 ,225 13:00 14:00 I Fig 9 111c I I,m ·1,22 I • ,1,21' 17:00 18:00 19:00
Chapter 9 Consecutive Intraday Charts -August I Fig 9.1 1 2a I _.ProRealTime.com eur/usd 5-minute August 03-2012 " 02:00 I Fig 9 1 1 2b I 01:00 I Fig 9 1 1 2c I • T oioo 04:00 05:00 06;00 These type of breaks always look nice in hindsight. Perhaps on a faster frame they are quite tradable, if onty for a quick scalp. On the 5-minute, however, I strongty a<Mse against accepting entries that are "too" far removed from the 25ema. Should these breaks fail, you may not be offered a similar chance to exit with minimal damage as is usualty granted on a faster chart (more bars to assess). 1200 13:00 14:00 15:00 07:00 oioo 12:00 13;00 16:00 17;00 18:00 361 1,215 1 ,225 1 ,225
Understanding Price Action i9 9.1 13a I _.P",Re.mme.com eur/usd 5.minut. August (l;.2012 �Ot .Pr�rne.com 0200 03:00 04:00 05:00 I Fig9 1 13b I (0 Pt'oRealTme.com 07:00 ()9;00 10:00 I Fig 9.1 13c I Bearish moming session turned bullish. In such an environment, pullback reversals are less likett to find immediate follow-through (ranging market). Pick entties with care or stay out. skip OProRealrrne.CQm 12:00 13:00 14:00 15:00 362 1 ,235 07:00 00:00 OS:OO 11;00 1200 13:00 ',235 16:00 11:00 19:00
Chapter 9 Consecutive Intraday Charts -August I Fig 9.1 14a I www.ProRealTime.com eur/usd 5-minute August 07·2012 · 1 ,245 Should tile break start to fa�er, this could quickly turn into a trap (bears short ng tile bull break for failure). -- skip Wwvariant -- 1 ,235 �e���� �� ____ -r ____ � _____ � ____ � ___ ==�:: ___ � ___ � 04:00 05:00 06:00 O�OO 00 09:00 11100 I Fig 9.1 14b I 00:00 cioo I Fig 9.1 14c I 13:00 1,245 --M -- ········ ········· ········ ···· ···············(i6.1.Of 90.�60T ����t.... """ ---..-- · ··· · ·· · · · ·········· ······· 1�00 15:00 skip 1 ,24 ----: -- --''-- ---, --:-- -1 Bulls are Itle stronger party but Itle Trading 'iNI<I'{ from a round number into market is essentially still ranging. overhanging resistance (M) does not Consider also Itle EU lunch hours. qualify as a conservatve bet. 1200 1�00 14:00 16:00 18:00 363
Understanding Price Action I Fig 9.115a I www. ProReaITime.com eur/usd 5-minut. Augusl 08-2012 --- ----- w-- ---- -" • .!:! !!! """ com""-___ �----�, -------r- ----�,-- I Market is clearly buildingup to a reversaL I 04:00 05:00 00:00 0700 08:00 09:00 10:00 I Fig 9.1 15b I OProReaITime.com 06:00 09:00 I Fig 9.1 15c I 1200 1100 364 10:00 11:00 1200 Overhead resistance a little above the 00 level --------- I skip longs I ww----------- 14:00 15: ' 00 16:00 13:00 14:00 17:00 18:00 1,235 1 ,24 1 ,235
Chapter 9 Consecutive Intraday Charts -August I Fig 9.1 1 6a I W\WI.ProRealTime.com eurlusd 5·mmute August 09·�12 • 03:00 0.:00 07;00 08:00 12:00 ,3:00 • 05:00 06:00 07:00 09:00 1QOO 11;00 1200 Atway:, be careful with shorting for continuation in the current lows of the market, especially when there is a round number and a debatable pattern line involved. 14:00 '�OO 16:00 -MI evening-star I Iff \ ! 0000 skip ! noo 14;00 I skip shorts I 365 1 ,24 1 ,235 1 ,235 1 ,235 1 ,23
Understanding Price Action I Fig 9.1 1 7a ! www.ProRealTime.com eurfusd 5-minute August 10.2012 fA: ProReelTrne.com I Fig 9 1 1 7b I 08:00 IFig 9 1 1 7C ! @ProRealTime.com 13:00 366 04:00 05:00 00: ' 00 06:00 07:00 08:00 You can almost sense the market to roll aver. but the situation didnt really produce a tradable signal bar (very tiny) Optional in these cases is to postpone entry by one or two pip so as to be sure the pattem line is broken also (apply sparingly. though). 12: ' 00 , 10:00 -M - tt still positioned in the short. apply rev. exit above this bar (failure of bears to break through is likely to cause a bullish counterstrikej. 14:00 16:00 11:00 16:00 , 1 4:00 19:00 10:00 1 .225 I l,. 1 .225 1.23 1 .225
Chapter 9 Consecutive Intraday Charts -August I Fig 9 118a I www.ProReaITime.com eur/usd S-minute August 13-21l12 -------w------ I Bullish breakout in the making I 1,225 04:00 05:00 07:00 06:00 10:00 !!!..!;'!P,oRl!l!.!.!!!"�T""�.e£!!om!!!..__�----�----_----�----_r----_----�----'1,225 07:00 00;00 09:00 . 10:00 11:00 12:00 13:00 14:00 IFi99 1 18Cl -M - 1 .235 1 ,23 11:00 12:00 13:00 14:00 15:00 16:00 17:00 laoo 367
Understanding Price Aaion I Fig 9.1 19a I www.ProRearTime.com eur/usd 5-minut. August 14-2012 • Apart from the weak pressure on the whole, this is not a good level to trade the M-pattern for failure (near the highs) . �.�����r am� __ � __________ ________ ________ � __________ ________ � ________ � __ l� 0200 Inoo ()('OO 05000 01<00 07,00 moo �oo I Fig 9 1 19b I o ProReafTime.com 00,00 07:00 I Fig 9 1 19c I 11:00 1200 368 --- --'- �,�,.1.!.i __ _, "tt1-..� 10:00 Interesting false high, but not a great short setup, straight into the 50 level and the lows of a range (see Asian session) \ 11:00 ---- --- 13;00 14:00 15:00 16:00 --- w--- 17:00 13:00 18:00 1.21S 1 ,24 1 ,13
Chapter 9 Consecutive Intraday Charts -August I Fig 9.120a I w.w.'.ProR •• mm •. com .ur/usd 5-minut. August 15-2012 0<:00 I Fig 9.120b I o ProRealTime.com oaoo I Fig 9 120c I I Very thin Asian range I The thinner the range. the less forceful the breakout (in general). There is a nice magnet of the 50 level to gun for. though. 05:00 06:00 Progressive lower tops indicate failure of the bulls to break bearish defense. 01.00 With the signal bar so tiny. an attemative could be to wait until the little horizontal line is taken out. which would confirm the pattern break a little more strongly. 09:00 10:00 . 11;00 oaoo 09:00 12:00 13:00 The pattern on the left is a little too blocky to short for failure at this point. 10:00 14:00 + ' .235 ' .23 1 .235 1 .23 1.235 ' 1 .23 '''''' P,oR'''''' ''' Time'''''' '''''' ____ ---r _____ .---- ____ ____ -,-- ___ -'-'_----, _____ -,-- ___ --' 1 .225 12:00 13:00 18:00 369
Understanding Price Action I Fig 9.1218 I _.ProReammo.com eur/usd 5-minute August 16-2012 Nice scalp to the top of the range , pretty aggressive trade if you ai m for 20 pip, though +iI'+i4'Q� ����� �-------- OWl 05:00 0000 07:00 08:00 09:00 I Fig 9.121bl 07:'00 0000 09:00 10:00 11;00 1200 13:00 I Fig 9 121c I 370 ·1 ,?3S 1 ,23
Chapter 9 Consecutive Intraday Charts -August I Fig 9 122a I WoIIW.ProRearTime.com eurfusd 5-minute August 17-2012 Inoo I Fig 9.122b I o PtoReftlTime.com 07:00 CI3;OO I Fig 9.122c I t 12:00 Bullish dominance not convincing� established in 50 leveL 04:00 05:00 06:00 09:00 10:00 11:00 This short goes up against a pretty strong block (below 50 level). but the bears definite� hammered back the bullish charges above the round number, proving their dominance once more (worth a shot). 1 3:00 14:00 1�00 07:00 1�OO 1200 � you traded long and not yet on target, deploy a reversal exit below this bar to 1 ,2< avoid 50-level magnet skip 0000 09:00 1 ,24 13:00 14;00 1)35 1 .23 17:00 371
Understanding Price Aaion I Fig 9.123a I www.ProReamme.com eur/usd 5-minute August 20-2012 I"",OO ..IO\�� .235 ������t��i� • ProReaIf ..... can 03:00 04:00 I Fig9.123bl o ProReelTine.com 07:00 08:00 I Fig 9.123c I 1200 1�00 372 06:00 09:00 10:00 14:00 1�00 pb '1,23 01:00 08:00 09:00 1ctOO 11:00 12:00 13:00 14:00 1.235 1,23 17:00 16,00 1�00
Chapter 9 I Fig 9.124a I \/o';/W.ProReaIT'me.com eur/usd 5-minute August 21·2012 T • .,. ... to 04:00 �oo 00:00 01:00 I Fig 9.1 24b I .. Consecutive Intraday Charts -August J!'�� i skip i tff @ 10:00 "1,2< ·1,235 1 ,245 1 ,24 �O���NI�ft�� ________________ � ________________ � ______ � ______________ �1�S 06:00 09:00 10:00 11;00 12;00 13;00 14:00 I Fig 9 1 24c I 1 ,245 1�' @ProRealTime.com 1200 1100 14:00 1�00 I�OO 17:00 18:00 19:00 373
Understanding Price Action I Fig 9.12Sa I _ProR •• lTim •. com .urlusd 5-minut. August 22·2012 0.\:00 05:00 I Fig 9 125b I �ProRe8ITime.com 08:00 I Fig 9 125c I ++ 07:00 09:00 10:00 11:00 --------SHS-------- oeoo 09:00 1200 10:00 11:00 Do not short for failure in lows of range and straight into the round number to boot 13:00 14:00 ----w-- 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19;00 374 1,25 1�5
Chapter 9 Consecutive Intraday Charts -August I Fig 9.126a I www . ProReafTime.com eUf/usd 5-minute August 23-2012 --------�----------------�--�Lll�i Q ProRealTine.com 04:00 05:00 06:00 I Fig 9 1 26b I Buildup progressions in the lows --of a range w--: often set up a bounce to the top barrier (and ¥ice versa) 07:00 00.00 0900 50 level fight. Stay out and wait for the situation to tighten up. 1noo '1,26 1,255 1,25 1 ,26 �O��������� ________ � ________ � ________ � ________ � ________ � ________ __ l,25 08:00 0900 10.00 11:00 12;00 1ioo 1(:00 1,26 -1,255 375
Understanding Price Aaion I Fig 9.1 278 I www.ProRealTime.com eurlusd 5-minute August 24-2012 04:00 05:00 reoo 07:00 t o ProReelTime.com 08:00 O� .. OO moo I Fig 9.1 27c I 11:00 12:00 1 3:00 14:00 15:00 376 1,25 08;00 O!I.OO 10:00 pbp L 1,25 12:00 13:00 1 ,255 1,25 16:00 17:00 16:00
Chapter 9 I Fig 9.128a I www.ProRe.ITime.com eur/usd 5-minute August 27·2012 OProReanne .com Consecutive Intraday Charts -August Alwft-{S tricky to trade away from a round number in the London Open. But the short set up well. 04:00 05;00 08:00 07:00 08:00 10:00 •• OProReelflme.com 08:00 OProReamne .c:om 1200 I Very thin price action. Let go. ' UtOO 11:00 1200 13:00 Summer months can be awfully stale. When confronted with these lackluster sessions, a very common mistake is to overtrade . It's better to lay low instead. 13:00 14:00 16:00 17:00 1·4:00 ,....+ 1aoo 377 1 .255 1,255 1,25 1 .255 1,25
Understanding Price Action I Fig 9.1 298 I www.ProR •• lTime.com eUflusd 5-minut. August 28-2012 1 ,255 .. ----YW; ___ :... bC �e ��d�T_���_� ____ -r ____ -' _____ � ____ -r _____ ____ �_ 1)� 04:00 05:00 06:00 07:00 0000 09:00 1frOO I Fig 9.129b I --M -- o � b+O �(J1"+� � ')55 �,6 --""""'"'- �� o 07:00 oe:OO 0.:00 moo I Fig 9 1 29c I ' i.!..I.lf��.+�� ' � iirr1� / $ ProReamme.com 11:00 1200 13:00 14:00 15:00 378 Bulls are pushi ng on, but the 50-level fi ght seems far from resotved at thi s point. Best not to trade the M-pattern for fai lure here. 12:00 15:00 17:00 18:00 1,25 -1 ,255 ·1,25
Chapter 9 Consecutive Intraday Charts -August I Fig 9.130a I www.ProReaITime.com eurlusd 5-minute August 29-2012 ++ o ProRealTine .COIn 03:00 04:00 05:00 08:00 I Fig 9.130b I 1 ,26 I very weak setup 1,25 07:00 08:00 10:00 ------- Mm ------ 1,26 T �O�����T����--,-----�---�-r_----�---- -----._----��j ,25 07:00 08:00 09:00 10:00 11:00 1200 I Fig 9 130c I . � Annotated as aggressive because of the triple adverse magnet (25ema, 50 level and pattem line extension). The stop sulVived the pullback but it was a close call. 13:00 14:00 I Perhaps this doesn't look 50 bad, but do note that this took place in the US lunch-hour doldrums (1 8:00- 20:00) . 1 ,255 �O������oom� _____ r_----�----�-----._----�-----r--- ,25 1200 ll00 14:00 1�00 16:00 17:00 18:00 379
Understanding Price Action I Fig9.131a I www. ProRo.lT!mo.com eurfusd 5-minute August 3J.20t2 +",,',.&. I 50 level range I �O����Tmeam�-------� . . oo----------__ -------- ---------- -------- --------��------� � 04:00 06:00 07:00 08:00 09:00 moo I Fig 9 131b I OProRealTime.com 08:00 I Fig9 131cl o ProReelTirne.com 380 The market had hardly moved since the UK Open, which is indicative of a very stale session. That always makes a tease break a very likely candidate to get countered. Some contrarians like to short on perforation, others may want to wait for the break to fatter first. Tactics may differ, but the idea is the same: to take advantage of the bulls' poor chances for follow-through. 10:00 11:00 12:00 Repeated fai lures to trade away from the round number on both sides of the fence Best to lay low here until the situation could really boast of a technical resolution. 13:00 14:00 16;00 1,25 13:00 14:00 'I ��(Jr.Q"''t:J''lt'''�'" 1�00
Chapter 9 Consecutive Intraday Charts -August I Fig 9.132a I WoWf.ProRealTime.com eur/usd 5-minute August 31-2012 04:00 05:00 06:00 I Fig 9 132b I ------ VVW variant ------ 07:00 00:00 09:00 1<100 b4J o b J�� · O ? l1 Y �T�� JJ60 . . . th S . . . TTt. � � 1 _ A typical charactensUc of e upertrend IS that prices WIll " "Jtim" ,OO'�"' " " 25_ S"''''''' '' '. nl:J� sist on hopping along. standard pullback reversal tactics �."" .J1 may not suffice and more aggression IS called for. � My personal advice: sooner skip than chase. 07:00 08:00 0900 10:00 @>Pr e.Time,CClm 11:00 1200 13:00 14:00 11;00 15:00 13:00 1.:00 .t1'1 All bars exceeding their .... average span. Stay out. TT 17:00 18:00 381 ·1,255 1,25 1,25 1.16 1 ,255
Chapter 10 Trade Size-Compounding With so much of the attention directed towards the technical side of trading, it is easy to overlook the importance of accounting, and that of trade size in particular. For all who take their trading seriously-in essence, as a business-devoting a few moments to read up on this most essential topic will be time well spent. What will be offered in this chapter is not a set of hard-and-fast rules on how to apply volume per trade "correctly"; the variables regarding capital, skill and appetite for risk are just too widespread for accounting to be molded into a one-tits-all format. What we can do, however, is look at it from the perspective of the average, relatively underfunded trader and tind out how a better understanding of trade volume can have a major impact on the bottom line over time. All this is completely separated from the technical side of trading. It really is an accounting matter. The essence of trade sizing is very simple at heart. The basic idea is to always apply a certain amount of units per trade in relation to the available funds in the account. As the account grows, so should the number of units played. If this is done in strict accordance with a certain percentage of capital, it is referred to as compounding. For example, if an account grows from $5,000 to $5,500 and the risk is set to 1 percent per trade, a compounding trader will have increased his number of units by 10 percent but his risk per trade still stands at 1 percent. Likewise, when the account shrinks in value, so should the amount of 383
Understanding Price Action units per trade, yet the risk per wager will remain the same in terms of percentage. When exactly to adjust one's volume is a personal call. Scalpers, trading a single instrument, may want to do so every new session; but the principle of compounding works equally well when done from a weekly perspective, or even on a monthly basis. Variations on the compounding theme are practically infinite, and all will show different results, but more important than the exact application is to grasp the advantage of steadily increasing units in accordance with a growing account. For ease of use, we will explore the compounding factor based on weekly adjustments. Note: The following accounting suggestions are specifically geared towards traders who have been showing positive results for, say, at least a few months. Those still struggling to come out ahead are best advised to work on their trade selection first and not think too much about account buildup. They should either do their trading on a paper-trade account or, preferably, on a live account on superlight volume. The latter option is a great asset of trading spot Forex: you can participate in the actual market and see your orders filled, but without the psychological disadvantage of having too much capital at stake in the learning stages. (Many retail brokers allow you to trade as low as nickels and dimes.) A widely accepted and generally sound idea is to risk between 1 and 2 percent of capital per trade. While there is of course room on the low side, it is strongly advised not to risk more than 2 percent on a single wager; sooner or later, such hastiness is bound to backfire-and there isn't much call for it either. Compounding units on a more conservative risk model may have the account growing at a calmer pace, but the inevitable drawbacks will have less of an impact also, and in the end, this may benefit account growth much more than slow it down. To fully understand the virtues of compounding let us compare the trading results of two traders who scored the exact same points per week for 48 weeks on end. Trader A kept trading the same units per trade, despite his growing account, yet Trader B incorporated the compounding factor on a weekly basis. Let us further assume that both 384
Chapter 10 Trade Size-Compounding traders started out on a $5,000 account, risking 2 percent per trade ($100) and that they consistently scored 2.5 points per week. (A single stop represents 1 point, so this would be 25 pip per week when working with a 10 pip stop on a trade.) For Trader B, the compounded outcome as shown below can be computed with a so-called compound interest calculator, we will get to that in a moment. The results are as follows: Trader A consistently took out $250 per week, which means his assembled profit for the year is $ 12,000 (250 x 48), bringing his account up to a total of $ 17,000. Quite a respectable feat. Trader B started out with the same $250 profit in his first week, but then immediately incorporated these gains into his trading volume for the next week. And he kept applying the compounding factor every new week. After 48 weeks, this trader's bottom line will amount to a whopping $52,000. Do realize that both traders scored the exact same points per week for 48 weeks straight; they may even have taken the very same trades and managed them the exactly same. In other words, the huge difference in bottom line is solely a consequence of accounting. Of course, somewhere down the line, Trader A, in the face of his steadily growing account, will surely have increased his volume per trade. But then again, it is certainly not uncommon for a profitable trader to remain stuck on the same volume for many months on end, for example when trading the futures markets (it's quite a step to go from 1 to 2 contracts) , or when habitually pulling out monthly earnings to cover living expenses. Necessities and preferences aside, it is plain to see that the ideal situation is to run a trading account purely for trading purposes, without taking anything out for as long as possible. This way, even a "small" account can prosper pleasantly over time. It is interesting to note also that if both traders had managed to take out not 2.5 but 5 points per week, the yearly profits of Trader A would have doubled to $24.000 (bringing his account to $29.000), but not so with Trader B. In fact, after 48 weeks of compounding 5 points per week on a 2-percent model, his account would have shown an incredible 385
Understanding Price Action figure of $485,000. Such can be the power of compounding. Please understand that all of the above just serves to point out the virtues of running a trading business effectively. It is not about projecting hypothetical riches into the future. These figures, however, do illustrate the amazing differences in bottom line between two traders doing the exact same thing, but who take a different approach to accounting. It is therefore highly recommended to start implementing the compounding factor into the trading volume as soon as possible when profitable across the board. Quite intriguing also is that compounding not only proves its merits on the positive side of the equation. It works equally well in protecting an account from full depletion. In fact, it is virtually impossible to blow up an account when strictly abiding by the rules of compounding. After all, on a shrinking account, each new week will be traded with less volume (but with the same percentage of capital risk per trade). For example, if we once again picture a trader with a $5,000 account, risking 2 percent per trade, and we now let this trader lose 2.5 points per week for 48 weeks straight, then his account would still show a positive figure of about $426. In other words, for a non-profitable Forex trader to add funds to a shrinking account is a folly, for he can theoretically trade as long as he wants without ever depleting his initial stake. Adding funds to fatten up an account should only be done when profitable across the board and never in a desperate attempt to swing things around by trading bigger. Granted, this holds up mainly for the Forex market and may not apply to futures or stocks, where you may not be able to place a trade without a certain minimum balance in the account. But do check with your Forex broker on this matter also, because some may have put up a minimum barrier as well. The great benefit of trading spot Forex, and particularly functional when compounding, is that we can increase our trade volume in the smallest of increments. Instead of having to add a full contract, as in the case of the futures market, we can add just a handful of units on the next trade if we so desire (100,000 units being a full contract). To check the amazing benefits of compounding for yourself, you 386
Chapter 10 Trade Size-Compounding could run your numbers through a rather complicated mathematical formula, but a much quicker way is to look up a compound interest calculator on the web. There are many of them freely available. (Find a simple one that only compounds interest annually, not quarterly.) Since these calculators are originally designed for annual interest computations, you have to discard the years-to-grow box and read it as if it says weeks-to-grow. You only have to type in three entries: Current principle (your account balance), weeks-to-grow (the number of weeks you want to project) and the interest rate (see below) . If there is a box for annual addition, just set it to zero. Some calculators may not allow you to type in more than 40 weeks (years basically) ; just find one that has no limit. Always cross check your results with another calculator, just to make sure you can trust the figures presented. What to put in the interest rate box is dependent on the number of points per week you wish to project, and on the chosen percentage of risk per trade. Regardless of what bracket settings are used, a full stopout always equals 1 point (in our bracket a full winner equals 2 points) . On a I-percent risk model, 1 point equals 1 percent. So, in the interest rate box, type 3 when you want to see the results of 3 points of profit per week compounded. When using a 2-percent model, type 6 for these same 3 points per week, and so on. To check if your calculator works properly, a random example should look like this: Current principle ($10,000) ; weeks-to-grow (48); interest rate (3); The future value should read: $4 1 ,322.52. As you can check as well, scoring the same points per week consistently on a more aggressive 2-percent model will not just double the results. In the example above, after 48 weeks the balance will stand at no less than $163,938.72 (in the interest rate box, enter 6 instead of 3). Does this imply that a profitable trader is depriving himself when applying a risk model of less than 2 percent? In all fairness, no one can answer this for another. Being more comfortable with a lesser amount of capital at stake may very well outmatch the benefits of playing an aggressive 2-percent model. When just starting to emerge on the profitable side, a trader may still lack the confidence and emotional stability that comes with experience over time. In this promising yet often brittle 387
Understanding Price Action phase, perhaps an idea could be to start out with, say, a 0.5 percent risk per trade and then gradually work up to a I-percent model in the coming weeks; and from there on to a full 2-percent model. It's all up to the trader. Note: It should be stressed that the calculations derived from the compound interest calculator are based on a consistency of points per week that is virtually untenable in practice. Even when two traders take out the same points per month, their weekly results will probably differ and so will the way they compound. For example, one trader may have taken out 5 points per week for 4 weeks straight (very consistent) , and in his case the computations of the calculator will match up. But another trader may hypothetically have scored 0 points in the first three weeks and then 20 points in the last. His result for the month will amount to a lesser total in comparison with his more consistent fellow trader, simply because he had no profits to compound in the first three weeks of the month. As we can see, the possible variations on the compounding theme are practically infinite and all will show different results. (Think: also of losing weeks and having to lower volume on the next week.) In other words, playing around with the calculator can be fun, but it is highly recommended not to indulge in silly fantasies on future riches. Moreover, once the practical advantages of compounding are established, my advice would be to fully discard this tool. Not only is it unrealistic to project hypothetical gains into the future, should the weekly objectives not be met, this may add an unwelcome element of stress and frustration. Much more useful is to concentrate on improving consistency first; the rest will follow by itself. As to deriving the right amount of units per trade, there are calculators freely available on the web, but perhaps it is wise to briefly examine how these computations can be done by hand. If you have no direct need for this, just skip the following paragraphs. Anyway, here goes: To compute the amount of units to be assigned on the next Monday's trades, we need to know (a) the account balance, (b) the risk model, and (c) the "stop factor" on the instrument in question. To understand the latter, let us examine the specifications of the 388
Chapter 10 Trade $ize--Compounding eur /usd contract first. The pair is made up of a base currency (eur) and a quote currency (usd). A full contract represents 100,000 units, but the value of the contract in US dollars is dependent on the currency rate. If the pair stands at, say, 1 .3000, the value of a full contract is 100,000 x 1 .30 = $ 130,000. If the rate goes up 1 00 pip, it will stand at 1 .3 100 and the contract now represents a value of $131,000. From this we can derive that on a jiLll eur/usd contract, 1 pip equals $ 10, regardless of the current rate. The "stop factor" is key in the computation of units. It is derived as follows. A theoretical 1 pip stop requires a factor 1 00. If we use a 10 pip stop in our bracket, we need to divide 1 00 by 10, and so our stop factor is 10. Should we want to use, say, a 12,5 pip stop, then we should divide 100 by 12,5 and our stop factor will be 8, and so on. For ease of use, let's stick to the 10 pip stop, representing a stop factor of 10. Thus, on a $5000 account and a 2-percent risk model, a trader can compute his units as follows: 5000 x 2 x 10 = 100,000 units (a full contract). Should the account go up with, say, $250 for the week (25 pip profit) , the new balance will stand at $5,250 and the computation of volume for the next Monday session is as follows: 5250 x 2 x 10 = 105,000 units. When using a I-percent model, it is just a matter of adjusting the risk model in the computation: 5000 x 1 x 10 = 50,000 units. After the same 25 pip of profit for the week, the balance will stand at $5,1 25. The next week can now be traded with 5 125 x 1 x 10 = 51,250 units. The computations above apply to an account held in US dollars. If you hold an account in, say, euro, you need to incorporate a "conversion factor" as well. For this you need to look at the current rate of the eur / usd instrument. The easiest way to do this is to first compute the number of units as if holding an account in US dollars (as shown above) and then multiply by the rate. Let's say the eur/usd is quoted at 1 .3000. To compute the units on a euro account of£5,000, the computation for a stop factor of 10 on a 2-percent model is: 5000 x 2 x 10 x 1 .3 = 130,000 units. Of course, the rate can fluctuate substantially during the course of the week, which, strictly seen, would demand adjustment along the 389
Understanding Price Action way. However, much more important than being absolutely meticulous about compounding is to understand the importance of steadily increasing unit size. The easiest way to do all your trade sizing is to find a Forex Position Size Calculator on the web, freely available. With this tool you can compute in just a few seconds the right amount of units for any currency pair in relation to your risk model, account balance and account currency. When doing your calculations by hand, take specific note of pairs that are quoted with different decimals, such as the Japanese yen. Always make sure, though, to check your volume in actual risk per trade. Chances are, your platform will already warn you when a preset unit size is way off the mark (margin error notification). Note: For "ease of use", some brokers do not specify a full contract in the standard 1 00,000 units, instead they name a full contract as 10 units. For example, should you want to trade 1 35,000 units, you may now have to type in 1 3.5 in the order ticket. And your next possible step up would be 1 3.6. Although this will affect the exact application of unit size in terms of capital percentage, the incremental steps are still small enough to allow a steady increase of trade volume, which is what compounding is all about. For what it is worth, one silly trade that could have been avoided will have a much bigger impact on your weekly earnings than a unit size that was slightly below or above the desired percentage. To summarize on the above, let it suffice to say that responsibly increasing your volume along the way, regardless of how exactly it is done, is a most vital aspect of running your business effectively. The advantages of compounding simply cannot be ignored. 390