Sometimes when you read through blogs like this you get the impression that the author doesn’t make the trivial and sometimes foolish mistakes the rest of us make. Well, that ain’t necessarily so.
Take for instance the EURGBP trade I’m in at the moment. I got in short at 0.7923 last week. It’s taken a meander to the south but found support, albeit fuzzy and messy support, at 0.7825. It then tested that support twice more before reversing.
I was hoping that as it got squeezed between support and the lowering moving averages, the support would give way and we’d be on our way again. But that obviously didn’t happen!
So what were the clues that I should have taken profit at that stage? Four things:
- As Al Brooks says, if price tries to do something twice (let alone three times) and fails, it will usually then do the opposite. Price here tested the support three times and failed to break it.
- Between the second and third test of support, there was reversal divergence on the Stochastic, a reliable warning that momentum short was leaving the market.
- The third test broke the support but, as predicted by the divergence, it was a fakeout.
- Just as importantly as all this, my wife was convinced that the bottom was in and kept telling me to take the money!
So, both price action and the unnerving intuition of “her indoors” called the bottom perfectly and since then price has pushed back up to the Weekly Pivot, the only resistance level before my stop loss. The only saving grace is that the trade’s made a profit regardless and that there’s a slight hope that the double top will help price fall away again.
The moral of the story is that when you’re trading a Forex chart, trade the Forex chart. I was guilty of hoping price would break the support and became blind to what the price action was telling me. The price of that hope? About 2% profit.
Adam – The Day Trader