Just a couple of weeks ago, the EUR/USD and GBP/USD looked as if they were going to zero. The media and experts were citing all kinds of bearish facts and fundamentals. If you look at the prices now, both pairs have dramatically reversed and are showing nothing but signs of strength. What happened? Were you distracted by all the “experts”? How do you know when a financial instrument is about to turn?
It all begins with being strongly aware of technical conditions on your larger time frames. Keep in mind that no one can predict a top or bottom of a market consistently before it is established. As speculators, it is our job to listen and observe market conditions and recognize when the market is ready to change. What can help us accomplish this?
Price action analysis. Many inexperienced traders overlook or undervalue the information that this technique can yield. For example, go pull up a 4 hour chart of the GBP/USD. You will notice in the 2 – 3 week of May 2013 it was selling hard. Lower low after lower lower. It went from 1.5600 area to test 1.5000 relatively quickly. Soon after that, over a TWO WEEK period, it retested 1.5000 and it is now near 1.5400. It took two weeks for this pair to put in a significant bottom. That means you will never see this coming on a 5 minute chart.
Once such a bottom is in place, it is time to recognize that whatever was driving this pair lower is no longer acting on it. It also means that short signals become very risky and irrelevant. If you do not adjust your expectations after facing a structure of this kind, you will find yourself on the losing side of many trades going forward.
So to summarize, in order to capitalize on this kind of information you need to be able to understanding chart patterns on a psychological level, have the patience to wait for their emergence, and employ a process to validate what it is implying. If you are missing any of these elements, trading becomes more of a frustrating series of gambling attempts.
Make sure to register for my upcoming webinar related to this topic. See the SMB events calendar. At SMB we train our traders how to recognize and validate a variety of setups and market conditions. To learn more visit bit.ly.smbhome
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Mark Principato, CMT,
*No Relevant Positions
