Do you sometimes feel “lost” when looking at the charts or your open trade? Or perhaps you feel insecure about your next decision?
Get ready for a step-by-step explanation how to analyze the charts and find trade setups like a pro.
This article will explain these 3 key aspects:
Once the charts have been analysed we should know whether the chart is interesting to trade or not like an interesting reversal pattern or a neat break, pullback and continuation pattern.
The next step is to translate analysis into a concrete trading plan.
This translation often causes problems with traders. There are two types of traders and they have their own challenges:
Many trading teams split the duty of analysis and trading into two different positions. Retail traders do not have that luxury. We need to cope and do it all.
The main issue once analysis has been completed is that it creates some level of trading bias, which in turn creates emotional ties to your analysis and trades:
What is the triangle of trading? It composes of three parts:
Image: purple lines show decision zones of this patterns, triggers are candlestick patterns at the decision zones.
We need to review our analysis and locate the areas where it makes “sense” to trade, both from a probability point of view and a reward to risk ratio perspective.
The first 2 steps are:
Here are the definitions we use:
We prefer taking trades at decision zones because this increases the chance of a substantial movement in price. Decision zones help our trading in a couple of ways:
Here is a simple chart that explains the decision zone and potential wide open space.
Image: these smaller decision zones are marked in orange. The break above the resistance shows the potential for bullish breakout. Wizz (purple lines) show where the next target is and hence how much space is offered.
Basically, this helps us avoid bad trade setups and take setups that follow the market’s movement, rather then trying to predict its movement.
Here are a few more practical examples:
As you can see, decisions help us look for bounce and break setups but also avoid bad setups into support.
One more important note: the decision zone does not have to be a key round level. It could be as simple as a breakout of the bull flag chart pattern.
Image showing SWAT triggers: green arrows are main signals, purple arrows show minor confirmation signals.
Once we have one or more decision zones in mind, it’s time to be patient and wait for price to reach the zone before trading it.
Once price reaches the zone, we can look for a trigger and confirmation pattern, which is when price action is confirming a breakout or bounce.
The best way to measure triggers is by using candlestick patterns or our ECS systems (like ecs.SWAT and ecs.CAMMACD). Candles provide direct information about the expected price movement at the decision zone.
We basically use confirmation patterns and invalidation levels for each decision zone:
Here is how we use these concepts step by step:
Last but not least, it is time to take an entry once the trigger and confirmation pattern has arrived.
There are a dozens of options how to enter but here are some ideas:
The three steps to taking action are:
Let’s show a live example on the NZD/USD 4 hour chart.
Image showing NZD/USD decision zones.
Decision Zone: The Fibonacci retracement tool (blue) is placed on a swing from the daily chart. Price has reached a 50% Fibonacci support level.
Bullish potential: the 50% Fib could cause a bullish bounce or reversal.
Bearish potential: if price breaks below the 50%, it could also be a bearish breakout.
Outcome: with the NZD/USD price made a bullish bounce and later on a bearish breakout.
Trigger: the 50% Fib is a decision zone but waiting for the trigger is the next step. The trigger could be a candlestick pattern on the 4 hour chart or a break above the resistance trend line or below the 50% support.
Bullish trigger: there was a bullish break setup at first which is indicated by the candle breaking above (green arrow) the resistance trend line (orange line).
Bearish trigger: later on, this was followed by a bearish breakout (yellow arrow) below the support trend line (blue line).
Bullish 2nd trigger: any bigger upside breakout was never activated because price never broke above the resistance trend line.
Entry: the entry is sometimes the same as the trigger. But here is where traders can apply more caution as well by zooming one time frame and trading pullbacks and breakouts or by waiting for a retracement of the breakout candle for instance.
After the entry has been completed, trade management becomes important but this is a topic for a new article.
Until next time and many green pips,
My twitter: @ChrisSvorcik
More info on our ecs.SWAT course and trading system
Elite CurrenSea Twitter: @EliteCurrenSea
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