Telling a story about forex price action trading using gold (XAUUSD)
Forex price action trading – all price action no indicator
This article demonstrates how price action can tell a story for XAUUSD without the use of any indicators. Importantly, the story can reveal the trend that gold is trading, taking care of the overall multiple time frame analysis, its sentiment as well as strong levels i.e. support and resistance. Not just in its value for story telling and analysis however, the steps show how traders can understand the whole price action in the market and use it as a basis to trade.
The charting components are:
- Candlestick patterns
- Line chart
- Multiple time frame charts, in this illustration weekly and daily
- Charting tools, drawing zones, boxes
- Price sentiment in terms of opening, closing levels
- High probability setups from chart patterns
Setting up the chart
In the beginning we start with a candlestick chart. A thick line based on the closing price is created to overlay a line chart together with the candlestick chart. In my experience, I have found this setup excellent for revealing important resistance-support levels while candlesticks paint a picture of market sentiment and its tails will highlight extreme levels. Between the closing price and the tail of the candle, a zone is formed.
In addition, I added boxes to define the highs and lows as well as boundaries in charting time frame. In this weekly chart, year-year boxes are drawn. They will play a role in our technical analysis in a short moment. The same steps are carried out in the daily chart.
Lastly, I included horizontal blacklines to show the opening prices as well.
Starting with the higher time frame for XAUUSD
We can see that gold formed a horizontal consolidation in 2012 although 2011 was higher than its previous year. Ample visual input is provided by the boxes in the weekly chart. At this moment, we are still in that consolidation until existing highs and lows are broken.
Fact #1 – Gold was in uptrend from 2011 but went sideway in 2012.
The technical take-away is like this. If gold rallies above 52-week high, it is a rally in the direction of its previous trend. If it rallies above 2011 high, that is a very strong signal.
We can also see from a long horizontal zone that we drew based on turning points in the line chart that 2-year long resistance-turned-support level around 1570 is very significant. This is the best level to buy cheap in an uptrend story. But if price fail below, gold gets cheaper but we would no longer have strong conviction of a rally in gold since such a significant support could fail.
Lower time frame – story in the daily chart
The picture in the weekly chart tells a strong significant story but is not the best place to judge momentum of price and not the best place to trigger any position. Taking the same approach in the daily chart however, the story goes like this: Gold is in its sixth month of decline and has shown no sign of reversing. During this sixth months swing and forex day traders were going short. However we can see by price reaction to our horizontal level that gold has rebounded from support twice in 3-months and thereby exhibiting the validity of the zone.
Fact #2 – Gold is still declining but prospects for support here looks very positive.
In fact the morning star candlestick pattern sends a very clear message. The price action late last week shows how on Wednesday sellers believed they were correct, the struggle that took place on Thursday and then the Friday buy-up that was an enormous reversal in the sentiment because visually price went back across the zone and reversed the losses in the past 2 days.
Concluding a price action story
The price action so far shows how strong support is but there is no proof of a change in direction. Any buyer who intends to jump now has to work on enormous faith that 1. the support is correct, 2. there is some other input not in the chart to support a buy, and 3. buying but depending on a tight stop loss.
A better way but having to pay a higher price is this: wait for price to rally beyond 1598 thereby turning price sentiment positive when it goes over this month’s opening level (below this is considered a losing month, above 1598 month performance is positive) or exceeding March high and creating a bullish expansion and possibly triple bottom in the daily chart.
Here at TerraSeeds Market Technician, we teach you an entire discretionary method of trading and providing the technology and support to do so. You can learn to trade, understand the market very well and we include very sophisticated methods including fibonacci ratios, components of elliott wave and ways to create very precise triggers. And we hope you are convinced of the remarkable forex trading performance that we did so far.