Forex Q&A

As a follower of PipHut you have probably seen us write our targets like this:

“Targets at 20/25/30/25 pips for 100 pips profit”.

What does this mean? This means that Target 1 is at 20 pips, Target 2 is at 45 pips, Target 3 is at 75 pips and Target 4 is at 100 pips. We give targets this way because trending S/R levels will rise or fall throwing off any exact prices we give. For example, if today’s signal said:

“We are looking for a break of rising trend support (currently at 1.3500 and rising)”

If we listed out the exact price levels it would look something like this: “with targets at 1.3480, 1.3455, 1.3425 and 1.3400“.

However since rising support, well, rises, after the current candle closes the support would no longer be at 1.3500 – it would be at something like 1.3515 – and the TP levels we listed would no longer be valid or make any sense. To get around this problem we list our TP levels as pip increments. For example: “with targets at 20/25/30/25 pips” would mean targets are at 1.3480, 1.3455, 1.3425 and 1.3400 when support at 1.3500 is broken (1.3500 – 20 pips = TP1, T1 – 25 pips = TP2, etc.). When the candle closed and support rose we would simply subtract the new levels from the new support price. For example if support were at 1.3515 now targets would be 1.3495, 1.3470, 1.3440 and 1.3415 (1.3515 – 20 pips = T1, etc).

How do you know where the support and resistance levels are if they are always rising and falling?

If you are a PRO user this is easy – you can view our charts for each pair, freshly updated every 10 minutes. You will also receive email alerts whenever a S/R level is broken or bounced off of.

If you are a free user it is a bit more challenging – if you are looking to emulate our support and resistance levels then you will a) only have access to the free EUR/USD chart (instead of the 5 pairs PRO users have access to) and b) you will have to try and draw our S/R lines on your charts by hand.

Many of you want to receive your email alerts as text messages and, for most cell phones and most carriers, this is no problem and is a feature that you probably already have available to you (and don’t know it)!

Find your carrier from the list below and replace the ‘phonenumber’ portion of the email with your phone number and you are good to go. So, for example if you have ’3 River Wireless’ as your carrier and your phone number was 555-555-5555 your Email-to-SMS address would be ’5555555555@sms.3rivers.net’. Simply plug that into the PRO email validation form and you’ll be getting the alerts texted to you!

Don’t see your carrier on the list below? Contact your carrier.  The list below is by no means complete. Most carriers offer this service for free and just don’t advertise it.

(source: http://www.email-unlimited.com/stuff/send-email-to-phone.htm)

Gaps occur in trading when the open price of a candle occurs below or above the close price of the previous candle. In less liquid markets like stocks gaps can occur constantly throughout the trading day, but in the forex markets where trillions of dollars exchanges hands every day we usually only see gaps after the long weekend break, shown below:

It is commonly believed by many traders that “all gaps close” or that a pair will always “close the gap” within a few days of occurring - while we have observed this to be true many times we have seen no studies that scientifically demonstrate that this is the case.

Flag patterns are a reliable continuation pattern that is characterized by two parallel lines (i.e. a channel) that goes against the trend, and is preceded by a large drop or rise which is commonly referred to as a “flag pole”.

In the example below we see a strong bearish flag pole, followed by a bullish channel with two parallel lines which make our flag pattern:

There is no reliable data out there on how many traders use which time zones, but many large institutions use UTC time even though a good number are located in the US East Coast time zone.

A ‘false signal’ in trading is any trading signal that does not result in the expected or desired outcome. So, for example, a bullish doji that does not result in a bullish reversal.

To effectively trade false signals using candlesticks one has to have accurate backtesting data of candlesticks to know which candles will result in the desired result and which won’For example in backtesting if, for example the historical data given to us using the Backtesting portion of CandlePRO. For example in backtesting if you see a TP/SL that has a win % under 50% that tells us that TP/SL combination loses more often than it wins, so a trade in the opposite direction as forecast will win more often that it loses. So a TP/SL with a win % of 20% in backtesting would have a win % of 80% if taken in the opposite direction.

A ‘descending triangle’ is a bearish continuation pattern and consolidation pattern that indicates the price will continue in the direction of the previous trend. It often times accompanies a flag pole formation. Shown in blue lines on chart below, in a descending triangle the top resistance is a downward sloping trend line, indicating that selling pressure is increasing on each rally, while bottom support is horizontal. Descending triangles are bearish signals on breaks of bottom support.

An ‘ascending wedge’ is a bullish continuation pattern that is formed when both the top resistance line and bottom support of the consolidation pattern slope upward as in the example below. Ascending wedges are very similar to ascending triangles – the main difference being that in an ascending triangle the top support is a horizontal line and does not slope upward.

A forex continuation pattern is any chart consolidation pattern (triangle, wedge, flag, etc) that indicates the price will continue in the direction of the trend.

Yesterday we had a picture perfect setup for a Support/Resistance trade using CandlePro to confirm the trade, and provide us entries and exits so I thought I would share. P.S. – click on any image below to enlarge it.

Step 1: Look at the chart

The first step, of course, is always to look at the chart and analyze which direction the price action is leading us. Here is the chart from yesterday:

As you can see there is a wedge pattern in the chart. Because the wedge pattern is preceded by a long bearish pole the probable breakout direction of this consolidation pattern is to the downside. Lurking underneath that wedge pattern though is strong daily support in the form of a red line on the chart. The EURUSD has been skipping off this support for weeks now so it is an area of concern for any shorts we may take.

This daily trend is easy to spot, by the way. Just back out to a higher timeframe and zoom out a little bit. No indicators required for this clear of a trend. Take a look:

Step 2: Look for CandlePro confirmation

My analysis tells me the bias for the wedge is for a downside breakout so I then turn to CP for bearish confirmation. If I wasn’t using CP I would probably wait for a sustained breakout and get a worse price.

I look on the 30m and 1h (just my preference) and took the 19:00 Bearish Engulfing:

In hindsight I could have done without this trade. It ended in profit, but it was against the overall trend which usually is a no-no for me, and the RR ratio was mediocre at best (1.6). What bolstered this signal in my mind were three items:

1. I firmly believed that wedge we discovered in Step 1 was going to break to the downside.
2. Strong support, like we have with the rising trend support (red line on chart) can act as a magnet in these situations, pilling the price toward it
3. It was a DOUBLE. This was really the deciding factor for me. If it was a single signal I most likely would not have taken it.

I ended up getting short after a brief pullback (1.3685).

Step 3: Watch the Rising Trend Support Carefully

Alright, so now we are sitting on a short from 1.3685, the pair breaks the wedge to the downside (good for our trade) and starts challenging that strong daily trend support we talked about in steps 1 and 2 above which is the bottom red line on the chart at the top of this page.

Because we know this is strong support and our trade is against the overall trend I immediately close half the position as soon as it looks like it might touch. I don’t close it all yet though. In fact, unfortunately for me at this point in the trade I go to sleep, literally. My SL is set on the remaining position to lock in profit and I am tired – but good for those of you during the London session who go to see these next signals.

Here is what those of you in the London session saw next:

A bullish, 4h doji that just touches our strong daily trend support. This would have been reason enough for me to close out the remainder of my position and consider going long. To decide whether or not to go long here we need to look at performance report:

A 2.2 RR average and median, on a bullish doji that just touches our rising trend support? STRONG rising trend support from the daily charts that has been respected for weeks now? In the direction of the primary trend? Count me in for a few lots at least at the close price of this candle – 1.3650.

Step 4: Add to position with more confirmation

If that bullish 4h doji, in the direction of the trend that just touched strong daily support and had a great RR ratio wasn’t enough, look at the very next 4h candle:

It is a Three Inside Up, TRIPLE. That means the EUR/USD, GBP/USD, and AUD/USD kicker all line up perfectly on the 4h charts.

Add some lots here if you have more room for risk in your money management system. Why? Because trades don’t get any better than this. You have a trade in the direction of a perfect trend, with great historical Reward/Risk ratios, a doji that just touched daily support that hasn’t been broken in weeks and then was confirmed with a TRIPLE Three Inside Up.

Did I mention the historical Reward/Risk ratio on that Triple 3inup was over 3:1?

Step 5: Take Profit

That little 4h bullish doji is at about +200 currently, for each lot you went long.

Congrats to those of you who got in for the full ride and/or are still riding.