Forex, Time, and Distance

In response to the number of requests I've had to write about day trading, here is a significant lesson. This can be applied to longer time frames as well.

One of the most crushing moves for a novice trader is to be watching a chart, seeing a strong move take off, waiting for it to clear a resistance, then hitting the buy button, only to see the currency begin tanking like a rock.

Such moves are also called "traps". Depending on who you talk to it is called either a bull trap (one that traps unsuspecting bulls) or a bear trap (one that a bear uses to catch a bull). Since there doesn't seem to be a uniform usage, we'll just call them traps. Obviously, they can happen in either direction. Typically, they are fast moving, and extend a certain percentage beyond resistance. My experience is that they will often move to the 38.2 extension of the support or resistance, stop, and reverse.

That being the case, it pays to know where these reversal points are. Now you can' t just blindly set an order to reverse, you have to see as the price action approaches the point, if the pair is showing some signs of exhaustion. That, coupled with the fib extension, will often provide an excellent entry for one who is day trading. Also, if you are actually trading in the direction of the movement already, the 1.382 is an excellent target on a fast move, once the price clears the initial resistance or support.

Another means of measuring the same thing is the angle of the price action. In an uptrend, an angle of45 degrees is very pleasant. It indicates strength building, and no blow off runs toward exhaustion. Beyond that, every 5 degrees or so increases the likelihood of a strong reversal. once your pair is moving at an angle of 75 degrees, you can be pretty certain that this move will not last. If you have the time to watch it, waiting for the signs of exhaustion can prove to be a powerful trade. Even if it only retraces 1/3 t0 1/2 of the entire move, if it looks like good pips, then enter with a small small risk, just above the recent high, if it takes that out, exit immediately and wait for another sign of exhaustion.

This can be done on any time frame, but remember, the longer the time frame,the more reliable the signals are.

Also, the more familiar you are with a certain pair, the better you will get at this. Each pair contains its own idiosyncrasies, and the better you get at noting them, the better of a trader you will be.

For now, just remember, fast moves nearly always mean fast reversals. so even if y9u break a good support or resistance, maybe especially then, if the pair has made a long fast move, it may be best to stand aside, and wait for the extension, then reverse the pair on the way back down. Watch out for those speed traps!

Until next time...Happy Trading!

Bill