Using price action as an entry guide

This week I want to show how I might interpret price action for entry signals.

We'll have a look at the price action on the 4hr chart during last week and interptet signals for both bulls and bears. This is a great exercise for anyone and can help you to find signals when the market is open.

In the above chart I have marked some areas that would be of interest to me. First lets look at bearish signals.

Red candle number one - this is a 'bounce' off the weekly trend line. It would be reasonable to take a short position from this candle (bearish engulphing) or the next candle (pin candle) if you are bearish.

Red candle number 2 (bearish engulphing candle) - Not a good signal because of the support level shown in the rectangle. Plus notice the two pinbar candles that 'bounce' up from .9100 just preceeding it.

Red candle number 3 (bearish engulping candle) - reasonable short signal. Because it was generated in a breakout zone and price is near 'historic' highs of .9400 or so. Indeed this bearish signal could be still in play depending on placement of the stoploss. Also, aggresive bears might still take this bar short because price has not yet broke to the upside and current price offers a tight stoploss if placed just above that bar. Next weeks open will come into play on this signal too.

On the bullish side there are two bullish engulping candles early in the week which are not marked and occur before the first bearish signal candle 1. They are not great signals because of the looming weekly trend line previously discussed. However, either one could have been taken and if your stop was just below them they would have closed because of bearish candle number one. If your stop was below the rectangle of support the signals would still be in play. In my opinion only one of these signals would be taken as they are too close together to take both.

Green candle number 1 (bullish breakout) This candle is the first to close above any last bearish candle. Also recent price action suggests that given the respect for support in the rectangle and the recent bounces off .9100 that a long signal might be a good one. However, remember that weekly trend line is still above so it would be wise to keep a tight stoploss. This entry could still be in play. In fact I took an entry around this candle and exited using a manually placed trailing stop that was placed under the bearish signal candle #3.

Green candle number 2 (bullish trend line break) This candle is the first to close above the trendline and turned out to be another strong signal for bulls. Note how the candle just before this candle bounced down from the weekly trendline but now we have closed above it regardless of that bounce down. This suggests that the trendline is not being respected as resistance any longer. A stoploss placed just under this candle means this entry could still be in play. An exit could have been taken using the same technique described above in green candle 1 OR one could simply haved moved the stoploss to break even in attempted to gain even more.

Three candles later is another bullish signal that I haven't marked but which should be noticed. It is the first to close above the last red candle also it closed above .9200 after the three preceding candles bounce UP off that weekly trendline which now appears to be giving support rather than resistance. An entry here could still be in play.

Green candle number 3 (bullish engulping) Closed above the previous red candle which was a pinbar bounce up from .9200 or so. An entry here might be still in play but many traders will not take an entry so close the the weeks end. Why? Well as you can see from my last few weeks posts opening price often gaps one way or the other and a large gap to the downside could easily take out any open long positions - even below your stoploss! So entry here may include risk that you have not and cannot calculate. Indeed some traders will never keep positions open over the weekend.

I hope this exercise proves useful to you. I believe I have gained some insight myself just by presenting it here. Remember that no signal will be good 100% of the time. Key in being successful will be keeping your losses small and letting winners run. That way you may even have more losses than winners and still be profitable.

Dan

Thanks for visiting!!

This is not a recommendation to trade.