WARNING: This text is a word-for-word transcription of Mac’s daily forex trading video. That means the writing will reflect the way he speaks, if anything seems out of place, please refer to the forex video on the page.
All right, everyone. Well, we’re looking at a market that did exactly what I was warning against, both earlier in the week and yesterday in particular, after the pound really exploded to the upside. Here was the day where we saw an extreme amount of volatility. The pound moved up from 5,480 to around 5,800, and then in one hour had retraced nearly that entire amount. And the reason why I was cautioning against chasing the market is this: it’s very easy to get in on an up‑move like this and then get lulled into complacency with the market moving up slightly ‑ it’ s not going much of anywhere ‑ and then get caught like a deer in the headlights once the market starts to move back down.
In fact the professional traders are hoping that that’s what’s going to happen to you and, quite frankly, the rest of the market.
So when you see big volatility ‑ what I mean is when you see huge up‑moves or even huge down‑moves ‑ the best thing to do on a short‑term basis is to sit back and wait. And there are really two possibilities as far as what you’re waiting for.
The first is waiting for a move down like this for an opportunity to buy. The easiest way to do that is while the market is making its down‑move, you are waiting for your 15‑minute chart over here to show some kind of three‑bar reversal.
Let’s look for an example of that. It actually would have come in here during the New York session. So once the market moved down and then started to move back up and flatten out, this period here is where we have a decision point.
Remember, we’re not trying to predict the market. We’re trying to look for the likely direction of the market. We’re trying to then use the patterns that tell us the likely direction of the market in order to be consistently profitable traders.
So when we get this strong move down, we need to wait for the market to recover and give us the signal, which is the three‑bar reversal on the 15‑minute chart. Now in this case the pound went sideways for most of the New York morning and then managed to pop itself back up, but then eventually here at the very end of the New York session would up kicking quite a bit.
But case in point is when you’re planning your trade ‑ and this question was asked in the one‑on‑one support session on Tuesday. The question was, in essence, “Well, how should we think about the marketplace?” It’s important for us to be able to let the market just continue to move down, but then for us to have a distinct plan on what it is we’re trying to do.
In fact, if you look over here on the hourly time frame, we’ve got a little bit of a flag pattern here as the market bounced its way up. In other words, we had the market push up and then form this flag pattern going sideways. This is what we’re looking for, because now we have buyers and sellers lining up on both sides of the market.
Whenever you get this, a one‑way direction in the market, you never know when the market starts to push back up if it’s going to immediately resume the trend, if it’s going to push back up and go sideways and then continue going up, or if it’s going to push up, continue going sideways for a period of time, and continue going down.
So we’ve got to plan for both. In other words, we need to see sideways action, and then we need to capitalize whichever way the market goes. That’s the power of the three‑bar reversal when you combine it with some of the higher time frame analysis. In other words, looking at the market making a big move down, seeing on the daily bars that we’re pushing up towards the top end of a multiple‑month resistance area.
So coming into tomorrow’s session, it’s Friday. We’ve had a lot of volatility, and you can expect even more volatility coming into tomorrow. Why? Well, because you’re going to have some traders which are going to need to square up their positions. Maybe they bought back here, maybe they bought in here. They need to just get out of the market. Maybe they’ve been short in here and they need to get out. Who cares?
Bottom line is we’re coming into Friday. Fridays are very common days for the market to do one of two things: either nothing or a whole lot of something. [laughs] I’m chuckling because that almost sounds like I’m not saying anything.
Here’s what I mean by this. If we start to break over the highs, I would anticipate that the market will run even higher into Friday’s close. If we don’t get a break above the high, I don’t anticipate much in the way of the marketplace, plus we’ve got to break through both this area of support and our last low in order to get any kind of run on the market.
So let me say this. Once again, if we’re near the European open and the market is breaking through these low prices over here, which is coming in at 5727, that’s going to give us an opportunity to go short. But I think it will be a prudent idea to wait for the little dipper. In other words, wait for the market to come down and then re‑test.
It’s not a good idea to try to try and count on the market doing this exact thing again. In fact, quite the contrary. Now that it’s happened once, it’s more likely that the professional traders will let people pile in short and then push price back up to scare them out of the market. That’s the typical pattern.
On the other hand, if we’re near the top here, near the highs coming into the European session ‑ this is the 5894 area ‑ this will make a good opportunity to see if the market is going to continue its push.
In both cases, though, we’ve got to watch and see what happens coming through the Asian session. If we have another period like this where we have a very well‑defined trading range, then quite simply if the market breaks the trading lane top or bottom, you trade that particular pattern.
Remember, we’re not in a trending market, and so we’ve got to be able to adjust and modify our trading plan accordingly.
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