It is always useful to keep in mind the big picture. In the monthly chart you can see how GBPUSD has been moving in a trading range since 2009. Now the price is in the middle of this trading range starting the move from the low limit.
In the previous GBPUSD analysis I stated that the price was coming to long term support level and it is possible that the price starts to move up. Later Analitical Trader detected strong signal (Minor Demand) and the price turned its direction. In this chart you can see key levels in GBPUSD. Resistance and support levels are very important in trading, because by analyzing the price behavior near these levels we can predict further movement. Look how the price notices the levels. Analitical Trader detects strong or weak signals when the price comes near the resistance or support levels and helps us to understand the next move. At the moment the price is near the long term support level and again there is a strong signal in the chart. So it is possible that the price will change direction once again. Look carefully for weak signals.
What was right in this trade?
- The background is weak. It means that imbalance of supply and demand in favor of supply – we should be looking for short entry.
- Weak signal (Minor Supply) before entry. It is better if we have several weak or very weak signals (supply or major supply).
- Dynamic trend turned from green to red.
What was wrong in this trade?
- Before the entry point we had wide spread down-bar on high volume. The next bar is up and in the chart appeared Major Demand (very strong signal). Therefore something was wrong in this high volume. For the next bar to be up it must have contained more buying than selling. Also this wide spread bar moved lower than previous low. Many traders set their sell-stop orders on the level of previous low. Those who went long set here their stop-losses. All this creates selling from the weak holders when the price crosses the level of previous low. Strong holders absorb this selling – that’s why the volume is high.
Risk management is very important in trading. You must expect losses, so you must plan for possible losses before placing a trade. Risk management techniques are designed to limit these losses. The most important part of risk management is the setting of stops, which must be placed every time. The Analytical Trader indicator will help you to find optimal level where to place your stop-loss and take profit.
This trade was opened based on the previous EURUSD analysis.
- Overall background is weak.
- Price was close to the resistance level (1.146) which several times has proved itself in upper timeframes. Here appeared weak signals.
- Dynamic trend turned from green to red. Entry – when the price comes closer to the dynamic trend. Stop-loss above the resistance level. After I saw strong signal I didn’t close the trade, because I thought that bear move still had potential. Strong signal here may be caused by triggering stop-losses of traders who went long when the price crossed previous high. But I moved stop-loss closer in case I was wrong.
- Exit by reaching take profit level.
Total: +112 Pips
One week has passed since previous EURUSD analysis. There was a very weak signal (up-thrust) in the weekly chart. But you need to look at the overall picture rather than one bar’s action. During 3 following bars the market didn’t respond to this sign of weakness. Though the background is weak, for the moment the market is not ready to fall. One of the reasons is that the US Federal Reserve on Thursday announced that it would keep interest rates near zero.
In order to understand the overall picture it is better to look at different timeframes. For example, if after weekly chart we look at daily chart, we can find very interesting picture:
Here we see how Euro has been moving in ascending triangle lately.
1,146 – is a resistance area. It seems that in this area some big seller or group of sellers place large sell-limit orders. Purpose – do not let the price to penetrate this level (they are not interested in higher prices). As soon as the price comes close to this area, sell orders are activated and the price bounces down. In one point this level was penetrated (high volume up-bar without result) and the seller had to defend the level by market orders.
Look at the lows – each time the move down stops higher and higher. The lows become closer to the resistance area.
It will be very interesting to observe development of this situation.
How we can use it in our trading?
Well, now we have 2 interesting for us areas: resistance and support area (up-trendline). We should be watching price behavior and volume near these levels. VSA techniques and Analytical Trader indicator will help us to identify imbalance between supply and demand, choose right direction. Look how accurately the indicator identified supply signals in resistance area right before the price moved down and demand signals when the price was near the up-trendline.
At first I zoom out H4 timeframe. Here I see that AUDUSD is moving in stable downward trend.
Then I draw down trendline with several touches. Price has noticed this trendline several times. It means that now this line is a resistance for higher prices, because traders will place their sell orders at the intersection of price and trendline. The area above the supply (higher) trend line is known as overbought area. Analyzing VSA signals (weak or strong) we can assume whether this break-out was genuine or not.
At the moment we see no strong signals in the chart.
Background in H4 is neutral and in D1 is weak – we should be looking for short trades.
Let’s get a closer look at this picture.
There is no selling climax at the bottom of the market (after substantial falls have already taken place). Selling climax – it is an imbalance of supply and demand causing a bear market to transform into a bull market. The volume has to be extremely high on down-moves, accompanied by narrow spreads, with the price entering fresh low ground. Also there is no accumulation area.
Here we see only 2 no-supply bars (bars in the bottom of the market with low volume). It means that global downward trend is not over yet and now we have a reaction to this trend.
When the price crossed down-trendline – we have 2 weak signals. Major supply – this is an up-thrust which happened on the news that Fed postpones rate hike.
At the moment there are no strong signals, but dynamic trend is still up (green).
What was wrong in this trade?
- Background is strong. If the background is strong we have to be ready to open a long trade, not short.
- Price was too far from resistance level. Good entry for short trade – when we have supply near resistance or trendline.
- This is bullish volume – wide spread up-bars on high volume. It is confirmation that bullish trend is still in force and it is too early to go short.
What was right?
- This is a weak signal (supply) before the trade was opened. It means that there is imbalance between supply and demand in favor of supply.
- Dynamic trend turned from green to red.
