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Consolidations and Pullbacks For Confident Trading

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Why do I often mention to use lower time frames when I post my weekly Forex and Cryptocurrency setups?

Because lower time frames can give you a better view of the imbalance that is playing out on other time frames.

This can result in:

  • Better entries giving the trade room to run before any potential support or resistance zones show up
  • Keep you out of trades that look strong on the daily but show weakness on the four hour chart
  • Can set up lower time frame trades counter to the higher time frame for quick trades

Something I didn’t say is it gives a person lower danger trades. There isn’t any such part of the general idea of risk but there might be trades where you utilize a various risk user profile.

I often have a smaller placement on change trades from the trend but in no way is the entire risk various – I will still shed

EURAUD Pullback Example

One of the blog readers, Shingi, asked a question about the EURAUD that is posted in the comments.

 This week’s EURAUD set up, you say ” consolidation or pullback for another upside shot”, what is your reason to wait for a consolidation or pullback and not go long straight away?

We don’t want to try to decipher the reason why that query was submitted but I’ll say that after traders observe large impetus candlesticks, the preliminary impulse would be to just hop on the trade about the fear of missing a trade.

Concern with missing out is really a very real and incredibly dangerous fear to possess. Accept that you’ll miss trades particularly if you trade along with limit trade purchases.

This is the chart that was posted over the weekend prior to the market open on Sunday Jan 14/18

Why would I consider long trades when price is making lower highs and lower lows?

Remember…as swing traders….we want one clean swing in the market regardless of trend direction IF price is showing that potential.

  • Price had been trending down
  • Reversal off lows with momentum candlestick that is obviously different from most that came before it
  • Price had complete a measured move from the highs of this chart

Is this a perfect setup? 

Not really.

I’d have favored a more powerful exhaustion towards the downside which may have additional more importance towards the large candlestick. Nevertheless, large impetus thrusts once we saw right here often imply revert after which lead to a different move within the same path. The character from the pullback is essential.

I ‘m playing chances that came from back again testing – there’s an advantage in this kind of trade.

Is actually that sufficient to simply market within and proceed long?

Inside Consolidated Price Pattern

Let’s look at consolidations and to do so, I am going to use a graphic from a previous trading article about trapped traders.

Inside of lower time frame consolidations (sideways range), we can often see clues where the imbalance leans towards – buyers or sellers.  Seeing pokes below support of a range and quick returns inside the range (for long trade interest) show that lower prices are being rejected.

That is bullish and I will often enter trades in those areas.

The key is that I am not using a range trading approach where I buy lows and sell highs.

I am using the lower time frame pattern to position inside the higher time frame pattern.  This is vital to understand.  As well, all decisions from stop to trade targets are based on the higher time frame chart.

Why Wait For A Pullback?

To be clear, I consider pullbacks and ranges as consolidation moves as they often share the same purpose.  The character of the pullback will also show who has the balance of power.

This chart is showing the 1 hour time frame with an inset of the weekly so you can see the weekly did show signs of strength. I have also included an inset of the daily chart showing what you do not want to see in a pullback for a continuation trade.

Advanced traders could see on the four hour chart what the one hour chart shows and for ease of explanation, I will use the one hour chart.

The vertical line is the beginning of the trading week.  The red lines are marking of the swings of interest and the question is, what type of trending pattern is that?

It’s not a trending pattern and shows consolidation instead of a trending pattern.  We would need to see higher lows holding or increasing to consider a long trade. – it is not doing that.

Does that mean longs are off the table? 

Yes, at least for the moment.  The market never showed bull strength since that thrust and the character of the pullback actually shows weakness in the EUR on this pair.

  • The consolidation did not show a strong bias for either direction
  • The pullback started to break down with momentum which is not what we want for a continuation trade

Remember Large Momentum Moves?

Earlier I mentioned that large momentum pushes often mean revert and then will often set up another push in that direction.

I want to draw your attention to the green arrow on the chart.  What do you see that would give you some confidence in a short trade?

  • Strong momentum push to the downside that ate up most of the range
  • Lazy pullback in price (bear flag)
  • Profit target is the A-B=C-D and price terminates at the last pivot low before price breaks through

These patterns play out on all time frames – I just prefer higher time frames for bigger runs and a more “hands off” trading style.

Every Week Is The Same Approach

When I post my setups online for both Forex and cryptos, this is a generalized way I look at every single chart.  There is no mystery but does require a lot of proper chart time looking for things that have an edge in the market.  There is an edge in this approach – unlike most approaches that are trading dogma.

Keep things simple and always ask “why something should work”.

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