Marc Walton on March 30, 2014
This week, it seems as though we are staring down a lot of engulfing
weekly candles. So how do you know when to trust them?? I have a
3-step checklist I use to determine whether I consider a reversal
candlestick formation valid or not.- Context: The real question becomes, “is there a move to reverse?” So often, we see engulfing candles right after sideways moves. We also see them out of the blue. The problem is that if we took every single one, it wouldn’t be as profitable as choosing select engulfing/reversal candles that have context. There must be a move to actually reverse. I consider at least 3 prior candles enough to establish a trend before the reversal. On monthly though, we just need 2 prior months since that can cover so much of the market. For a reversal candle to be valid, make sure there is the context of at least a move to reverse.
- S/R Rejection: The second check on the list becomes “did price reject a major area”. Reversals work best when price fails (the more dramatically the better) to take a major area and close through it. When we see rejection of a major area after an established move in the direction of it, we can see that the opposite side stands strong there and could reverse price. If price simply rejects or reverses without this, it could simply be a small pullback that will continue the move later. By ensuring we have rejected an area of s/r, we give ourselves a better chance of catching a legitimate reversal.
- Valid Formation: I know this may seem obvious, but it’s worth analyzing. The question is “Is the candlestick a valid engulfing/pin bar/reversal?” It is worth the time to sit and look at the candle itself. If pin bar, does the body agree with the reversal? If engulfing, does the body completely engulf the prior candle’s body? Making sure you don’t just see a wick and decide it’s a reversal can save you from losing a trade. After checking the first two items,make sure the reversal candle is actually a valid candle to qualify for whatever type its supposed to be.
The Forex Week Ahead:
As mentioned above, there are lots of engulfing candles on the weekly this week. Some of them look valid and some don’t. I go over most them in the video. Of course, at the end of the week comes NFP!! The big news of the month. I ALWAYS pay close attention not to trade around NFP the first week of the month and FOMC on the third week of the month. Directions can change and new trends often start after those announcements drop. Try to make your pips early this week and watch NFP from the sidelines. Who knows? It just might be a big move that takes us into next week!!Euro/$: ”Triangle broken. Confirmed on the weekly for 2 weeks but we still don’t have a monthly confirm to verify this multi-year triangle break. When we look for big trades, we need big timeframe confirmation. ” That was my analysis VERBATIM from 2 weeks ago. Interestingly enough, the triangle DID NOT hold as we finished last week!! Of course, we still have a couple of days left in the month to “fix” that. Look at March candle after it closes and starts Aprils. In the meantime, keep an eye on 1.3825 and 1.3715. Break above 1.3825 and I’ll long. Break below 1.3715 and I’ll short. Otherwise, I’m just watching and waiting for the Euro to decide what the next big leg will be.
Gbp/$: Looks markedly different than the Eur/Usd. This pair seems to be back on the bullish bandwagon. 1.6600 will be the area to look for a long and 1.6730 still looms large above either for a counter-trend short or as an area to look for a good, solid bullish break to trade from.
Aud/$: Well, I am finally convinced we are heading up with this pair. I hope all of you were able to grab the easy action from .9050 after so many weeks of waiting for a real break of this area. Last week we launched from it. Now we sit above .9200 but below .9300. Potential pullback to long from .9200, .9150 or maybe even .9050 again. Look and see how price reacts as it touches those areas. If we just pop higher, long from .9300 would be my preference.
Euro/Gbp: This pair seems to be my new Cad. Up and down. Even though we had a very big bearish engulfing weekly candle to finish the week, it came and sat and stayed above a trendline that has been valid for months. Check the video to see what I’m talking about. Safer trade is wait for a bearish break below .8250ish while some of you may just want to take “old faithful” and short at .8300. Stronger moves up will have to clear those pesky EMAs that seem to be in control of this pair and are bunched between .8300-.8400.
$/Yen: My analysis has not changed much here. Still doesn’t look clear, small daily ranges. Danger rangers will look to long from 102.50 area since this is an important 200 EMA but I honestly am not going to trade this pair until we break above 103.75 or below 101.00
Euro/Yen: Not much going on. Leaving alone until we get way more clarity
Aud Yen: After weeks of silly trading, this pair seems to have finally decided on movement. And that move was bullish! We closed above 93.60 and the important area of 94.50. Look to both of those areas for longs, and let’s hope we are at the start of a nice trend upwards.
Usd/Cad: Engulfing weekly candle, but here is one of my choices for “fake reversal”. Of course I could be proven wrong as it is the CAD!! Look to long from 1.1000 or counter-trend short from 1.1175. If either area breaks take the opposite trade from either area.
Eur/Cad: All good trends must come to an end. Is that what’s happening here?? This engulfing weekly seems to suggest so, but I would use caution nonetheless. I feel this pair and the Aud/Usd are the two best to focus on this week. Look for breaks either above 1.5300 to long, or below 1.5200 to short. This pair has had a great daily range lately so we might get some more nice trades from it.
New members please note: If I am looking to take a trade long, at for example 1.5000 , I place my order 10 pips above & 10 pips below for a short. This is because price often does not quite reach a major line and you need to allow for spreads.
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Hope you enjoy the analysis!! See you Wednesday for an update!! Best wishes and happy trading to all!!!