There is a lot of ‘behind the scenes’ reading for this post to make better sense. My primary ‘indicator’ that I use for my trades is The BMI – MacD Magic Monster. It is not yet detailed in this site, but it is detailed in draft form on the ForexFactory site. Even if you are a seasoned trader, it is worth you taking a look at so that we are both on the same page.
This will allow you to more clearly understand this post. For you to take a look at it, you can find it here.
This picture shows the 4 hour chart of the GbpJpy at maximum zoom. The indicators used in this picture are the following:-
Big MacD Magic Monster, Small MacD Magic Monster, Bollinger Band – Set at – 20MA – 2.45 Deviation – Close, Bollinger Band – Set at – 20MA – 0.4 Deviation – Close, Stochastic Oscillator – set at – 200 – 3 – 3, Stochastic Oscillator – set at – 100 – 3 – 3, Stochastic Oscillator – set at – 13 – 3 – 3. All three Stoch’s are in the same Window and all three are set at max 100 and min 0.
GbpJpy H4 – Max Zoom – April to August 2010
The Long Term Trend ( Follow the Thick Indigo 500EMA – aka GrandPa ) is downward, with a turn showing upwards.
The Medium Term Trend (Follow the Medium thickness Firebrick 47EMA – aka Mother ) is upward.
The ‘slow’ and ‘medium’ Stoch’s are in the over bought region and have just started to drop bellow 80. While the ‘fast’ Stoch is just above over sold. (20)
The Price Action is in the Narrow Band (meaning indecision) of the ‘big’ Bollinger Band, and is bellow the ‘small’ Bollinger Band.
GbpJpy H4 – Max – 1 Zoom – May to August 2010
As you can see by looking at the thick white trend line, the medium and slow Stoch’s are now in the over bought region. Obviously the fast Stoch flicks up and down many times on this route.
The price action as well as the fast EMA’s have all reached above GrandPa(EMA500-Indigo) and GrandMa(EMA290-Purple). They have all been below the GrandParents since May.
The natural question that springs to mind is this – Are they going to break above the GrandParents (meaning a start of a reversal) or fail the test and get pushed back below the GrandParents (meaning a retrace in the Long Term Trend)
We do not know. We can not predict, and we should not even try. Prediction is not a logical business choice to invest money in a trade. However, we do have some patterns and indicators at our disposal that allow us to see the likelihood of which will occur (reversal or continuation of the Long Term trend)
I will explain why I have a vertical line on 2010.08.15, but ignore it for now. Now let us take a further ‘out’ look at the picture….
Now that you are looking at the Daily chart of GbpJpy, you can see that the Medium Term Uptrend is in a Long Term Down Trend Channel. It is most likely to continue this Long Term Uptrend until somewhere around Mid September 2010. There is no certainty of this, since it may turn and break below the channel. What else can we see from this picture? There are some patterns that are not immediately visible on his scale, which I will comment on in pictures after this, however one point that is visible here is that GrandMa and GrandPa are slowly tapering towards each other. There is no ‘rapid’ or ‘sharp’ deviation in that pattern, which shows that it is most likely that the Price Action will not break above the channel. Also if you observe the white trend lines on the main chart, you can see that this is the perfect description of a down trend. The Lower Highs are followed by Lower Lows from July 2009 till August 2010.
As you can see, the ‘uptrend’ from Nov 2008 till July 2009 was actually not an uptrend at all. It was a long Term Trend Retrace. Two things show us this. The first is that the price action (even though it is followed by a Higher Low) was not able to reach above GrandMa in July 2009. Also the slow and medium Stoch’s both reached overbought in July 2009. We can see in the Stoch’s window, that the medium and slow stoch’s are in the Higher High, Higher Low phase. In both February and May, they failed to drop to or below the level they were at in November 2008 and January 2008. Yet the Long Term Trend is still downward. This can indicate a possibility of deviation, meaning that within the next 400 to 500 days, the trend might turn upward. Since this is a fairly long term issue, it does not have any major impact on our current trading decisions, but it is always good to keep these things in mind. The more items of valid info that we can assemble for our trading, the more certain our analysis becomes.
By looking at the Daily chart from July 2007 til August 2010, we can see the basic swing shapes that the Price action has followed. It is more or less the same path as Mother (the firebrick 47EMA) which is shown by the Red Lines.
Notice that the low of the last Swing (or scallop as I prefer to call it) is lower than the low of it’s preceding scallop. The probable reach of the top of the channel in Mid September would be a perfect place for a fourth scallop to begin.
If you follow these pattern shapes on charts (they occur in all timeframes including the tick charts) you will notice that it is extremely rare for there to be only one scallop followed by a bounce. You can follow the train of thought by doing a bit of Elliot Wave Study here.
There are usually at least 3 Swings before they reverse into a bouncing uptrend. Sometimes we see only 2 Swings that reverse as Bounces, but these are in fact the ABC part of the Elliot Waves. More often than not, the sequence is 5 Swings which are then followed by a retrace of 2 bounces.
It is important to understand that although the Scallop in this picture is seen on a Long Term Downward Trend, that this is not always the case. The price action can also be in the Scallop shape on an uptrend. The trick is that when the actual shape alters, either from Scallop to Bounce (or Turtle I prefer to call it, since it is the shape of a Turtles shell), or from Bounce-Turtle to Scallop, that it indicates an extremely High probability of reversal, as opposed to retracement.
Sometimes it does happen that the Price Action (specially in short term timeframes) seems ‘confused’ and the shape alternates between Scallop and Turtle many times in a row. This is usually called Ranging, but if you go to higher timeframes, it can more easily be seen as the bottoming out of a Scallop.
What we perceive as Ranging, is not actually an indication of any uncertainty in the market at all. It is fractal by nature and it is simply following it’s path.
I have not yet got to the actual possible trade that is forming yet, but do not stress, because it is not a scalp trade that I am going to point out. It is a trade that will (if it fully forms) take place on the 4 hour chart, and is likely to yield a profit of about 200 to 300 pips. I will get to it soon, but right now is enough for now. (Brain fried from trying to get all the fundamental info across so you can better understand the trade with more certainty when I discuss it.)