Forex Traders: Ready for a quiz to see how chart smart are you?
(Don’t worry! If you don’t get the answers, I’ll provide tips to help you out.)
Chart Smart Quiz Question #1:
In this example with USD/JPY on a 4Hour chart, the question is, what’s going to happen next? Will it go up or will it keep going down?
Answer: Nobody knows.
Ok, hang on! Keep reading. You know that was the right answer, if we’re being responsible! But, I can make a case for a possible bullish move coming next.
- If you think it’s a down-trend, you might believe a lower low is coming, since continuation is what trends do.
- If you think it’s a range, you might anticipate a swing back up toward the center, because turning back is what ranges do.
So, here’s the question we all have to figure out. How do you know if this sell-off is going to keep pushing to lower lows, or in a state of over-sold-panic it’s going to race back toward a more neutral position?
Chart Smart Tip:
Never be early to a counter-trend trade. If you’re expecting the market to turn back against an extreme move in one direction, (whether it’s a wide swinging range or an actual trend), wait for the MACD to cross the signal line to help you out with timing. Wait for it!
You know me by now — I’m calling this a range, at least until price stays below the moving averages for 30 bars. But, even if it is going to push for lower lows, probability is high that it will turn back towards the 50 sma before trending lower. The question is when? That leads me to:
Chart Smart Quiz Question #2:
On the chart below, what extremes do you see that could be leading to a setup to buy?
Answer: Stretch. (You never would have guess that, huh?!)
Stretch is my favorite word when looking for an opportunity to take a counter-trend trade. Price has stretched farther from the moving averages than any other point you can see on this chart; and MACD has stretched farther from the zero level than any other time on this chart.
When you see a good amount of stretch — price away from the MAs, and in MACD away from zero — get ready to trade when MACD crosses the signal line.
I’ll show you what it looks like. See below where I drew a green circle around the point in time when MACD says “Buy now!”
May you have perfect timing on all your trades this week!