Had a really great question from a reader of my site that I wanted to share and answer here in a trading post.
Regarding last weeks trades, I’m struggling to see the reason for entering the EURCHF, EURJPY and AUDJPY. I couldn’t see any clear rejection at the point that they turned, apart from just playing support and resistance and trendlines (which I believe has no edge on its own). If you have the time, could you please explain how one would have entered these markets because they all played out extremely well.
P.s thank you for all the hard work you put in to keep this fantastic site running.
It’s a good question and highlights an issue that many traders have and that is trade entry.
Let me say up front that there will never be a perfect trade entry and in truth, it doesn’t need to be. We won’t always get the obvious such as engulfing candlesticks at certain chart locations and there will be times to just get the trade on.
Remember we are trading at points where a potential imbalance can happen. We are not randomly placing a trade (although you should test a coin flip long/short entry and trail with a 100 pip stop loss- you may be surprised at the result) but are doing it within patterns and locations that show and edge when you trade.
Entries…yes are important….but it’s the context of why you want to place the trade.
Trade Setup Entries
As you may have noted on most of the many charts that have been posted, the four hour chart is used in relation to any daily chart setup.
Trend line breaks etc don’t have an edge by themselves, correct. You can however use them as a means to enter a trade in the context of more “concrete” analysis.
Price comes right into former resistance, ranges and breaks downside with momentum. Use four hour chart. Several upper shadows in range. Strong rally back up to lows of range and stalls. Even if you traded the daily without dropping down, there is still an entry with the massive engulfing.
The EURCHF had an impulse leg that had momentum to the downside. It broke from a range where price consolidated near the low with momentum. We look for a corrective move. As price hit up against former support, the four hour chart is used.
You can use a trend line which is used an the entry in the context of what I just wrote. Draw a trend line ensuring you connect the last pivot low before the high. Price breaks the trend line with momentum forms a small range and breaks again with momentum.
What does a trend line break represent?
A break shows a change in the character of the move from a more or less orderly move to something out of the ordinary. That is combined with the context of the setup.
Price rallies hard into resistance virtually forming a double top. Four hour chart shows climax move into resistance without follow through. Small basing appears. Trade the breakout of the range.
Price Patterns As Entries
Trading breakouts is something many traders do as a stand alone method of trading. When we trade the breakout as a trade entry, it is done so within the context of a complete trading setup.
As an example:
- You are trading a pullback
- Price stalls at resistance
- Lower time frame shows a breakout in the direction of the impulse leg before the pullback
In the AUDJPY chart, we are trading a pullback. On the lower time frame, we see price attempt to break resistance and turn into – a failed breakout. We can trade the failed breakout in the direction of the impulse leg the preceded the pullback we were trading.
I do prefer trading failed tests of highs and lows as entries (context matters) because they offer an obvious stop location – just over (below) the high (low) of the failed candlestick.
You can also, if you remember you are trading the daily chart, use a one hour chart to look for ledges inside of a larger trading range. These can often be implied on the higher time frame through candlestick analysis.
But entries won’t always be perfect and we must accept that in trading.
Excellent piece. After months of coming here every week i am really beginning to have some moments of understanding. I spent no joke thousands in courses and what i have getting from here is worth much more. Please continue.
Wow, thank you Shane for taking the time to explain that in full. Like you my favourite play is the fail test, for good reason. But once again you have me looking at ranges and structure areas in way I never thought possible. Many thanks.
By the way, over the weekend I’ll back test your coin toss strategy too (haha joke)
People look at breakouts and pullbacks as stand alone trading setups – because that is what all the textbooks talk about. They both can be used as trade entries which is rarely discussed.
If you did backtest that strategy…I was serious that you may be surprised with the result. I’ve done it.