50 pips Price Action Analysis

I post my views here because I see a lot of traders struggling to understand the dynamics of forex market. I was in similar position a few years back and always glad to share my experience for the benefit of others. I cut my teeth here and I love sharign some of my new tricks here. Forex is an "organised chaos" and you need to an "helicopter eyeview" of the market to discern the pattern. 50 pips price analysis, which I explained belows, is one of the tools I now use to know the intention of the "big players". .

50 Pips Price Action Analysis (50-PAA)

50-Pip Price Action Analysis or 50-PAA is something I stumbled upon by accident. There was a day I had problem opening my MetaTrader and I had some trades running. To monitor live price action, I went to www.bbc.co.uk. There was a live forex chart on the website divided with horizontal lines which are 50 pips apart. That day price was consolidating within a very tight range of 50 pips. After about 8 hours, price was still within that 50 pips range. When price broke out of tight range it moved for about 150 pips. I found the observation interesting and replicated similar lines on my chart for closer analysis. I will now discuss some of the benefits of 50-PAA based on my analysis.

Daily Candle

50-PAA easily shows the average price movement in a single day. For example the cable generally moves about 80-120 pips per day and around 200 pips per day when breaking out of consolidation. The benefit of this is that you can fairly predict the range of a daily candle, identify consolidation, identify a breakout including support/resistance level. For example from the daily chart below it is clear that price has been consolidating between the yellow and red points (about 250 pips) for the past 11 days.

H4 Candle

As I mentioned in some of my previous postings here H4 is the key for day traders. It is easier to pick temporary support/resistance areas. Furthermore, you have the luxury of adequate notice to take a trade (this could be up to 16 hours in some cases) . From the H4 chart below, you can see where H4 candle consolidated for between 12-60 hours within a 50 pips range around support/resistance areas before a big move.

The benefit of 50-PAA for day traders is that H4 candle will give you up to 12 hours or more notice to enter the trade a good trade that would yield over 150 pips. You can then go to lower time frame at M15 to enter the trade. With this knowledge it will be easier to recognize 1st class trading opportunities and will never be under any pressure to enter into a trade.

H1, M15, M5 Candles

With 50-PAA it easy to see many H1, M15, M5 candles within a 50-pip range and easily recognize a break out or a continuation of a strong move.
Using this analysis it becomes easier to understand price movement without any complicated and confusing indicator.

See the relevant charts below as usual.

Benefiting from the greed of “big boys” - 1000 pips trade set-ups

What I will share with you today is how to benefit from the greed of the “big boys” using the 1000 pips trade set-up. As I mentioned in my postings on the Mastercharts that the major resistance/support for GBPUSD and GBPJPY are encountered after every 1000 pips price movement. After every 1000 pips movement for these pairs, expect a pull back. A circle for GBPJPY is divided into two parts of 500 pips each, while that of the GBPUSD varies. In a generous trading environment, the GBPJPY could complete this circle within 2-3 weeks and between 4-8 weeks in most times. GBPUSD takes between 6-12 weeks to complete this circle as a result of its numerous pullbacks.

The “big boys” are greedy and they don’t let go until they get between 900-1000 pips even when there is no justification for such price movements. That is why you see 300 pips wicks on weekly candles. How do you benefit from their greed? This predictable circle of 1000 pips price movement gives a very useful signal that a medium/long term trader could utilise to trade this circle successful over and over again. You cannot predict his circles, but the weekly chart provides very useful and insightful signals. To trade these circles, this is what to do:

a) Wait for a weekly candle to print a new high or low
b) Draw a horizontal line or circle at the lowest or highest point i.e. the wick of the candle.
c) From the lowest or highest price on the weekly charts calculate 1000 pips and put a draw a box to identify the likely target areas.
d) If price has not moved far from these points (less than 100 pips) you can enter the trade if you are ready to wait for some few weeks.
e) If the price has moved far (300-400 pip) it is better to place a pending order at the point where the reversal is expected (900-1000).
f) Follow the ride and jump off if you make some sizeable pips.

Look at the weekly chart for GBPUSD and the 1000 pips movements indicated by the red and yellow boxes. On the GBPJPY chart the levels are shown by the price movement between two yellow line or two aqua lines. Based on this analysis the expected target for GBPUSD if the bearish run that was reversed at 1.57800 is completed is around 1.67800. The target for the GBPJPY is around 135.00.

I have mentioned it very times, success is only guaranteed only when a trade has “helicopter view” of the market. Remember, the important thing is to take only first class trades because it is your money that is on the line. If the opportunity is not right, forget it and look for better ones. There are always better opportunities in this market. The reason is simple - this market is driven by greed!

Using mastercharts for day trading

We shall now discuss how to use the Mastercharts for:

a) Day Trading: Multiple trades targeting less than 10-50 pips at a time. Such trades should not be carried overnight, unless it is at BPE



b) Short term trading: Trades targeting 50-100 pips that could run for more than a day


c) Medium Term Trading: Trades targeting 100-200 pips that could run for 1-2 weeks


d) Long Term trading: Trades that could run upward to four weeks or more (1,500 pips and above)



Day Trading:

For day trading you need to take the following steps:

a) Draw additional horizontal lines every 50 or 25 pips on your chart
b) Use the H4 time frames to pick your trading opportunities
c) Your buy signal is given when the RSI on H4 timeframe enters the Red box and the sell signal when it enters the Yellow box
d) To enter a trade, go to M15 time frame and buy when both RSI on H4 and M15 enter the Red box and the sell signal when H4 and M15 enters the Yellow box
e) RSI 50 point level is where to take your profit or lock your trade (10-50 pips) per trade is adequate for this strategy.

See the daily H4 and M15 charts for daytrading. The sell signal zone on the charts are shown aqua boxes and the buy zones by blue boxes on the M15 chart.


short term Trading:
For the short term trading take the following steps:

a) Use the Daily time frame to pick your trading opportunities
b) Your buy signal is given when the RSI on Daily timeframe enters the Red box and the sell signal when it enters the Yellow box
c) To enter a trade, go to H4 time frame and buy when both RSI on Daily and H4 enter the Red box and the sell signal when Daily and H4 enter the Yellow box
d) RSI 50 point level is where to take your profit or lock your trade (100 pips and above per trade is ideal for this strategy.

See the Daily and H4 charts for short-term trading. The sell signal zone on the charts are shown by the aqua boxes and the buy zones by blue boxes on H4 chart.

Medium term Trading:
For Medium-Term take the following steps:

a) Use the Weekly time frame to pick your trading opportunities
b) Your buy signal is given when the RSI on weekly timeframe enters the Red zone and the sell signal when it enters the Yellow zone
c) To enter a trade, go daily time frame and buy when both RSI on Weekly and daily timeframe enter the Red box and the sell signal when Daily and weekly enter the Yellow box.
d) RSI 50 point level is where to take your profit or lock your trade (500 pips and above per trade (1500 pips most times).

See the Weekly and Daily for medium-term trading. The sell/buy zones on the charts are shown by the red circles on the daily chart


Long term Trading:
For Long-Term take the following steps:

a) Use the monthly time frame to pick your trading opportunities
b) Your buy signal is given when the RSI on monthly timeframe enters the Red box and the sell signal when it enters the Yellow box
c) To enter a trade, go to the monthly time frame and buy when both RSI on monthly and weekly timeframe enter the Red box and the sell signal when monthly and weekly RSI enter the Yellow zone. Historical analysis over the years have shown that you can begin to short if there is a reversal candle on the weekly when RSI touches 64-65 on the monthly. You can go down to the daily chart to get the best entry opportunities.
d) RSI 50 point level is where to take your profit or lock your trade (1000-3000 pips).

See the Weekly and monthly and weekly charts for long-term trading. The sell/buy zones are shown by the red boxes on the weekly charts. As you can see such opportunities rare. Personally I have not started trading at that level.


See the Weekly and monthly and weekly charts for long-term trading. The sell/buy zones are shown by the red circles on the weekly charts. As you can see such opportunities very rare. Personally I have not started trading at that level.

How to use mastercharts

I will use the GBPUSD to explain the usage of the charts. You will have observed that GBPUSD is my favourable pair followed by GBPJPY. GBPUSD is more rational, predictable and logical while GBPJPY on the hand is perhaps one of the most irrational and volatile currency pair in the world. If you read some of my previous posts you will have a better insight into the character of some of these pairs.



How to use the Mastercharts

Trading requires careful preparation and insightful analysis. This could be overwhelming and confusing to majority of traders. The truth of the matter is that most traders are incapable of undertaking the complex technical analysis required for informed decisions. The fundamental analysis is a different challenge entirely. I read somewhere that you need 100,000 hours of study to fully understand forex trading. Let me tell you the truth, this statement though slightly exaggerated might not be very far from the truth. However, as a result of my researches over the last few years, I have narrowed down this complex endeavour into some simple easy to understand strategy. The secrets of forex price action are in the higher timeframes. The first step in this process is to prepare the chart for any currency pair you wish to trade to be trader-friendly. How do you make your charts trader-friendly?



How to create a user-friendly chart


If you read my post on how trading could be colourful you will have a clear insight on how to achieve this. As a recap, here are the steps to make your charts user-friendly:

a) Open a new chart for the currency you wish to trade (GBPUSD in this example)
b) Go to the weekly timeframe and draw horizontal lines at the level indicated in my mastercharts. The major levels for GBPUSD are:

a. 1.73000
b. 1.63000
c. 1.53000
d. 1.43000
e. 1.33000
f. 1.23000

c) Insert Relative Strength index (RSI) for 14 days period.
d) Go to the daily timeframe and identify the historical high and low points on the RSI
e) Draw horizontal lines on the daily RSI depicting the historical high and low points.
f) Go to the weekly time frame and click on insert shapes and draw rectangular shape between the highest horizontal line on the RSI and 70 point level. Do the same thing for the lowest point and the 30 point level.
g) Select the rectangular shape above 70 point level and change the colour to yellow. You can select by double clicking on the shape first, then right click and pick rectangular properties and pick the colour from style.
h) Select the rectangular shapes below 30 point level and change the colour to red.


If you follow the above steps, your chart will look like the chart for my example. Your chart is now trader-friendly and you are ready to roll.

GBPUSD trading opportunities.

In the past few weeks, we have discussed the mastercharts for major pairs. Beginning from this week we shall begin to examine the interpretation of some of these charts beginning with GBPUSD which is the major pair I trade regularly.

As I have mentioned in some of my previous posts, if you want to be a successful trader, it is always advisable to concentrate on one or two pairs first. Trading this way, you will develop the ability to understand the key support/resitance areas, trend and price action for the pairs. By the time you understand a pair, it is alway easier to make profit consistently from your trades. In fact, you do not need to trade more two or three pairs to be a successful trader. Timing is very critical in this endeavour and the important ones are:


TIME TO WAIT
TIME TO BUY
TIME TO SELL
TIME TO TAKE PROFIF




GBPUSD closed around 1.61900 last week. Both the daily and H4 charts closed below the long-term bullish trendline from April 2010. The weekly needs to close below this trendline and 1.60000 to finally confirm that the bear has taken over.

Short Term Trades

Here are the targets for short trades:

1st support - 1.61000
2nd support - 1.60000
3rd support - 1.59350
4th supprt - 1.58000
5th support - 1.55000
6th support - 1.53000


Here are the targets for long trades:

1st resistance - 1.63000
2nd Resistance - 1.64000
3rd Resistance - 1.65500
4th Resistance - 1.67500
5th Reistance - 1.70000

The most important support/resistance levels for this week is the first and second resistance/support levels.

From where the price open this week, we have roughly 200 pips either way for this week. You will still need H4 to confirm immediate support/resistance and M15 for the best entry point. Please include RSI 14 days period with horizontal line at 50 point marks in your chart to confirm this support and resistance level on any time zone.

Long Term Trades

Here are the available targets for short trades:

1st support - 1.60000
2nd support - 1.53000


Here are the targets for long trades:

1st resistance - 1.63000
2nd Reistance - 1.70000

For long-term trades if weekly fails to break 1.60000, then a long will be a good trade and if the weekly fails to break 1.70000, a short will be a good trade. Both trades should be good for between 300-500 pips and will require between 3-5 weeks for it to play out.

I attach the weekly, daily and H4 charts in support of the above analysis.