Saturday, 18 February 2012

EurUsd...anatomy of a reversal

Wednesday Morning i was at my screen watching the European/London session kick off from 8am here in France and 7am in London (the server time in the chart is GMT+2 or Eastern European time) so with my coffee and pastry was watching minute bar by bar. The facts were that we had fallen sharply since the previous post and price seemed to be getting laboured and tired. The descent was slowing and becoming almost sideways. There was some structure form median and reaction lines but this means nothing as we have no way of knowing where price will turn until it gives us hints and indications by its behaviour. Also we were bang on the 1.30 level and just below. What would London do after the overnight continued sell off in Asia? What i saw was continued attempts to push it lower and this was with little success...a few more pips lower we went then bounced but failed to make a HH as price was trapped by the DS reaction line as can be seen below.

Watching all this live can never be replaced by retrospective analysis because the longer you watch live the more you lean or can 'gauge' from the behaviour as it progresses. It was becoming obvious to me that we were going to breach 1.30 where the reaction line ( & green ML) laygo lower but also i was aware that we may break back up out above 1.30 where i was looking for a potential long term 'long' position trade plus a short term long if it all went 'tits up' and we only saw a 20 or 40 pip rise before coming back down.
Price broke lower to 1.2986 where two identical bars( 5 min chart) on the green ML at 1400 server time was i thought a perfect rejection of going lower... however persitance to go lower was not over and as if with increased effort from price to go lower (as volume increased) gave us a new low at 1.2973. I had almost reisgned myself to a further fall sell off down to 1.2950/60 ( and you know how quickly we can move lower under such circumstances) and had almost given up looking for a reversal here when we made a mini double bottom on/just below the RL at 1.2976 at 1502 ( server time).......This was bullish but we needed a HH and to take out the 'roof' of the 'roman arch' of this mini double bottom at the juncture of the 3 reaction lines. The 'poke' bar came about 15 mins later - up to ( and then through) the reaction line at 15.19 server time. This was then follwed by some uncertain bars (but all higher) and a few mins later another 2 spike bars showed us that something was changing. This was the ideal point for a long entry using the reaction line and roof of the arch/double bottom as a place to put the stop under around 1.2986. Sure enough price retraces 100% to 1.2990 and retouched the reaction line and then the game changed and we were off in a new direction with a damm good bar up. If you had watched it live like i did (and perhaps you did) it gave me an understanding that cannot be gained from viewing the chart now. I observed the slowing of the descent, The urge to go lower and continious attempts to go lower , but all were thawted with just a painful few pips progress and then the general acceptance by price that the downside was over and all the energy/momentum that had been gathered on the way down like a coiled spring was ready to be expended in a new direction and then as a final effort the mini double bottom but with a higher low and the downtrend was dead. Fascinating and exhausting to watch!! But i have only mentioned the pure price action what about indicators? What were they telling me?What about forks and reaction lines?
On their own they tell me nothing and without watching the price action they are all simply pure 'fluff' and can tell me whatever i want to see.
There was some divergence ( 5m in and higher TF) but so what...on its own this is wholly unrelaible. I can draw mini forks but again only watching can reveal the subtle change in behaviour the preceeds a change in trend.

Perhaps at a stretch you could call this a 'over and under' divergence setup in the 10 min chart below but its not cleancut case( is the 7-3-3 below the 21-10-4? by a whisker?)...however if you add the two together then you have more evidence for a reversal but no proof in advance...but I had more clarity from watching the several hour long episode that was this bottom and at the end of it felt as tired and exhausted as price did trying to go lower BUT i could see & feel that the very dynamic of price's behaviour was changing and no indicator can give you that. Infact to be sure even as we made successive higher highs i still had no reason to believe we would not fails and fall again ( hence my position of a keeper and a short term profit. In the end i closed one lot at 1.3055 and the second at 1.3087 ...I lack the confidence to run a really large profit on trades and even though i look at this as a success if i look at my trading overall and all the energy that goes into it i would have made double/triple etc if i had learnt to leave my positions alone and not get obsessive about them. Infact some of my greatest trades have been when i am out of the office and away from the screens and cannot interfere with the course of the trade!!

I guess i must also ask the question....did i need to watch this bottom/reversal forming? Would it not have been simpler to wait until i saw the change in direction and then pick a long entry in the trend direction on the first or subsequent minor retracement? The answer is yes and no. Yes it would have been 'easier' but not as rewarding as i believe there is no substitiute for watching bar by bar.

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