Anyone observing forex price action will note a certain peculiarity in behaviour; only some will understand the dangers to their trading…
You have probably seen the way forex charts will appear to expand and contract as you scroll them laterally.
This is because varying degrees of volatility result in the candlesticks themselves contracting and expanding as price action cools down and heats up respectively.
Most traders are so used to this pattern of behaviour in charting packages that they hardly give it a second thought as they go about their trading.
This can be a bit of a trap for the following reason: a price action signal may escape their notice depending on the level of volatility when it occurs.
As ever, examples will help to paint a clearer picture:
In the frame above (shown on a five-minute chart as are the following examples) trading has just commenced for the day in Asia. Price action has been trending down overnight and seems to have found support at the round figure of 1.0400. Price has formed a nice rejection hammer at the 20 EMA, presenting an otherwise perfect setup for a Bladerunner entry.
Would you have taken this trade? If you had been worried by the level of support and passed on the opportunity a little while later the chart would have looked like this:
Price has now formed further rejections signals at the 20 EMA, signaled by the first white ellipse, and then finally broken below the 1.0400 level and closed with a heavy candle down (second white ellipse). This presents another opportunity for entry.
However, the cautious would point out that price is still trending relatively sideways and that the shape of the chart itself presents currently as a channel.
As further time elapses the following screen presents itself:
If you haven’t entered by now the bearish engulfing pattern indicated by the white circle represents your last opportunity to board the train! Price has now retested the round figure and failed at that level convincingly with a perfect forex candle pattern for confirmation.
The shape of the chart is now undergoing change also, as price breaks out of the channel. However, this may not be apparent to the trader with their eyes fixed on current price action. You would need to be scanning to the left of the chart to pick up the fact that price is at the start of a further move down.
Once more, the chart is changing shape and if you get stuck only watching the current shape it has formed over the past several bars you could be missing an important opportunity. This is confirmed in the following chart frame:
The trade has now well and truly played out. A trader watching to the left of the charts, who noted the big move down overnight and the fact that price was now channeling in early morning trade, and to have further noted the breakout from that price channel shape, would have been rewarded by their diligence.
The following two charts illustrate further the aspect of how live charts change shape as they progress across the screen from left to right:
In the example above we see price rejecting very convincingly (from a weekly pivot level, incidentally) and crossing over the 20 EMA to present further opportunities for Bladerunner entries to the upside.
It is apparent, scanning this chart from left to right of the screen, that the price rejection has been a significant one.
Now have a look at the same chart several hours later:
As price has progressed across the screen and eventually broken lower than the significant price rejection level the chart has changed appearance once more. Notice how the rejection level does not appear to be as significant as in the previous drawing of this chart.
The actual mechanics of price charts changing shape as they progress may seem a little obvious, but awareness of this mechanism will reward the conscious trader.
By keeping an eye on the overall chart’s shape indicated by price action to the far left of the screen, and by being aware of how price action is panning out on higher time frames, we are much more in tune with evolving price action.
This hopefully allows us to get into moves early, and not miss moves that we otherwise might have.
A further thing to be aware of with respect to forex chart shape is that when price action looks extremely volatile and choppy over the course of several bars, it may in fact represent relatively stable price action within a comparatively narrow channel when looked at from the bigger picture of the overall chart shape.
In this situation, as the chart progresses and price breaks out of the channel what seemed volatile price behaviour at the time will be seen to have been in fact rather docile, sideways trending price action instead.
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