Today, I want to go over the subject of “fingerprints” in MT4 markets; specifically USDJPY. What I mean by a “fingerprint” are identifying characteristics that can often be found in helping you identify the short term direction of the market; the 2 most popular in USDJPY are 1) retracements, and 2) double tops and/or double bottoms.
The first I don’t pay much attention to because the M1 volatility algorithm will most often totally nail the turn after a retracement in price, so there is no need to guess [no matter how educated] what that particular level may be. The majority of the time retracements in price in USDJPY are in the 20-25 PIP range before the move continues on its merry way; however, “willy nilly” taking a position just because it retraced 22 PIPS can be very dangerous, as it might be on its way to a 40 PIP or even 60 PIP retracement before resumption of the trend. In any event, the M1 algorithm will pinpoint the turn anyway, so what’s the point of guessing?
There is however a scenario, on both tops and bottoms of a short term move, which we can take advantage of and make money. To set this scenario up, let’s assume 1) I am using the HR1 with SAR [0.032 & 0.32 respectively for input values], and 2) if the general intermediate uptrend in USDJPY is up, then I have yellow support lines [2] in place for a change in trend [tutorial]. Assuming these 2 criteria are in place, also assume that the “white dot” SAR is above the market [sell] at the moment and USDJPY is moving lower and I want to “buy” at the change in slope of the Plum Line from negative to positive when the Plum Line is under the Yellow Line. [Note: this is the market scenario which is currently present.]
In this scenario, I am clearly faced with a market “correction” in an otherwise intermediate up trending market; there are “cross currents” here that have the potential to make trades either “choppy” or losers with a higher probability than if the “white dots” SAR was below the market [buy]; what those probabilities are I can’t tell you, but they are lower than the 95%+ we would have with the SAR below the market.
USDJPY, especially when the down move is strong, very often will attempt a test of the low before putting in any kind of rally I’d like to capture. If the attempt to take out the most immediate low is successful, you can expect some gap action on the downside; however, when the attempt for a new low fails [a double bottom], the M1 with the algorithm is very quick in picking up the trend change, and it is this rally I want to capture. In other words, 2 things to pick up from this: 1) you don’t have to “take” every single algorithm buy [sell] signal in a down market because even if you were wrong and it would have made you money, by missing it you only have lost opportunity, and there are infinite opportunities available to you in the future, and 2) the second signal many times will be the one with power.
Today’s action in USDJPY bears this out; all the conditions above were met, and once we got into the New York session, there were 2 trades that show what I have been writing about above. Directly below the 2 trades.
You can clearly see the 2 double bottoms, and the subsequent rallies that followed them, with the second one going to the RM=1 exhaustion line. This type of trading action happens frequently given the assumptions I made earlier; however, don’t look for this [cuz you aren’t going to get it very often] scenario when the SAR is below the price. Most often, in that case, you have one opportunity before the “train leaves the station”, and if you miss it, you aren’t going to get another chance at that price level.
Take everything I said above and “flip it over” for price action from the sell side, and now I’m talking about “double tops”; the scenario here is exactly the same except reversed for price and the position of the SAR. Nothing in trading is 100% “fool proof” or guaranteed, but what I described today happens so frequently, I think it’s worth paying attention to on an ongoing basis. Having said that though, if you totally ignore today’s post and simply follow algorithm rules [on either the M30 or the HR1 from the tutorial], you will still be very profitable; this “tweak”, if you will, simply has the potential for you to be more profitable in your trading without violating algorithm rules and/or procedures.
Experienced professional traders, like me, don’t just sit like “bumps on a log” and drift through life year-after-year when trading, happily collecting money along the way nary a thought in our heads; I READ, THINK. STUDY. ACT. PROSPER. I pay attention to anything and everything that might possibly give me and/or the algorithm a problem and then I find a solution, or a course of action that mitigates the risk I might be facing; I learn the “personalities” of markets, how this differs from other asset classes, what the particular “fingerprints” of any market are and how best to trade it, and always have “my ears to the ground” listening for possible paradigm shifts in financial trading.
I wasn’t really planning on trading today, but after that first exhaustion move up off of the lows, another algorithm buy signal popped up that I thought should be a good trade … actually became a great trade. Directly below today’s first and only trade.
I’ll take it, and now I’m sooooooo outta here. Until tomorrow …
Have a great day everybody!
-vegas
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