In this trade I want to point out a mistake which is better to avoid if you do not want losses.
What was right in this long trade:
- Strong signal (Minor Demand) before trend changed.
- Dynamic trend turned from red to green – this is the right sign for a long trade.
- Entry was made in a low volume down bar. This is basically o’k, only one thing – price moved quite far away after the trend changed.
What was wrong in this trade:
- There was only one missing thing – background was still weak. You do not have to go against the background, because even if other components are right for a long setup, it is most likely that this will not be a winning trade. If background is weak it means that imbalance between supply and demand is in favor of supply.
In previous NZDCAD analysis it was noticed that the price was moving in mark-up phase. It is possible to draw an up-trendline with several touches which represents support line for the price. The following trade was based on near-trendline setup.
- Background is strong.
- Strong signals (Major Demand, Minor Demand) near the trendline.
- Dynamic trend turned from red to green
- Entry in a down-bar near the dynamic trend
- Exit by reaching TP level
Total +138 Pips
In daily chart CADCHF is moving in a bearish trading channel. Background is weak. Lower and upper lines of trading channel are trendlines with several touches. Upper line is a resistance to higher prices and Lower line is a support. The area between the upper and lower trend lines is known as the trading range. In VSA terms, the (sideways) market is trading within its range, and will continue to do so until applied (selling or buying) effort makes it break out. VSA trader will analyze price action in the top and bottom quarters of the trading range, because important observations take place in these areas, as the price heads for the supply or support lines. The area above the supply (higher) trend line is known as overbought and the area below the support (lower) trend line is referred to as oversold.
In H1 timeframe the price has reached the upper line of trading channel. Near this area we see several weak signals (Supply and Minor Supply).
Today I would like to analyze I think the most common mistake amongst traders – opened trade at the top of the market, right before price reversal. The professional knows people react to the two fears – the fear of losses and the fear of missing out, and so trades with this in mind.
After substantial rises, the ‘herd’ will become annoyed at missing the up-move, and will rush in and buy. This includes traders who already have long positions, and want more. The problem is that usually smart money is selling at this moment. They do not have to wary that this selling will put the price down, because they have plenty buy orders coming into the market (from weak holders) which will support the prices (therefore volume is high). Without interest in higher prices from professionals, price will inevitably fall. This will usually happen after up-thrusts: a wide spread up during the bar, accompanied by high volume, to then close on the middle or on the low.
- At the time of entry background is strong – o’k
- Dynamic trend turned from red to green – o’k
- Weak signal at the top of the market without strong signals at this price level (In VSA it is an up-thrust) – Not o’k
- The trade is opened when the price moved too far after trend changed – not o’k
During upward trend it is better to wait a reaction to this trend and enter the market after strong signal which would suggest that the reaction is over and rally will be continued.
- At the time of entry the background turned to strong. It means that imbalance of supply and demand is now in favor of demand.
- Very strong signal (Major Demand) before the trend changed its direction.
- Dynamic trend turned from red to green.
- Entry – when the background turned to strong and the price didn’t move too far from the dynamic trend.
- Exit after weak signal (Supply) appeared in the chart.
Total: +145 Pips
In the chart we see that mid-term resistance (previous high) was crossed by wide spread up-bar on high volume.
Resistance – this is a level of previous high, many traders bought near the highs and were locked-in when the price suddenly fell. They are now holding out in the hope of reducing their losses. Locked-in traders want only one thing – to get out of the market at a similar price to the one they first started with. Professional traders that are still bullish know this. To encourage these old locked-in traders not to sell, professional traders will mark-up, or gap up the market, through these potential resistance areas as quickly as possible.
All price movements in Forex can be divided in 4 phases:
- Accumulation
- Mark-up
- Distribution
- Mark-down
Accumulation means to buy as much of positions as possible, without significantly putting the price up against your own buying. This buying usually happens after a substantial bear move has taken place. To the professional traders, the lower prices now look attractive. Once the smart money has completed accumulation, there will be no resistance to higher prices – this is a start of bull market (mark-up). Once a bullish move starts, it will continue without resistance, as the supply has now been removed from the market.
A Bull Market occurs when there has been a substantial transfer of stock from Weak Holders to Strong Holders, generally, at a loss to Weak Holders.
Distribution phase is the same, only it happens after a substantial bull move and professionals are selling as much of positions as possible. Once the smart money has completed distribution, there will be no resistance to lower prices – this is a start of bear market (mark-down).
A Bear Market occurs when there has been a substantial transfer of stock from Strong Holders to Weak Holders, generally at a profit to the Strong Holders.
In NZDCAD we see clear indication of accumulation phase at the bottom of market and later mark-up phase. Now the price has come to the long-term resistance (previous high). Often this may be the point where the price changes its direction. Look for distribution phases on the top of the market.
