While analyzing the Daily charts following the close of the New York session I spotted a potential Forex doji bearish reversal pattern on the NZD/CHF. The pair is in an uptrend on the Daily chart and the doji candlestick pattern formed at recent highs creating a new 17-month high.
The doji candlestick isn’t the typical short-wicked doji. This doji had a long upper wick and could have been easily mistaken for a Shooting Star, but it wasn’t a bearish candlestick. It showed a strong rejection of bullish momentum at the highs, which caught my attention. I added NZD/CHF as a trade idea to my short-term intraday watchlist and planned to look for a retracement of the doji during the Tokyo session and just prior to the start of the New York session.
While waiting for a setup to form I dug deeper into my chart analysis. I quickly noted that the doji had formed on the Daily chart at an area of Resistance. Since Forex is a sideways market and only trends about 20% of the time, it’s worthwhile to learn how to identify support and resistance areas for potential profit targets and trade entries.
In this video I demonstrate an easy method for drawing areas of support and resistance. It isn’t an exact science and the key is to think about areas of support and resistance rather than focusing on one specific price.
Of the technical analysis techniques discussed thus far, the easiest for a new trader to identify would likely be the triple top chart pattern.
Tip: A trader could draw a horizontal line across the highs of the triple top pattern to mark a level of resistance.
Building a Case for Trade Entry
Thus far, I’ve identified five pieces of information that support a bearish entry:
A doji with a long upper wick
Price rejection at an area of resistance
A triple top
New 52-Week Highs and Lows frequently trigger automated buy and sell entries, respectively
Stop loss run above the highs
The fourth and fifth bullet items are important because a crucial step in my trade analysis is to think about where other traders may be planning order fulfillment. This line of thinking crosses my mind many times each day and is always taken into consideration before I enter a trade.
A Contrarian View
Identify a reversal pattern and take the trade. Not exactly. If trading was that simple the market would be flooded with algorithms generating hundreds of millions of dollars in profit each year. It’s not that simple.
One of my steps in building a case for trade entry is to have a contrarian view. I am basically looking for enough evidence to convince myself to not take the trade!
Here are pieces of information that worked against a bearish bias.
New 17-month high
When analyzing the above areas I’m also thinking about where is the trap. Is the market trying to trap bulls who bought on a breakout of new 52-week highs or is the market trying to trap bears who are trading a reversal pattern off of resistance, but may not have noticed or taken into consideration nearby support. Where is the trap? There is always a trap near highs and lows.
At this point, I’d gathered enough information to support an intraday bearish trade on Thursday targeting nearby support for profit taking. The opportunity to go for a larger profit target was there, but the risk was too high considering the lack of a retracement and considerations mentioned previously. In reviewing how price played out on Thursday and Friday I made the right decision and am now positioned to potentially profit from two trades based on one trade idea! Cha-ching!!!
On Friday, price retraced up to the 38.2% Fibonacci retracement level of the doji, which is ideally what we want to see when trading a bearish reversal as described in my doji tutorial. After the market opens on Sunday, I will be looking for evidence of a reversal to the downside. However, an easy low-maintenance entry would be to enter the trade at the 38.2% or 50% level and place a stop loss above the 100% Fibonacci level.
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