The new site & trade signals!

Hello all,

 

The next time you visit simplyprofit.net you will find my new site up. As many of you know, the home of my previous Live Room was at TheForexRoom.com. The site is still up there, but now that I'm trading Futures as well as Forex I wanted a new site and decided to use this URL.

 

I'm looking forward to many of you that accompanied me at TheForexRoom to join me at my new site.

 

I will still keep this blog for posterity. I began this blog after I had taken a year off trading and moved from London, UK, to Toronto. It was a huge change in my life and writing my trading ideas in this blog was a connection back into trading and meeting other traders, some of whom have become lifelong friends (Tim, Shyam...).

 

Wishing you all a wonderful journey as traders and as human beings.

 

Huzefa

+35 pips for a 20 pip risk: GBP/USD 1-hour live trade

I haven’t updated this blog since 2011, but I was recently talking to a group of traders in Toronto and showing them screenshots of some of my recent trades, and I fondly remembered my own blog!

So here’s one of my most recent trade: a GBP/USD long position on the 1-hour chart.

This first chart shows the screenshot as the trade was placed:

Back over a decade ago, when I was first taught Technical Analysis under Paul Rodriguez of ThinkTrading.com, the continuation pattern was taught as a key trade entry. We examined charts in his class without indicators, and he said that a lot of traders look for market reversals to enter because that’s where they think the big moves are; but it’s often where they get whipped out even if they turn out to be right about the subsequent market direction. However, continuation patterns are much easier to trade because you’re not guessing market direction. That advice stuck with me: continuation patterns are great entry points because the trend or direction has already been established. You’re just looking to trade the established direction.

This continuation pattern is a textbook example. I spotted it at about 9:30pm ET, June 30, 2014. Earlier that day, the price had started to trend up and break out of a previous range, helped by a large push due to a USD news announcement at 10am ET. It then settled into a nice triangle.

That evening, other USD pairs had made similar pattern: a breakout followed by a triangle. The reason I chose this pair is that there was no previous resistance to speak of on the hourly or 4-hour chart. (In fact, the GBPUSD had broken out into new highs not seen since 2009.) The other USD majors had choppy areas or previous resistance in the recent past.

What else made this continuation triangle a textbook example? Aside from no previous resistance, the size of the triangle was relatively small compared to the previous push up. That means you can have a tight stop and a high risk/reward ratio. People spot triangles all over the charts, but they only have meaning when you put it into context of the rest of the chart. Is the triangle preceded by a clear breakout or trend? I.e. is the continuation pattern actually “continuing” something? And is it small relative the previous push? A continuation pattern should be small because it should represent a brief and small pause in the trend.

I placed a market order in the triangle with a stop-loss of 20 pips and a target of 35 pips. The risk/reward was 1.75. Because it was an evening trade, I left my order in with the stop-loss and take profit. The trade went about 11 pips against me, so about half my stop-loss, before moving up to hit my target.

40 pips today on EURUSD - 88.6 Level

The target was at the beginning of the retracement (Point 1), approximately 40 pips, and was hit within the hour.

Technicals for 1,000 pip plus moves

I had a conversation this week with a colleague (thank you Shyam!) about Technical Analysis versus fundamentals. We debated whether Technical Analysis is more appropriate for short-term trading whereas fundamentals trump the longer term view.

My view is this: I believe Technical Analysis is equally as effective in long-term analysis as it is in the short-term.

That said, Technical Analysis is a tool. It can be successful, but has to be applied with skill and discipline (just like fundamental analysis).

To illustrate how very accurate technical analysis is in the long-term, let’s do a step-by-step analysis of a long-term chart. We’ll look at the US Dollar versus the Swiss Franc, USD/CHF, on a current weekly chart.



Next step: I’ve labelled the last three major points on the chart.



Point 1: 1.19670; 12 March 2009
Point 2: 0.99090; 26 November 2009
Point 3: 1.17302; 1 June 2010


Now let’s look to see if there are any basic relationships between the three points on the chart. From Point 1, the price moved down to Point 2, retraced to Point 3 and then continued its moved down (in line with the longer term downtrend). Did the retracement from Point 2 to Point 3 match any key Fibonacci levels?



The above chart shows that as the price retraced to Point 3, it stopped within 2 pips of the 88.6% Fibonacci level.

So the price retraced 1,821 pips over 27 weeks, and it still managed to hit a key Fibonacci level within 2 pips!

It’s worth looking at how this would have looked with all the other Fibonacci levels in real-time:



As the price moved up past the Fib levels, the price never hit any of them cleanly and reversed. It did come quite near the 50% level, made a bounce before moving back up. However, it hovered around the level for 3 weeks before moving down. When the price pinned the 88.6% precisely (a sign that that particular level is going to be respected), the price quickly and decisively moved down. A trader could then plan trades using Point 2 as a downside target. If the trader waited two bars (or two weeks) after the Fib level was hit to confirm the reversal, there was still over 1,000 pips available up to the Point 2 target.

Note: The 0.886 Fibonacci level is derived by taking the 0.618 Fibonacci golden ratio, square rooting it, and square rooting it again.

More basic than Fibonacci, are trendlines. Let’s look at a simple trendline using the last two major higher lows on the chart:



Shortly after the trendline is broken, the price moves back up and retests it again within a couple of pips.

The first low marking the beginning of the trendline is on 17 March 2008. The subsequent retest after the trendline is broken is on 1 December 2010. So a trendline that took more than two and a half years’ to form was retested again within 2 pips. Since the retest, the price has moved more than 800 pips: very precise technicals especially given the hundreds of pips the price moved to meet the levels.

So what’s my point?
1. Technical Analysis can be as precise on long-term charts as on short-term charts.
2. You can use long-term Technical Analysis independently of other analysis.
3. You can use long-term Technical Analysis to plan trades.

Two 50+ pip trades on USD/JPY

In my last post, I identified two key support levels in the USD/JPY based on the long-term chart: the first one was made in April 1995, a multi-decade low of 79.75. The second support level was made recently in October 2010, at 80.24, almost touching the historic low.

Let’s look two trades that unfolded since that post.

I suggested that with the recent support made at 80.24 and it being so close to the historic support, 79.75, this would be a good time to plan trades.

According to classic Technical Analysis, you buy off support levels; if the support gets broken and tests it as a resistance, then you sell from the previous support.

So in line with the logic that we’re trading above key support levels, I looked for buy trades.

The very time of the post was a good entry for a long trade. There were some chart patterns that indicated a bullish momentum.

1. Key trendline was broken and retested before moving up
2. Recent “Double Bottom”
3. Forming of a “Base” bottoming pattern
4. Recent 78.6% Fibonacci bounce
5. Recent 88.6% Fibonacci bounce


Trendline break & retest


Double Bottom pattern


Base pattern


78.6% Fibonacci bounce


88.6% Fibonacci Bounce


At the time of the post, the price was consolidating nicely. The price was making higher lows, and it almost immediately made a new 61.8% Fibonacci bounce:


61.8% Fibonacci bounce just prior to trade entry

So technically, the picture was looking bullish.

As the consolidation was tight, a 25 pip stop would have covered you easily. If you planned your trade around a simple 1:2 risk/reward ratio, you would have earned your 50 pips within hours. The price did actually rocket over 100 pips; that said, I rarely exit a trade after three times my risk, i.e. 75 pips in this case.

More recently, there was a brilliant text book example of a Reverse Head & Shoulders pattern. See the below chart:



The blue lines on the next chart mark an 88.6% Fib Bounce for the Right Shoulder:


88.6% Fibonacci bounce forming Right Shoulder of Reverse Head & Shoulders

My entry was at the consolidation for the Right Shoulder, 25 pip stop. I exited at 50 pips but the trade could have netted over 80 pips. I was content with a 1:2 risk/reward ratio on this trade.

H. Hamid

Yen at historic multi-decade support level

Today's post isn’t a specific trade recommendation, but a key chart observation to help plan future trades.

This is a very interesting time for the USD/JPY coming near a major support level, and the lowest level for over 20 years.

Looking at a chart with monthly bars stretching back to late 1988, USDJPY traded at a low of 79.750 in April 1995. The pair came tantalisingly close to that level in October 2010 trading at a low of 80.241.

For many months, I’ve been reading how the Yen is fundamentally overvalued: Japan has had zero interest rates for over a decade, the country has an aging population, the strong Yen is killing exports and the country’s debts are large compared to other industrialised nations.

I’ve never placed trades based on fundamental plays, because I believe good technical analysis can interpret and time the fundamentals better, as well as account for other factors such as market sentiment.

That said, the current Yen price level now could provide the crucial push for the Yen to weaken, placing it in line with strong fundamental influences.

If you’re involved with international trade, or are a longer term trader, the long-term USD/JPY chart should definitely be of importance to you at this juncture. I would be examining how it reacts to the historic support level - whether it bounces off the support, or whether the price moves through it, retraces and continues to move down to strengthen the Yen - as I believe a move in any direction will be strong.

H. Hamid

Profit Target Hit: 50+ pips

A few hours ago I posted a quick note on the GBP/USD looking bullish and a possible Long/Buy trade setup.

The price at the time of writing was 1.5419 at around 16:45 EST (21:45 GMT). As the price was moving sideways into a nice little triangle, it made for a perfect entry. I stated a profit target of 1.5475. The profit target was hit around 19:15 EST (00:15 GMT), or about two and a half hours later. The trade would have yielded 56 pips if entered at the time of the post.



What made the trade better was that the price moved less than 5 pips against you at the time of the post. A sensible stop-loss would have been 25 pips or so, giving a slightly better than 1:2 risk/reward ratio.

As I always say at the end of my posts, trade with a stop-loss and enter only when you have a good risk/reward ratio.

H. Hamid