Trading is like being an investigator. A trader needs to investigate before investing money in it. A trader’s investigation means analyzing the chart accordingly. Today, we are going to demonstrate an example of how the price action analysis is done on a chart for taking an entry.
Choppy Price Action
Today, we are going to study with GBPJPY- H4 chart. The price was within a horizontal range after being very bearish earlier. Let us have a look at the chart.
The price got caught within those two red horizontal levels. Before being here, it did make a strong bearish move. Traders must be watchful here and be patient for the price to come out from the range. Let us see what happened next.
The long-awaited breakout took place. Apparently, the breakout took place at the resistance level and that was too with a price gap. The price action suggests that we may get ready to look for a long opportunity here. Before going long, we have two more things to do.
- Drawing an up-trending trend line
- Wait for a pullback and an H4 bullish reversal candle making new highest high
Let us draw the trend line first
Formation of an Up-Trending Trend Line
Since the price made a breakout, the trend line is to be drawn here. Soon we find out why this is so important. Now we would have to wait for the pullback for an upside breakout. See what happened afterwards.
Twist in the Tale
The price did come back. However, the bearish momentum was so strong that instead of making a new highest high, it made a breakout at the up trending trend line. The arrowed candle made the breakout and the very next candle confirmed the breakout by being closed within the new resistance (After a breakout a support becomes resistance and vice versa).
While the buyers were waiting for an upside breakout and a new highest high, the sellers captured the market. However, they still had to wait for the most important candle called signal candle. Let us find out how that came
The Signal Candle
The very last candle (red arrowed) came out as a solid bearish engulfing candle. This is a perfect selling signal candle to go short right after the candle closes.
Take Profit and Stop Loss
There are three resistance levels that may be used to set Stop Loss. However, the best level to set the stop loss is right above the signal candle (with some extra pips). To set take profit, we may have a look at the chart below
After the trend line breakout, confirmation and the signal candle, it is very evident that the price would head towards the next significant level of support. The point where the up trending trend line was initiated, that was a swing low and a level of horizontal support too. However, it was a support point of the trend line more than the horizontal support level. The point initiated the trend line and the trend line was breached. Thus, take profit should be set at the next significant support level which is marked here with the red horizontal line. Please note, this needs hours of study/back-testing to get immaculate in setting Stop Loss and Take Profit levels.
The Bottom Line
These are the lessons, we shall remember
- We must watch the price action carefully and wait for the price to make a move.
- Every breakout must be confirmed by a corrective candle(s).
- The signal candle is to be a very commanding candle (An Engulfing Candle is the best).