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.
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.
- At the time of entry background was neutral. In this case you should check above timeframe. If it is weak – o’k for a short entry. In case the background is strong – you should not open a short trade right now.
- Weak signal (Minor Supply) before the trade was opened – o’k.
- Dynamic trend is still green. You should open a short trade when you have the whole set for a bear trade and only after the dynamic trend turns from green to red.
This is not enough just to see a weak signal and at once enter the market, because you have to analyze not only individual bars but look at the whole picture. Analytical Trader will help you to do this. You just have to follow simple instructions and wait until you have all the necessary signals before you open a trade. It will significantly increase your chances to be sucessful in trading.
- Background is weak – it is ok for short trades.
- There is no weak signal before the entry – it is a mistake to enter the market if you do not have confirmation from strong/weak signals. These signals show you the status of imbalance between supply and demand.
- Dynamic trend turned from green to red – it is o’k. If other part of a short setup is in order, you should look for up-bars with low volume (no demand). No demand means that the traders who matters (smart money) are not interested in higher prices. In this case – why should we?
- When you see a strong signal in the chart (Major Demand, Demand or two Minor Demands), it is time to close your short trade, because there is a big chance that the price will change its direction.
Always remember that it is very important to make a good entry. But it is no less important to timely exit the market.
More than 1 week AUDJPY was moving in a trading range (limited by 82.80 and 85.05) between long term support and 2 resistance levels (long term and short term resistance).
The first resistance level was formed when the price started to move down after several weak signals. Later the price came again to this level. Weak signals (Supply and Minor Supply) tell us that this time there will be no break-out. Two resistance levels which are very close to each other – it is a very strong barrier for higher prices. It will require effort to cross this level. Look carefully when the price is near the support or resistance levels. Volume, spread and strong/weak signals will help us to understand if the price is going to cross these lines now.
In the chart I highlighted down bar with wide spread on high volume. This movement was created by important news – “Nonfarm payroll employment” in the US. There is always high volatility in the market right after the news. Here we see that the result of this effort is negative – the market has turned and started to move up.
- In case background is neutral in the current timeframe, you should check above timeframe. It must be strong for long entry.
- There are no strong signals before entry. It is a mistake to go long here. You see that the price is near long term and short term resistance (they are very close to each other). These resistances are a barrier for higher prices. If professionals were ready to cross this barrier we would have seen strong signals and up bars with wide spreads on high volume. Here we see no preparation for this move.
- Dynamic trend turned from red to green – it is o’k for long entry.
- This is not a good point to enter the market. For long entry you should look for down bar on low volume (no supply) – like previous bar.
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.
