Patience Pays When You See This Price Pattern Correction

10/20/2014 9:00 am EST

Focus: CURRENCIES

Tyler Yell of DailyFX.com teaches newbie currency traders not look for the perfect entry but to keep an eye out for clean reversals and try to avoid messy corrections, and most of all, he illustrates how to “manage your trade so the trade doesn’t manage you.”

“When in doubt, don’t.”
-Benjamin Franklin

Traders are quick to try and spot the perfect entry. This is tricky because the perfect entry is found only in hindsight—and is often more luck than skill—because to identify the perfect entry is to identify how the collective whole of the market will act before they do. Instead of finding the perfect entry, traders can easily do better by finding clean patterns that allow for low-risk, higher-reward setups and stay away from messy patterns before entering.

Looking for a Clean Correction or Reversal

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Pre-Trend or Trend Correction patterns are very helpful guideposts for traders to identify an entry. A correction can be identified as any disruption in the trend that is not a reversal. If an uptrend does not reverse and become followed by lower highs and lower lows, we’re looking at a correction and not a reversal. Often the first break of a prior extreme, or fractal, can show you the water is at least no longer safe as a trader and it’s best to let someone else test the waters before you jump in a trade.

Learn Forex: Know When the Water Is Safe to Enter and When It’s Not

To carry the analogy further, a correction is clean when it follows any of the common pre-trend or trend correction patterns. A reversal is clean when after a bottom or high is made, a series of higher-highs or lower-lows begin to develop showing that a new force is taking over. A correction is messy and not worth trading when levels break higher and lower and no clear direction is taking shape. This can be a sign for traders with a limited sense of capital to stay away from the trade.

Learn Forex: AUD/USD Had Multiple Rough Water Bottoms Before a Decisive Breakout

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Waiting for the Definitive Move Higher or Lower

From an emotional standpoint, it’s exciting to think about finding and catching the one big turn in a currency pair. Of course, emotions and money rarely mix well. Many traders could fare better by focusing on clean setups. Clean setups mean that you’ll likely miss the first move of the new trend but you’ll know that the balance has shifted and you can, at least, be early on the new trend and ride it until it reverses.

Learn Forex: USD/JPY Has Shown Clean Reversals After Strong Moves

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Lean how to manage your trade so the trade doesn’t manage you.

Could AUD/USD Be Near a Turning Point?

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2H 2014 has told us a few things about the FX market and one is that volatility is back. As volatility has returned, some currency pairs have fallen from grace such as the AUD/USD, which dropped from 0.9500 in July to 2014 lows this month sub-0.8650. What’s important to know is that we don’t know what AUD/USD will do tomorrow or next week but we can form likely thoughts and have trades ready depending on how it turns out.

We can see from prior pivots that AUD/USD tends to chop as it tries to form a bottom. A choppy market means that bulls and bears can both get hurt because near-term prior highs and lows are taken out without a clear direction forming. As a trader whose capital is at risk, when I recognize this type of pattern near key support, I’ll stay away until a reversal develops or support definitively breaks in such a way that we could find ourselves in a new multi-year trend.

By Tyler Yell, Trading Instructor, DailyFX.com

 

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