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Return Of The Convict
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Return Of The Convict

by ScottJanuary 28, 2013

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).

Elements:

  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.

This is all evidence that BUYING PRESSURE IS BUILDING AT SUPPORT.

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.

I’m.back!


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Scott