Not every trade works out. We discussed the spring on the USD-JPY FX Cross market on the 4-hour chart in the free webinar held this weekend (video available at link below). We were looking for a pullback into the blue circle area and test of the spring. Tests confirm that selling has abated and give a good entry point. Unfortunately, this spring did not test.
Instead, it rallied higher yesterday beyond the downtrend line. It looked at first as if this would be one of those springs that doesn’t test and just takes off like a rocket. However, the sharp eye would have also noticed that although the market broke the trend line, volume was low (blue arrows) and within one bar, it reversed – unusual behavior for a spring that hadn’t tested.
The drive down saw increased range and volume as the market broke back under the trend line (red arrows). This is anything but testing action. Instead, it signaled selling was in the market pushing it down. We want to see valid testing with light volume and narrow ranges and this was exactly the opposite. We want only the best trades that setup properly and this one wasn’t it. As can sometimes be the case, we see the potential for a good – sometimes even a great – setup, but as we look for the entry the market shows us that the trade should be avoided. This is one of the many values of chart reading skills.
The market returned to the recent lows. We see buyers stepped back in at this level. We will watch this to see if they can hold the market here and, if so, whether evidence of accumulation occurs over the next few days.
Wednesday will be the start of Chart Reading Mastery. If you are interested in learning about market structure and how to read the market by its own actions to help you find great trades and avoid many of the ones that tell you in advance that they won’t work out, you are invited to learn more here: Chart Reading Mastery Free Webinar Video