1) Horizontal Lines - Fading key levels with price action trigger
This first strategy is meant to show the simplicity and power in simply looking for two things: a key level in the market (horizontal line) and an obvious price action signal. Some of the biggest moves in any market are signaled by a price action setup that formed at a key level, as well as some very lucrative short-term moves as well. What I mean by “fading” is trading against current momentum from key levels at extremes. We are looking for a rotation back to value as I teach in the course. For this particular strategy we want to see an obvious price action signal as our entry trigger, combined with a key level. Let’s look at some examples to learn more:
In the chart below we are looking at the daily GBPUSD, we can see a very key and obvious horizontal resistance level through about 1.6175. Price had made significant rejections at that level two previous times recently when on November 1st a very well-defined pin bar setup formed showing rejection of the level. Now, every price action signal is a little bit different, and that’s why we need to use discretion when trading these setups, so I don’t really believe in “perfect” setups, but as far as pin bars go, this pin bar from November 1st is about as “perfect” as they come. It had a good sized tail that was clearly protruding from the surrounding price action as well as rejection a very key level in the market at 1.6175; the market also had the exact same open and closing price.
Next, we are actually looking at the GBPUSD daily chart again, but this time it’s a zoomed out view. I wanted to show you guys just how powerful a price action signal at a key level can be. Note the key long-term resistance at 1.6300. Why is it “key resistance” you might ask? Well, basically it’s because it caused price to stop and make a significant move in the opposite direction…or rather a large longer-term move. Thus, when price retraced back to that resistance in mid-September, we would have wanted to have our eyes peeled for an obvious price action sell signal to “fade” the up move from a key resistance. As we can see, a very obvious pin bar sell signal did form there on September 21st:
In the AUDJPY daily chart example below, we are taking a look at an example of this “fading key levels” strategy that did not work. It’s important to show trades that failed too, because you aren’t going to win every trade, even ones that look “perfect”. This pin bar at a key support level had all the makings of a good pin bar “fade” trade, but as we can see price broke higher only briefly before falling again and moving down past the pin bar low. It’s worth noting that soon after that price did shoot significantly higher, and we could have gotten in on this large move from a subsequent pin bar that formed on October 15th, which kicked off the current uptrend in this market. So, the point is that if we stick to our edge, our winners should eventually out-pace our losers:
Next, we are looking at the 4 hour EURJPY chart. This long-tailed pin bar was a good example of what we call a “V” reversal. This is just like it sounds…a reversal so sharp it actually looks like a big V…and often there’s a long-tailed pin bar as the turning point. We can see below a large down move terminated in a very obvious long-tailed 4 hour pin bar which then immediately kicked off a large up move:
2) 4 Hour Fakey with long-tailed pin bar
In this strategy, we are looking for a 4 hour fakey with a long-tailed pin bar as the false-break bar. Continuing on with what I was saying in the second strategy above…the long-tailed pin bar is a very accurate signal, albeit somewhat rare. A fakey with a long-tailed pin bar can be a very accurate signal, and is perhaps even rarer than just the long-tailed pin bar by itself. We MUST have an inside bar to have a fakey setup and we always wait for the false-break of the inside bar before acting upon any fakey signal. Ideally, the fakey “confirms” itself when there is a confirming move back the opposite direction that the pin bar tail is pointing (the false-break tail). We can enter a fakey with long-tailed pin bar on a break of the inside bar, mother bar or a 50% retrace of the pin bar …if you need help on the different fakey entries see this article on how to trade the fakey.
This signal shows both a false-break “fake out” by the big boys of the amateurs as well as a very forceful rejection, thus it’s very accurate and significant as a turning point signal. We can look to trade this setup from key levels or with an obvious trend. Let’s look at some examples:
In the example below, we are looking at the 4 hour AUDUSD, and we can see a fakey with long-tailed pin bar setup. Note these setups can also create a “V” reversal like we discussed above. This 4 hour fakey setup occurred back in mid-November and the AUDUSD is still moving higher, albeit in a very choppy fashion. But, we can see that the initial move from this setup was quite significant. The best entry here would have been on a break of the inside bar high…after the pin bar had formed, with a stop loss set near the 50% level of the pin bar:
Finally, in our last example we are looking at the 4 hour GBPJPY chart. This is a particularly interesting setup because it formed after a huge move higher. Typically, such explosions higher are often emotional moves and are over-done, meaning the market moved too far too fast and needs to retrace back to value before pushing on in the previous direction. Really abnormally large up-moves like the one in the chart below just before the setup we are discussing tend to form from euphoria…people jumping into the market just because it’s moving and they are chasing it…but these moves are rarely sustainable since they were fueled by an over-load of emotion. So, when you get an obvious fakey with a long-tailed pin bar like we see below, after a huge emotional move, it’s a pretty good bet that price will retrace the other direction, and in this case it started a large move lower.
Closing notes:
One thing I want to make a note of before we end today’s lesson, is that sometimes it’s OK to take a 1:1 "risk reward". I know I talk a lot about 1:2 and 1:3 risk reward, but that doesn’t mean you should not ever take a 1:1 r:r. In fact, for beginning traders, it’s good to aim for a 1:1 r:r first and then improve that to a 1:2 and 1:3. This is sort of a “training exercise”; the first thing to focus on is mastering picking the signals and market direction, then you work on money management and obtaining a higher r:r.
By first looking to make 1:1 r:r during your training / practice periods it will build confidence as you achieve more targets. Naturally, a trader looking for 1:1 r :r will get a better strike rate, but over time it’s not a genuine advantage if he is not learning to let any of his trades run to build a larger r:r. So, eventually you’ll need to move up to a higher risk reward, but it can often help with confidence building and general learning to take a 1:1 r:r in the earlier stages of your trading.