In this article you will learn:
A simple setup for entering trades that have a high probability of success.
Those reading my analysis should, by now, have a good understanding of what to include in their analysis. We need to, among other things, pay attention to weekly, daily and intra day support and resistance areas as well as price formations and Fibonacci levels clustering together. For a more detailed explanation, please refer to my earlier analysis on the USA 500 index, Gold and GBPUSD. The purpose of this educational article is to give HotForex clients a very practical example on how to benefit from the analysis that I produce. On Wednesday 22nd I wrote a report on Gold (you can find it here).
Chart #1: Gold, 4h
As we now see, the analysis was correct and gold has, since then, been hovering between the two levels that I suggested as potential supports. The higher one was penetrated and has been acting as a resistance as price has been consolidating just below it. I still think it is likely that we will see gold touching the lower level.
Last week’s gold analysis suggested that because the price was right at a weekly resistance and the price action in 4h chart was losing momentum, gold could break the rising trend line and move lower. This information can be used in several different ways. First of all, those holding long positions and hoping they would have even greater gains from a further up move were given a heads up and an opportunity to exit longs while in profit. Secondly, traders that considered longs against the rising trend-line might have waited for price to break lower, settle or reverse at the lower levels and then look for buy signals from a better cost base.
The third option (shorting while price breaks lower) is the one we are going to explore here. So, how do we identify shorting opportunities in similar situations? First of all, we know from the weekly and four hour analysis that momentum was fading and gold was staying below the (red) down trend-line I drew (see Chart #1). This trend-line itself provided a guideline on where to take short trades at.
However, there is yet another way of identifying profitable opportunities when similar breakdown is just about to happen or is under way. For this we need three things: 1) 50 period moving average below 100 period moving average 2) a retracement to Bollinger Bands and 3) a sign of momentum fading, (= a narrow range candle or a shooting star).
Chart #2: Gold, 15 min.
Here’s the setup (Chart #2) in a 15 minute chart. At the time of the publication of my analysis, gold was breaking lower. My comment then was: “…(the price of gold) moves sideways just above one of the Fibonacci cluster levels drawn earlier, but seems to be slipping lower. If gold can’t close above the descending red trend-line but keeps on drifting lower, I would look at the 4h (240 min.) Bollinger Bands as potential support or first target for short trades.” Once the bullish traders decided to drive gold up to a level that coincided with 15 min. Bollinger Bands, the setup was almost ready: fast moving average (50 ma) was below the slower (100 ma) and price had reached the Bollinger Bands (see the point two in Chart #2).
Chart #3: Gold, 5 min.
The only thing that was missing when the price arrived at the bands was the momentum confirmation. This confirmation however came relatively soon. As the price of gold reached the bands, momentum of this upsurge started to falter. It was visible both in 15 and 5 min. charts. The price in the 15 min. chart created a shooting star candle (a candle with a narrow body and a spike higher) and the momentum indicator in 5 min. chart had bearish divergence or a lower high, while the price on closing basis made a higher high (see Charts #2 and #3). Once at the bands, price started to stall and also the five minute chart produced a shooting star candle. With a stop above the recent highs this trade had the probabilities on its side. The next opportunities to short gold using the same setup occurred again later on that same day, as price turned lower from the 15 min. Bollinger Bands. Should a trader use leverage wisely, these kind of setups can give handsome profits. And the good thing is that they occur relatively often.
Chart #4: Gold, 15 min.
Later, as the price of gold kept on trending lower this setup occurred three times. The price hits the Bollinger Bands, the move stalls and turns.
Chart #5: Gold, 5 min.
Here is the first one of the setups (numbered in the Chart #4) in five minute resolution. As the move against the trend starts to weaken, the first signs of it can be seen in the Momentum and Stochastic indicators. The other two occasions have similar characteristics, which you are welcome to study. Studying the historical price action is an excellent way of learning to understand how the price in different time frames develops.
Conclusion:
In similar cases to the above gold setting you can follow this simple procedure. Once you have read my analysis (and provided that your own analysis agrees with it), start to look for shorting opportunities. Create a 15 minute chart with the 50 and 100 period (simple) moving averages together with the Bollinger Bands. You can use either the standard 20 period and 2 standard deviation setting or both the 2 and 1.5 stdv. bands like I do. Then wait until the 50 ma is below the 100 and look for the price to move up to the bands. See then if the above mentioned signs of fading momentum occur to confirm the setup. Don’t forget to place a protective stop above on of recent highs and remember to use a reasonable leverage. Obviously no setup is 100% guaranteed, i.e. they don’t always work out but get stopped. However as long as they are based on solid analysis and proper risk management (no over leveraged positions and correctly placed stops) is used, the long term odds are stacked in the favour of the trader. Note: a similar setup can be used to find long opportunities. This will be covered in one of the future educational articles.
Janne Muta
Chief Market Analyst
HotForex