Forex education: Listen to the price action. It might save you (or make you) a few pips in 2017.

Author: Greg Michalowski | Category: Education

Dollar rally fizzles

As we begin 2017, it is important to remember the discipline you should have as a trader - especially if you are more interested in day trading/attacking a trend/taking advantage of maybe a fundamental move that you think has legs.

Today, the ISM data and construction data came out better than expectations and that helped to propel the USD higher against pairs like the EURUSD, GBPUSD, USDJPY.

However, on a move you need to look ahead on where you are going (the targets) and also protect in case the momentum reverses (the stops or risk defining levels which is how I like to define them).  

This was the EURUSD chart that accompanied the post (click here). For that pair, we were trading at new 14 year lows so there is not much in the way of support honestly (i.e. targets). What we do know however, is the risk defining level.  For the EURUSD, I outlined the 1.0375 area. It was the 50% of the last move down AND was the low from earlier in the London session. If the price could stay below that level on the correction, the bears would remain in firm control.  Shorts would feel comfortable.  

What happened?

The price action did not stay below that close risk level at the 1.0375 area.  When the price moved above that level (see char t below), the price rallied a little, came back and tested the 1.0375 level and then moved about 58 pips through the 100 bar MA - stalleing just before the 200 bar MA on that 5-minute chart (green line).

Shorts on the data could have gotten out with a small profit or at least a smallish loss (if they sold nearer the lows). 

Traders - who saw the failure of the move lower as a buying opportunity - could have leaned against the 1.0375 area AFTER the move back above the yellow area, and benefited from the subsequent short covering.

The point is, the price action applied to technical levels that should have held resistance, turned the bias from bearish to bullish.  We as traders need to listen to that price action and act. It often saves us pips when things don't go as planned and can make us pips if we can recognize the failure as such and trade the rebound. 

What about the the USDJPY?

Below is the hasty picture applied to that move.   Three things stood out. 
  1. The 1.8.51 level was a ceiling area 
  2.  The 118.34 was the earlier high
  3.  The 100 bar MA held support earlier (blue line in the chart below). A break would not be welcomed by buyers.
Failing at the 118.51 break is a worry but I can look beyond that initially if the other support levels held support.  

What happened?

The price fell below the 118.34 level and then the 100 bar MA (blue line). That started the fall lower and lower it went. For this pair, there was a stall at the 200 bar MA on the 5-minute chart (higher green line in the chart below). Then a fall even lower to the support target at the 200 hour MA level at 117.355. That is where the fall stalled.  We now trade between the 200 bar MA lines (two green lines)

Like the EURUSD, the price action and tools helped to define risk. It is up to us as traders to listen to that price action and those tools. If we do, we have the potential to save pips and even make pips if we can reverse on the failures.