I’ve been doing a lot of thinking lately on how I can help improve my trading, and I’ve decided to follow Pipcrawler‘s lead. For those of you that have no idea what I’m talking about, he has recently been making price action reviews on his blog, selecting the “Pick of the Day” on a daily basis. Basically, the idea is to review past price action to get a better feel for the best entry and exit setups.
As a discretionary trader, I think this is a good way of gaining valuable trading experience. It will really help drill the most optimal entry and exit setups into my head. In time, I hope to be able to internalize these setups so that I can recognize them and capitalize on them without hesitating when they arise again in the future.
Weekly Winner – Technical Framework:
Now, unlike Pipcrawler, I’m not into day trading. I prefer swing trades, so I’ll be using the 1-hour chart as my primary time frame, and I’ll be conducting my reviews on a weekly basis. Also, since I’m quite fond of currency crosses, I’ll be covering my favorite pairs – EUR/JPY, GBP/JPY, and EUR/GBP.
For my charts, I’ll be putting up a lot of the same horizontal lines Pipcrawler uses on his Pick of the Day framework. If you’re unfamiliar with them, they are:
- Week Open Price (WO, purple): The pair’s opening price on Monday, 5:00 am GMT.
- Previous Week’s High and Low (PWH/PWL, blue)
- Weekly Average True Range High and Low (WATR, red): I’ll be marking the top and bottom range for the pair based on its average weekly range of movement. Using the 20 period Average True Range indicator, you can derive these levels by dividing the pair’s average true range by 2, and adding/subtracting the resulting number to the week’s opening price.
- Major (’00) and Minor (’50) Psychological Handles (MaPs/MiPs, black): Since pairs have the tendency to react to round numbers, I’ll be taking note of the significant ones as well.
- Support and Resistance Levels: Of course, not all action will occur around the horizontal lines I have listed so far. I’ll also be highlighting any other support and resistance levels that may be established.
Stochastic: As usual, I’ll be throwing the Stochastic indicator on my charts, with its parameters set at (14,3,3). This will help me determine whether a pair is overbought (above 80) or oversold (below 20). At the same time, I will be watching it closely for any divergences that may materialize.
Fibonacci Retracement Levels: If you’ve noticed, I’m a big fan of Fib retracement levels. I’ll be using this tool often to locate potential retracement zones.
News Events: Since discretionary trading involves not just technical analysis but fundamental analysis as well, I’ll be taking note of any economic releases or news events that earned reactions from the markets.
Price Action Review
Let me give you an example of what I plan to do starting next week:
July 5- July 9, 2010 – EUR/JPY Price Action Review
Looking back, the week of July 5 to July 9, 2010 was another pretty good week for the euro, as risk appetite began to pick up. While EUR/JPY did dip to start the week, it soon found support once news came out that the EU would be implementing stress tests on their banks. This showed that European leaders were taking the right steps towards stabilizing and ensuring the future of the financial system. Euro bulls rode the positive sentiment, pushing EUR/JPY up nearly 300 pips from its lows of the week.
So how did price react to technical levels during this week?
Initially, the pair had a difficult time breaking through the previous week’s high at 110.76. After retesting minor support at 109.50, EUR/JPY made a strong up move, pushing higher and eventually breaking through the PWH. The pair continued to shoot higher, finding minor resistance at 112.00, before finally testing the top WATR. By that time, Stochastic was severely overbought, indicating that buying pressure had run out. EUR/JPY eventually gave back some of its losses and closed just below 112.00.
If you had spotted the bullish divergence that formed, then you could have made some serious money. You could have gone long at 109.50, after price found minor support and bearish divergence had formed. Going long with a 100 pip stop (putting it past the previous low), while aiming for resistance at the PWH would have resulted in decent 1.25:1 reward-to-risk ratio. If you were a little more ambitious, you could have aimed for the top WATR, at 112.30. This would have gotten you about 280 pips, and would have resulted in a sweet 2.8:1 reward-to-risk win! Pretty sweet, eh?
This could have been even bigger if I kept adding to my winning position. It’s a skill that needs more refining, but if perfected, it could lead to some humungous gains.
Why do all of this???
You might be asking, what’s the point of reviewing this? It’s not like you can take the trade anymore!
No, I can’t take the trade, and yes, it is in the past. But that’s not the point!
Like I said earlier, the purpose of this exercise is to train ourselves to see how price reacts to certain news as well as to key technical levels. In reviewing the past, we can add to our memory trading bank and exponentially multiply our trading experience.
Just take a cue from some of the best athletes in the world. Guys like Kobe Bryant and Peyton Manning are notorious for spending hours upon hours review game tape. They do this to find out other players tendencies (in our case, market tendencies) as well as to learn what they did wrong and how can they can improve.
Even the big boys over at Wall Street do this, taping their screens and going through the process over and over, trying to embed in their minds familiar setups, so that the next time it comes rolling around, a light bulb will pop up over their head and they’ll think, “Aha, I’ve seen this one before. It’s a high probability setup. I think I’ll take it!”
I do believe that by doing this, it will help me develop a knack for spotting better entry and exits on my trades. In addition, it will help me develop a very crucial but many times overlooked skill – risk management!