What to find in a good reversal trade signal: 4 elements
Trading forex is not an exact science. The best we can ask for is high probability outcomes. Despite our best effort, each trade can still turn out differently. Still there are lesson-perfect setups and rules one must look out for because these offer the best chance to produce consistent results.
In previous posts ‘Learn to trade forex: Elements of a trade signal‘ and ‘Elements of a reversal trade signal in EURJPY‘ (a good long time ago my goodness!), we wrote that good reversal trade signals have 4 elements:
- Roadmap and support resistance
- Chart pattern
- Candlestick pattern
- Coming together in a confluence
Price setups that have all four elements can best predict a reversal trade which one can trade and make money from!
AUDCHF meets 3 elements; high impact news skips the candlestick pattern
Element #1 – Roadmap of resistances levels, trend lines
The first element is a roadmap for selling. A convergence of 3 technical ideas, a horizontal resistance from significant previous as well as resistance from two equidistant channels tell us that there is a layer of resistance on top. Trading over the past 3-weeks cut through March 2014 high so we suspect that this could be a resistance level as well. When there is resistance on top, down is the easiest way to trade.
Element #2 – Chart pattern shows high probability setup
A triple top chart pattern tops recent 3-month rally in the AUDCHF pair, meets the confluence of resistance levels. A triple top is a high probability bearish pattern so it is not good news at all for bulls. In fact element #2 reinforces element #1 roadmap for a bearish view.
Element #3 – Candlestick usurped by high impact news on two fronts
In the candlestick’s place, what we have today is two pieces of high impact news that are negative for the Australian Dollar. From the looks market had to move in a hurry and its all according to plan (see element #1 and #2).
Element #4 – Confluence! Confirmation!
The final ingredient to this trading soup is a last bit of confirmation. Looking through our trading rulebook, a triple top chart pattern requires price to close below neckline to bring to pattern to fruit.
Putting the trade signal together
With all the overhead resistance, there is little reason to consider a long trade for this pair. With the triple top looking firmer all the time, the final bit is really confirmation. Depending on each individual’s trading plan, 4-hourly chart is a good place to look for candlestick to close below neckline although daily time frame is really a stronger place to look. Bearing in mind all the elements of this reversal trade signal comes from the daily chart, it is a setup that may have room to move so a daily confirmation is really the most fitting.
— Soh tiong hum (@Sohtionghum) April 23, 2014
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
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