Last night’s ECB Minimum Bid Rate and Press Conference saw price break out in line with short term trends but turn into major reversal as the breakout was faded. This post looks at the aftermath of a very high impact news, understand what it means to traders and reinforce some important technical mantra and concepts.
Trade the price action, not the narrative
High impact news like that from the ECB last night are just narrative. It gives cover to what is happening in the market. Some of this narrative can be compelling but mostly its story telling. Take action based on what you see in the market and follow sound technical analysis principles. These principles are not science like E=MCsq but they give structure to the market so that it is tradable. In my opinion, these are some of the most important principles:
- Support and resistance are pillars in the market
- Follow the flow; there are many flows because that’s the nature of multiple time frames but the flow in the higher time frame is strongest
- Do not play breakout; breakouts succeed once in a while but fading breakouts i.e. trading against a breakout is the higher probability trade setup (this is so important to understand I strongly recommend you see this ‘How market makes money from both buyers and sellers’ bonus chart)
As a reminder, this was a key message I posted last night prior to ECB news ‘ECB high impact news forces traders to fade or play breakout‘:
And then this one which I posted 2 weeks ago.
What are breakouts? Price breakouts are just the best opportunities to create wash and rinse, bull trap, bear trap, squeeze, stop hunt among many names.
Fade the breakout and don’t get suckered!
- Because EURUSD has fallen more than 4-weeks with little or no retracement, reaching 76.4% Fib-R of the big flow is very attractive for bulls. We can see after last night action that 76.4% Fib-R support is intact.
- That long tail is is a wash n rinse aka bear trap aka short squeeze.
- We now have a triple bottom bullish reversal.
- Short squeeze follows breakout of 2-week support; reveals bear trap.
- 61.8% Fib-R resistance is intact after the massive false breakout triggered by ECB.
- Line chart shows double top.
- Candlestick has a long tail aka price spike.
- Note the huge price spike on 4-hourly chart that turns out to be a false breakout. If one did not have an open position prior to this, the bull trap itself would be a very attractive short signal instead.
This currency pair has most of the features of the previous two, like the resistance based on Fib-R. But the most prominent feature is that price met at a convergence of big trend and small trend like I wrote here. Once ECB news came out, we can see that price rally over the past few weeks was merely a retracement and with the bearish expansion we saw this morning, the pair is ready to resume its overall down trend.
In addition, we can see from points 1 and 2 that bull traps are not rare.
- Here a trader should ask this question ‘isn’t that breakdown a very good trade signal?’
Bonus EURCAD charts
Verdict for traders
- If you got existing positions in the profit before a piece of high impact news, take some and prepare for a lot of volatility on the remaining.
- If you got no existing positions, keep cool and wait for clear trade signals to emerge; high time frame is best.
- Fading a breakout is the higher probability trade setup.
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.