Hello traders! Every once in a while, we get a week or series of days where the trading seems almost TOO easy. Last week was one of those weeks. Taking a look at the supply and demand zones on the EURUSD chart, is there any wonder that people were very happy when trading?
At the blue arrow marked 1, you can see how the yellow supply zone has turned into a demand zone. Notice how quickly the trading price approached the demand zone in the downward trend market “A.” This is one of several odds enhancers discussed in our Online Trading Academy classes. What is an odds enhancer? Glad you asked! It is a technical piece of the charts that we expect to increase the odds of being correct in our trade; that is, having a profitable outcome. A second odds enhancer for that trade at the blue arrow “1” is the intersection of the trendline from January 15 and that same demand zone. Nice little 150 pip bounce, wasn’t it? Perhaps you exited at the 1.3185 level, maybe even took a short there back to the 1.3025; if you did, nice work!
I would like to point out how the price action “respected” the trendline going forward. Not only can we use trendlines for direction, but also for support/resistance areas in our trends – helping us to join a trend. Can you see how once the trendline broke at point “B,” that the upward sloping trendline became resistance at point “C” after it had acted as support? This is one of the amazing things about trendlines – in the future, don’t just delete the line once it breaks; leave it on to see if it changes from support to resistance or from resistance to support! You will be amazed at how often it works!
Another note about trendlines. Just because a line has broken doesn’t mean the trend has changed direction. It only means that the trend has weakened. Don’t be too quick to immediately reverse your bias in the market as very often the original trend will continue such as at the blue arrow labeled “2.” Depending on your trading style, you may have traded this 150 pip channel two or three times in these few days!
Now, take a look at the red arrows at the top supply zone. Curious as to why we reversed direction there?
On this daily chart, you can see that we hit a rather vague supply zone from early December. At the time, you may not have considered this zone unless you had the 100 period exponential moving average on your chart. This “intersection” of the moving average, price and the zone may have led you to sell short at the red arrow marked “3.” If you didn’t notice the moving average, then by the time price retested the zone at the red arrow “4,” you should have been interested! This could have been another 100 pip trade. For a complete list of the moving averages that I watch and why, see you in my next Forex class in your area!
How about at the red arrow marked 5? Would you have taken that retest of the small yellow supply zone? This could have given you yet another 100 pip+ trade. Can you count all the drop-base-rallys and rally-base-drops on this chart? It is almost too many to trade!
So, let’s say you’ve had a terrific week or two of trading, seemingly without fault. Pulling out 100 pip trades every other day with ease can lead to a bit of overconfidence in our abilities! As human beings, we are obviously subject to the potential pitfall of bringing emotions to our trading – and the market always knows when we believe we are great! My only warning to traders is this: When the money seems to be coming too easy, take a step back and examine the charts. Are you in a market that is an easy trend where everyone is making money? Are the moves very clean and easily seen on your favorite time frames? Look back even further on the chart – was it always like that? I doubt it.
There is an old phrase in trading that goes something like, “Your biggest losses will follow your biggest gains.” This is referring to the issue of overconfidence where traders put on too large of position size and then take a few losing trades, or worse yet, refuse to take the small losses when a trade goes against them because they “know” the price will eventually go their direction! This may end up being an account ending disaster. Always stay humble when facing the market – it is bigger than you and me put together!
Cross your fingers that the next few weeks will be as “easy” as the last few days!
Until next time,
Rick Wright firstname.lastname@example.org