Spot Gold Price Chart - Gold Breakout Daily Chart

This is a classic example of a breakout from a pennant pattern which we had been following in the spot gold market for several weeks, and is covered in more detail on my daily market commentary for the spot gold market. As we can see from the daily gold chart, spot gold prices had been consolidating in an increasingly narrow trading range, forming the pennant pattern as a result which is outlined with the two lines above and below which give the pattern it’s name. Such trading is typified by prices moving in a ever small range day after day, until one day we see the explosive breakout that occured in the spot gold market recently, with the breakout on this occasion coming to the upside. There are two things to note in order to trade such breakouts, and the first is simply that the longer the sideways consolidation continues, then the greater will be the force and speed of the breakout when it does occur – much like a tightly coiled spring. The second point to note is that generally the breakout will be in the same direction as that which the market was taking before the start of the consolidation, so in this case we were expecting a break to the upside as the more likely for spot gold prices in this case.

The question of course, is whilst we can see the pennant forming on the daily chart, how do we benefit as traders, and the simple answer is in two ways. First we can trade the breakout before it happens by placing a long straddle in position using options. This is known as a directionless trade, as we benefit whichever way the breakout comes, but ONLY if the trade is in place when the breakout occurs. Should the market continue to consolidate sideways, then this trade will lose, unless you sell any remaining option value back to the market. So the key to success with this trade is in the timing, and you must therefore allow sufficient time for the trade to develop such that the options do not expire before the breakout occurs, and my suggestion for such trades is normally around 3 months, which I suggested on this occasion to my regular readers. The second trading option is to wait for the breakout and then to trade in the direction the breakout has occurred once the market has settled – more risky as we often see considerable volatility following the breakout from the trading range, but nevertheless this is a second way to trade – however, my preferred trading strategy for breakouts is always to use the straddle option strategy wherever possible, and if you would like further details please just follow the link here which explains this in more detail.

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EUR GBP 10 Minute Chart - 27th March 2009

This particular chart, which I have taken from this morning’s trading session on the euro pound currency pair, provides a classic example of how to make money scalping in short term currency pairs. The chart is based on ten minutes, and as we can see, at 9.30 this morning, three consecutive shooting star candles arrived, one after the other, indicating weakness in the market and a possible trading opportunity. I took a chance at this point and placed a wide stop loss above my short position, but had I been more patient I would have waited until 11 am for the confirming bearish engulfing candle to arrive, at which point I would have gone short, yielding a nice return. Now the key thing to note, is that it is very easy to take the first signal that arrives and to enter the market too early – in this case I waited for the third shooting star, a clear sign that the market is weak, before entering. The key to success in scalping is to be patient and to wait for the opportunities to come to you, and not to try to force the trades. Just be patient. Scalping is an excellent way to improve you technical analysis skills, and also forces you to be disciplined with your stop loss placement and management. Even if you only practice in a demo account, it is well worth the effort as these signals arrive every day across all the pairs, and if one is not providing anything of interest, simply change to another time frame or another currency pair, and it is an excellent way to ‘paper trade’ by honing your skills – yes I know it is always harder when real money is at stake, but practice, practice, and more practice will make you a better trader!

You can keep up to date with all the latest currency news, live currency charts, fundamental news, and ofcourse if you are looking for a good fx broker or ECN broker, please just follow the relevant link.

CHF/JPY - Daily Candle Chart 9th March 2009

I wanted to share this chart with you, as it highlights some important issues regarding timing, and in particular the need to be patient and not rush in and open a position as soon as we see a signal. Candlestick analysis is all about waiting for the signal to be confirmed as true or false – once this has happened then we have a much better chance of success, rather than rush in at the first opportunity without bothering to wait, frightened that the move will get away from us.

In this case we are looking at the daily chart for the CHF/JPY currency pair, and let’s start with the bearish engulfing signal on the 21st December 2008, following a shooting star candle. Had you been looking at this chart without the benefit of hindsight you would have seen the signal, and been waiting for prices to fall the following day, and no doubt rushed in to open a short position based on one candle. Your position would have closed at a loss, as prices moved higher in the day. On the other hand had you waited, then by the end of the day’s trading you would have known that the signal was false, as the charts were now telling you, loud and clear. Six days later we see another bearish signal, a shooting star after a long rally – a sign of weakness, when combined with the earlier bearish signal, this now starts to create a picture. Finally on the 5th January 2009, we receive a bearish engulfing signal which now confirms the weakness, and we would now be looking to trade short with a much better chance of success. Being patient is one of the hardest lessons to learn in trading, but it is one you need to learn, and learn fast. Chasing the market is the quick way to lose all your capital! So be patient and wait for the signal to be confirmed, and if it isn’t just remember that the signal is still there, and could be the first sign of a change, but only the FIRST sign!

Now the second example is really confirming the above in reverse with a bullish engulfing signal on the 27th February – a great signal and we open our position on the 28th February and go long – well in this case we may have survived, or we may not, depending on how tight our stop loss was, but again we are too early because we have been too impatient, and frightened that the move will get away from us. Had we waited, six days later we see another bullish engulfing candle, which when added to the first signal gives extra weight to our decision, and therefore a better chance of success. Now that bull rally is still continuing today, over one month later. So the moral is, be patient – I know it can be hard at times, but if you are constantly chasing the market you will lose – be patient and wait, and then use the earlier signal as a confirmation of a later one, adding weight to the decision. You may still be wrong, but at least you have waited and not rushed in at the first opportunity.

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USD/CHF Daily Candle Chart - 27th February 2009

I wanted to show you this candle chart, as again it has some extremely important lessons for us as traders, using technical analysis as our primary trading tool. The first aspect of this chart which I think is a perfect example is the waterfall effect, seen in mid-December 2008. In any down move, increasingly wide spreads indicate that the move is gaining momentum, and as you can see here, the spread of the down bar increases, creating the so called “waterfall”, which describes the pattern perfectly. Now if you have volume on your trading system, then this is an excellent tool to validate the move as we would expect to see increasing volume with the increasing spreads as the market bears take control. So in any move, if you see widening spreads, in either a down move, or an up move, then this is an indication that the move is gaining momentum, and therefore provides us with a trading signal.

The second aspect of this move, is at the bottom of the waterfall, where we see a classic hammer candle, hammering out the bottom which we have discussed before. With such a deep hammer, after such a strong down move, there is only on way for prices to move, and that’s back up, but only temporarily, and this is the key point. As traders we have to be patient and wait for the confirming signal to appear. Whilst we might have made money trading the first hammer, we might have got stopped out in any reversal. The second hammer which appears six days later, is a much stronger signal as it confirms the first, and therefore we can trade with much greater confidence that the reversal is a genuine one, and not a temporary move higher. The lower wick of the candle is re-tests the same level as for the first hammer candle, adding more weight to the signal. Having seen the second signal we would then wait until prices moved up and through the moving averages which then provide us with added confidence as the move develops. I am still in this one and waiting for prices to reach the resistance above before closing out, or alternatively if a reversal occurs then trigger my stop loss below the 1.15 level.

Continuation Candle Pattern - Falling Window

The Japanese have some wonderful descriptions for their candle patterns, and one of these is called the window. In the West we call this a gap up or gap down and whilst not common in forex markets, they occur much more frequently in stocks where prices close in the evening, and then open with a gap the following morning, due to some overnight breaking news. This of course rarely happens in the forex market, so I have taken an example from the futures market and WTI oil contacts with a great example for you to see. The Japanese call this phenomenon an window, and in essence there are two kinds, namely a rising window which is a bullish signal and the falling window, which is the bearish signal.  Both signify the same thing, namely that they confirm that the move is likely to continue for the time being. Now the important point to note, and this is where many traders and chartists become confused, is that it the price of the following day, enters the price of the previous day, even if this is only the shadow of the candle, then this is not considered to be a window in Japanese candlestick analysis. This is an important point and one which is often misunderstood. So let’s look at our example above.

As you can see on the 22nd of July we had a wide spread down bar, with small shadows top and bottom which was followed the day after ( 23rd July) by a narrow spread down bar with no bottom wick and only a tiny top shadow. This is then followed by our ‘falling window’  with a clear gap between this candle and the following day’s candle. As you can see the upper shadow of the candle on the 24th July has not penetrated back into the previous day’s candle in any way, and therefore we can say that this is a true falling window and a bearish signal which confirms that the move is likely to continue for some time. Had the upper shadow breached the candle of the previous day, in any way, then we would have to discount the signal. The window concept is also important from another view ( sorry for the pun) and this is that it provides a natural break to any reversal, rather like a firebreak in controlling the spread of fires which are much in the news at the moment. In order to control a fire, deep channels are dug making it much harder for the fire to jump the gap – well the same principle applies here with a window providing a gap across which prices have to jump in order to move higher ( or lower ). This is where the Eastern Japanese candle philosophy joins with the Western support resistance philosophy which make candlestick analysis so powerful, provided you take the time to understand all the nuances and subtleties of the methodology. So keep your eyes open for falling and rising windows, as these are great signals for a continuation of the move.