Return Of The Convict

I know it has been a long time since I posted. Long story cut short, I’m back in the markets, testing that my old edges still work before I start trading for real again. And since I know that 98% of suckers lose money, until I can verify that my skills verifiably put me back in the 2% I have no business trading.

That being said. We have interesting price action in the AUDUSD, I think it is worth having a look.

Let us start with the daily, eh? The MOST IMPORTANT thing we should be trying to work out in any market on any timeframe, is “is it trending, or is it trading in a range?” (or channel, or triangle or something similar)

Most of this chart trended up from the October lows, then it has devolved into a trading range. Gone down, found support at the lower bollinger band, gone up to test the prior highs, failed and is now once again testing the lower bollinger band.

So we have an INFLECTION POINT. If the market breaks to the downside here we are no longer in a trading range. The market is TRYING to break out of its range here, and so far failing. If it fails, a lot of bears will be trapped and forced to cover, which should drive the market higher. (if and only if the market fails at this point)

Statistically most breakouts fail.

Subjectively counter trend setups almost always look very good. And at this point it is very easy to become bearish on AUD. We have a high, and a retest of that high, and strong bearish action over the last few bars. However we are at support, and rather than guess which direction the market will go, it is better to just let the market tell us what it wants to do, and profit from dumbasses being trapped the wrong way.

We have a potential long setup, the Fakeout Buy (with hammer)


1) A Spike Low

2) A move down to break that spike low (labeled “testing old spike low” on chart)

3) Potential setup complete. However we WAIT until PRICE confirms our thesis, buying 1 tick above the setup candle, with a stop 1 tick below.

(Update, I have incorrectly labelled the setup candle as a shooting star – it is in fact a Hammer (thanks YKW)

The fact it is a hammer candle indicates that it has already tried and failed to break through the previous support, that the market is explicitly rejecting the lows

There is further evidence that AUD is not behaving “right” to the downside if we drill down to the 60 min chart.

If you look at the most recent push to the downside it has no follow through after the breakout to the downside. We are seeing more bars with bullish (white) bodies. 2 in a row, then 3 in a row later. Also we are seeing a number of lower tails on the candles, indicating the market is trying, but failing to push to the downside.


Buying pressure is CUMULATIVE in a trading range. If the bulls can muster enough mojo they will break out of the range. The top of the range is exactly the trigger point for the daily long setup. Ergo, short term timeframe traders betting on a reversal at the top of the trading range (if it fails) will be forced to cover, driving price higher in a positive feedback loop, emboldening bulls, causing daily timeframe dip buyers to buy at support.

In my view this is a solid risk/return trade.



This entry was posted on Monday, January 28th, 2013 at 6:24 pm. Both comments and pings are currently closed.

  • Darth_Gerb
  • thepercolator

    Welcome back, Scott!

  • Skynard

    Thanks Scott, nice post!

  • convictscott

    Also pertinent in the most recent price action on the 60 min AUD chart. Each bar is controlled either by the bulls (white body) bears (black body) or is 2 sided (some kind of doji type bar) 

    If you look at the bars the bears have been able to control, they have not been able to string together any bars in a row. Ie bearish black bar in the trading range, no follow through.

    Also, objectively the bullish bars have larger ranges than the bearish bars.

    If I was short the AUD at this point I’d be banking profits rtfn

  • convictscott

    U still short?

  • Skynard

    Yes sir, until a new high on the hourly.

  • AMCabrera
    “Statistically most breakouts fail.”
    So true. Monthly charts are littered with huge tails when you look at them closely. Anyhow, that is why I closed of my aussie shorts a few days ago. My new experiment is the eur/gbp. Lets see how much of this monthly candle gets “erased”.

  • convictscott

    perfect trading mate :) Give yourself a pat on the back!

  • JackSparow

    the next 3 bars may be telling 

    the daily is inconclusive

  • AMCabrera
  • AMCabrera

    and then we have daily which is Really hot. So yes trend may continue up BUT I would like to ride the shake down first.

  • newbfxtrader

    gbp is so weak though. would be a dead cat bounce.

  • AMCabrera

    AUD/USD is really something though. I would be very careful with the sucker move but yes for now 1.0400 needs to hold.

  • AMCabrera
  • Skynard

    New high, new trend:)

  • Skynard

    Long with a tight stop.

  • Skynard

    Good Example of:

    Accumulation>Advance>Distribution>Decline (the missing element)

  • AmazingLarry

    Definitely been the dumbass taking the loss on that. But I’m here to learn so TEACH! Thanks for the brief tutorial. 

  • Brishort

    OMG, I nearly had tears in my eyes… Scott is BACK!!!!!!!!!!!
    Welcome back.
    This market is just as fascinating as ever. 
    It’s going to be quite a ride for 2013, whichever the market chooses.

    Happy to see you here, we were satisfied by you showing up from time to time your shadow in the comments, but it’s super good to have you back posting!
    To his honor, MOLE is doing a job even better than ever… but you know… we don’t want to be too easy with him….. ;-p

  • convictscott

    Did anyone take the AUDUSD long?

  • convictscott

    Agree – Although the setup I posted does not mean I think I know what the market will do. I just see a probability of success around 65% (it doesn’t truthfully get much better than that) and an upside bigger than the downside.

  • convictscott

    Mole has been kicking ass!  I have some new concepts, new setups, new trade management ideas which I’ll be filtering into the coming posts. I’ve been working hard on integrating the Al Brooks tape reading stuff to my existing setups, which is really revolutionising how I think about price action. Every single bar on every timeframe is adding to my evolving picture now, and I’m not ignoring anything at all

  • Skynard

    Took it for the ride and now AUD, NZD have tagged the 100 daily. Therefore re-shorted since the daily NLBL has been rejected. Yen picking up speed now and dollar could rise since EUR went nowhere. Also seeing commodity weakness, checkout that leg down on /HG.

  • newbfxtrader

    Yep! Thx

  • convictscott

    Where is your stop? What is your trade plan wrt profits? Lets get a proper trade plan in place before it gets too complicated :)

  • convictscott

    I love the new face Mole!

  • Skynard

    /ES sitting on a fence.

  • AMCabrera
  • AMCabrera
  • molecool

    Hehehe – I thought the shoe would fit ya ;-)

  • molecool

    Maybe I get to take a vacation now …

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