- The first thing that we should do – this is to find out in which direction we will open a trade. In this chart we can draw an up-trendline (200+ bars) with more than 3 touches. This trendline is a support for prices and it will require effort and money from professionals to cross this support. We will be looking for long entry when the price is near the trendline and if there is no VSA signals (in this case weak signals) which would tell us that the trend is over.
- The background is strong. It means that imbalance between supply and demand is in favor of demand (more strong signals). It confirms that we should open a long trade.
- When we see strong signals near the trendline and there is no weak signals behind, we need to be careful and wait until dynamic trend turns from red to green.
- The price touched the up-trendline and moved up. Dynamic trend turned from red to green.
- Open a trade in entry bar (in this case in the down bar when the price didn’t move too far). Stop loss may be placed lower than support line (previous low) or in the place suggested by the Alert System indicator.
- Exit after weak signals.
Euro/Pound has seen massive buying around 714 price level, seen by the green signals and very high (red) volumes that accompanied them. The trendline is coming from 10th June, and has been recently broken. The prices also went below the 61.8% Fibo, levels used by retail traders that are usually shook-out for stop-losses on long positions by the smart money. The volumes on the up bars, however, are low (yellow in histogram), which doesn’t seem to be strength after such an heavy professional support that there was before. Perhaps the smart money isn’t interested in higher prices right now, and they either need to buy more to support an uptrend, or they need to see there isn’t significant supply (by a bullish test at a lower price), or it’s just a temporary weakness. I’m therefore looking for the prices to go lower and test the supply there, or waiting for more strong (demand) signals. If they go up on high volumes (above average) that would also be a confirmation that the trend is changing.
In this short trade there were 2 major errors:
1) There was a nearby Major Demand signal. Even though a down trendline is nearby, with significant demand behind, there is a high probability that it’ll break, or that a significant rally is to happen, hitting the stoploss. In this case there was a demand signal which prevent further losses, but as you can see the price then rallied significantly.
2) The background was blue (strong) at the time – it analyzes the supply/demand signals and trend, so a strong background means the conditions are right for a trend change, not a downtrend continuation.