Because the forex price action has been fairly slow lately I’ve been looking for ways to trade sessions where the price basically goes nowhere, unless there is a news announcement that causes it to spike.
I’ve always been wary of trading the news, but this strategy may just be one way of doing so. I’ve been trialling it in a live test situation for several weeks now, and the results are promising.
Basically, the entries go like this:
1) wait for a scheduled news announcement that causes price to spike
2) look for price to stall at a previously established support/resistance level
3) look for a reversal hammer candle to occur
Of course, the usual things to look out for, such as time of day, general market liquidity and so on apply.
There are other considerations that you could take into account also, most important being whether the news was strong enough to continue carrying price in the original direction of the spike.
The chart shown above is a trade I took in today’s Asian session on the five-minute chart on the AUDUSD. The slanting dotted line seen beginning just below the white circle shows the progress of the trade from where I sold it just after the bearish hammer candle, to where I was taken out for a 2 to 1 profit.
This trade incorporates several of the things taught in posts on this site, especially with respect to:
- Price Spikes
- Price Gaps
- Hammer Candles
- Rejection Bar Candlestick Formations
(use the Search form above at the right if you’re not familiar with any of these)
The basic premise is that when price spikes like this it is usually due to lack of liquidity rather than a massive, sustained burst for the currency pair. And those spikes will usually retrace and fill at some stage. The trade I have illustrated here represents a reaction to good GDP numbers for the Aussie, but the numbers weren’t of themselves, a real game changer for the currency over the longer term.
Hence, I was expecting/hoping for a retracement, which I got. And that retracement occurred at a weekly pivot, indicated by the blue dotted line.
This is one thing I have found absolutely necessary with these trades: they must be taken where there is a confluence of factors for entry, not just where the first reversal candle formation occurs. Every losing trade I have taken in live testing of this strategy has been a situation where I was entering at a level that was basically in no man’s land. That is to say, there was no other factor such as a pivot or round number or old support/resistance level to indicate that price might turn there.
I will continue to evaluate this strategy over the coming weeks and months, and will probably incorporate a version of it into my own trading. I hope it helps you in your own trading…