Welcome to my Masterclass.
In this lesson you will learn what the foreign exchange market is all about and how we are able to take advantage of the worlds biggest exchange.
Welcome to the third strategy of this masterclass called the "SR Break Advanced Pullback". Remember all the confluence that we look for in a reversal setup? Clean SR, deceleration, high- or low test candles etc? Most of the time these setups will play out to our advantage. But sometimes these setups fail, in the sense that they fail to pull trough, and might only give us a 1% in return before they retrace all the way back to our entry price.
And guess what? We don't mind. The fact that these setups fail to continue could actually present us with a great opportunity. When price fails to pull through, something is up. Smart money is most likely at play, and after most reversal traders are in (including us) they decide to take advantage of them. We don't mind as we've already locked in profits early. As price retraces back to our entry, we look for a hard push above or below the key SR that was initially respected and that we traded from. Once it impulsively breaks, we want to see price sustain this new high or low beyond the SR level on the 1hour chart.
If it does, we wait for a corrective 1 hour retracement back to the 1 hour - 12 EMA. Just like with the previous strategy.
Let me show you with an example. Take a look at the weekly chart of EURGBP. We see a clear resistance level that is being respected for the fourth time now.
The weekly charts gives us a better view to see the same price action (PA). Note how the weekly chart printed high test candles and inside bar candles only to go up in price? Remember to only pay attention to candle shapes if we are at key SR levels. Some traders do not and they are taken advantage of, just like in this scenario.
As you can see price respected the 0.950 area three times before. Just recently it rejected it twice. Now let's zoom into the day:
You can clearly see price decelerating and testing the SR line as resistance. However the last two candles were pretty impulsive, and we don't have a reversal candle at SR yet, so no reversal trade at this time. The doji candle at the top suggests deceleration and in fact many traders will trade short from it. We don't. We just wan't to see if we get presented with a nice reversal setup (high test candle of tweezer setup), or if price is going to break the SR level violently to the upside. Let's fast forward a few days.
Price did retrace from our SR level, however we wouldn't be in this short trade as we did not get the deceleration and reversal candle(s) at the SR line, and that is a must. But not to worry, we keep watching this pair as price might reverse and decide to take out the highs impulsively.
After rejecting the daily 50 EMA, price shot up impulsively and broke resistance to the upside. Now we are interested! After the daily break-out candle closed, this is what the 1 hour chart looked like:
Price broke above SR and held. Nice. Now we just want to see price retracing correctively back to the 1 hour - 12 EMA. Let's see what happens:
Price started to correctively move sideways after the first impulse up but did not touch the 12 EMA. If price would have touched it right there and then, that would have been our entry.
However price impulsed again a touched the 12 EMA the next day. Just as with the previous strategy; the ADX and DI's values are well above what we want to see (ADX above 30 and DI difference above 15), so we have a go for a long trade. Stop is at the 1 hour 50 EMA.
Let's fast forward a few hours:
5 days later our first profit target is hit for 1%. Let's see where this trade can take us by looking at the weekly chart:
As you can see the next resistance level can be found at 0,93 as price has rejected it in august 2017. It doesn't have to, but it is certainly an area to look for signs of a reversal and to take profit. Of course we can also trail our stop below the daily candle once our trade is running at at least 1% in profit.
Let's zoom into they daily as price hits this next SR level:
Price impulsively moved into the SR level only to stall and reverse at this level with a longed wicked doji candle. A clear sign to lock in profits (after the doji). Of course trailing our stop-loss behind the previous candle low is perfectly fine as well. In this case locking in a nice 1,5% in profit.