Trade Example – NZD/USD

Filed under: Learn Forex Trading |

I am currently in a short trade (which I discussed yesterday) on the NZD/USD – which is going very nicely. The trade is currently in profit to an amount of that equal to the risk, having been quite close to the target of two times the risk; so I have therefore now moved the stop loss to breakeven for a risk-free trade. What I want to do today is talk a little of the narrative of the candles (the stories that the candlesticks tell), and to use this trade setup as an example.

 

Figure 1.

Figure 1.

So, if you look at Figure 1, you will see the 4-hour chart for the NZD/USD pair. As price was moving up to a level of support/resistance (marked with a horizontal green band), a distinctive narrative unfolded. First, there was a bearish pin bar with a long upper shadow rejecting the support/resistance zone. This was followed by another bullish candle which could not close above the high of the pin bar, followed by another smaller bearish pin bar, again being unable to close above the high of the first pin bar. Although the market is still officially rising here, it is rising in agony, and it was no surprise that a bearish engulfing pattern formed next – taking out the two previous bullish candles. Many traders might have gone short here, but if they had (like I did!), they would have had their stops taken out, as the next candle was also a bullish one – but it was indecisive and again could not really close above the high of the first pin bar (not decisively at least). This bullish candle also had a bit of an upper shadow, and if we zoom in to the 1-hour chart, we will see something interesting.

 

Figure 2.

Figure 2.

Figure 2 shows the 1-hour chart for the same NZD/USD pair. On this chart, a long, well-defined bearish pin bar represents that long upper shadow on the 4-hour chart. This was the final signal and tip off before the capitulation downwards. Traders who had gone short at the close of this pin bar would now be carrying some very nice profits indeed. This demonstrates the narratives that candlesticks tell us – and if you can learn to read what they are telling us, you could have a significant market edge.

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