Spot Forex Triggers

Spot Forex Triggers

Let’s examine market price action and how to execute this signal. You have your predetermined pivot point resistance levels already mapped out for you. RealTick has the feature that automatically sets the daily pivot point levels on the charts. Genesis Software has the Person Pivot with the COMAS triggers programmed in a library feature that highlights the buy and sell signals with the red and green arrows. Some charting packages have pivot points available as well. If you do not have either of these two software packages, you can do an Excel program; or at the very least, you can use my pivot point calculator included on the CD or on my web site www.theforex7.com to program any market for any time frame you want. The key is that once you have the predetermined support and resistance numbers, it is the second variable that is more important, which is looking for a signal that triggers a call to action. That would be the LCD signal.

The chart in Figure 8.17 is a spot forex euro currency that shows once again why it is important to wait for sell signals at resistance rather than buying breakouts. The euro currency chart shows the market breaking out above the R-1 level. As a standard rule, I do not like to take buy signals at resistance (we have covered that in the pivot point section). I would rather wait for a sell signal to develop and go with the declining momentum. I believe that one reason why this signal works so well is that many traders are trying to trade breakouts of pivot point resistance and, therefore, go long once they see the breakout above the R-1 level. Once there is little follow- through and prices start to retreat, sell to get out of their losing trade.

 In this example, notice where we have a moving average crossover—not only do prices close below the doji, but also below both moving average values.

The trigger to sell short was executed at 118.67, and we saw an immediate reaction as prices plunged. The sequence of events that we want to see once we are in a short position, as in this example, is lower highs, lower lows, and the most important lower closing lows. Finally, the market pauses at 118.30, where we would look to cover half to two-thirds of our position, banking a quick 37-point (or PIP) gain per position. Now we can make a decision instead of placing a hard stop above the initial doji high. We could decide, since the move was a decent distance away from our initial entry, to place a stop at breakeven on the balance of our position. As the market enters a consolidation phase, we see that prices never close above the high of the first reactionary low’s high. That keeps prices contained in a sideways channel, which is similar to a bear flag formation. As we follow the flow of the market, notice how the market declines by the end of the day to the S-2 of 117.80. As a day trader, there is no question on where you need to exit the position. It is the end of the day, and you have managed a trade all day and rode a very nice trending market condition.

Using a half-position scale-out method, you obviously need to trade at least a minimum of two contracts. In this example, when you cover half of your positions at 118.30, you pick up $370 per 100,000 full-size contract. You can now afford to ride the balance. That generates the bulk of your profits, as you would be covering the other half of the trade at the 118.00 level for a 67-PIP gain, or $670. Combined, you have a profit of $1,040 on just a two- lot position.

In Figure 8.18, I want to look at a textbook setup in the Japanese yen. This is a 5-minute chart without the pivot point moving averages overlaid to help you see the progression of the trade and the sequence of the open/close relationship that candlestick charts display.

As the market advances toward the projected pivot point daily R-2, traders may assume the market conditions are in a bullish mode. When you get in that mindset, you tend to forget about looking at the current market conditions. The top pattern is not a traditional or classic morning doji star formation because the third candle does not close below the midpoint of the tall white candle. However, it does close below the doji’s low; that is the conditional change that takes place giving us the clue that the bullish momentum has dried up and that a reversal is imminent. First, there is a lower closing low; then, the market closes below the open; and finally, prices reversed direction—all after the market tapped the pivot point resistance level.

Therefore, we want to sell on the close or on the very next time period’s open, placing our stop (initially) as a mental stop-close-only above the high of the doji, which is 118.18. That is just three PIPs above the daily pivot point resistance level, too.

Again, what we want to see is almost instant follow-through for the price to decline. As you can see with this trade, there was immediate follow through. Notice the progression of the market as it declines from the entry price at 118.07 straight down to 117.87, for a quick 20-PIP gain. The market then trades back and forth, creating small-range candles, which form a sideways channel. If you look carefully at each candle’s close, you will see that it does not close back above the high of candle that established the first reactionary low. As a trader, you may want to hold all positions at this time or at least cover half of your positions for small gain. One reason to do that is because, as powerful and reliable as these triggers are, we still do not know how far prices can or will actually move. Remember that the patterns recur; the outcome is what is different each time.

The markets could easily reverse back and challenge the highs. By taking money out of the market immediately on half of your positions, you have profits; and more important, you reduce your risk exposure in the market.

Always remember that every time you are in the market, you face risk. So by establishing a profit and following the flow of the market, you can manage the balance of your trade with less stress, knowing you have made money. See how the candles in Figure 8.18 show the true direction of the market: The dark candles reflect closes below the open. For the most part, there are more of the dark, or negative assigned, candles, which are establishing lower closing lows, than there are white, or positive assigned, candles. Not only do they have smaller ranges, but they do not make higher closing highs. This shows that every time the market rallies just a little bit, sellers are present. Long real-body, or negative assigned, candles represent sellers, who dominate this market. Therefore, staying short on the balance of the position is warranted. Now, as the market price disintegrates, demonstrating the conviction of sellers, we can place a hard stop at breakeven on the balance of the position and start to adjust the stop to protect profits accordingly. This is what managing the trade is about and what we will go over in Chapter 9.

As a short-term trader, it is imperative to trade with the current flow or momentum of the market. Because there are so many variables that can influence your trading decisions, using the methods described here will help you keep focused and will alleviate the problem of trading on emotional impulses.

When you are armed with what the potential resistance levels are, then once you identify a low close doji signal and then apply trade management techniques, you can certainly increase your chances to consistently capture profits. It is literally up to you to pull the money out of the markets. In Figure 8.19, we have a 10-minute chart, just to illustrate that dojis form on various time frames as well. As you can see, the market starts to rally and closes above the pivot point resistance. By not allowing emotions to interfere with your better judgment, just by applying one mechanical rule—do not take buy signals at resistance—you will have eliminated the greed factor that often causes a trader to chase after a market. Therefore, just wait, and practice patience to look for a sell signal to develop. As you can see in Figure 8.19, after the long white candle forms, a doji forms. Then, as the method dictates, you do not enter a short position until you see confirmation of a breakdown in the bullish momentum by a lower closing low below the doji’s low. Once that occurs, you enter a short position on the close of that period or on the next open. Remember that this does not tell you how much money you will make on each trade. Every outcome is different. There is a strong possibility that, based on historic reference, you should see a decline in prices; the question is by how much.

In this chart, you see an immediate reaction, as you would have entered a short from 122.94; and the bears take over almost immediately. There is a sequence of lower highs, lower lows, and lower closing lows.

In fact, using the moving averages, notice the confirmation of a negative crossover and prices closing below the moving averages. This short-term downtrend ends when you see a change in conditions once the moving averages cross back up and prices start to close above both moving average values. This is a sign that the negative momentum, or selling pressure, is fading and that it is time to exit your position. Also, notice that a doji forms at the bottom of this downturn; it is the candle that closes above the doji’s high that makes you commit to exiting all positions. This trade results only in an 11-PIP gain; but not all outcomes will be grand-slam home runs. The key is in being able to identify true conditional changes that will make you act on facts, triggering a call to action by a set of rules rather than by emotional impulses. If you have the discipline to trade by a set of rules and to follow those rules, you will reap some juicy trading profits consistently over a long period of time.