Do you sometimes feel “lost” when looking at the charts or your open trade? Or perhaps you feel insecure about your next decision?
Get ready for a step-by-step explanation how to analyze the charts and find trade setups like a pro.
This article will explain these 3 key aspects:
- Learn how to combine patterns, trends and support and resistance.
- Find out how to identify the path of least resistance in real time.
- Know where, when and how to find the best trade setups on the chart.
Trading Bias and Difficulties
Once the charts have been analysed we should know whether the chart is interesting to trade or not like an interesting reversal pattern or a neat break, pullback and continuation pattern.
The next step is to translate analysis into a concrete trading plan.
This translation often causes problems with traders. There are two types of traders and they have their own challenges:
- Analysts who are insecure about taking trades based on their analysis.
- Traders who skip the process of analysis.
Many trading teams split the duty of analysis and trading into two different positions. Retail traders do not have that luxury. We need to cope and do it all.
The main issue once analysis has been completed is that it creates some level of trading bias, which in turn creates emotional ties to your analysis and trades:
- Successful trading is not about removing those emotions but rather learning how to handle them.
- Ultimately, trading is using that bias only when your bias is right.
- The triangle of analysis helps develop a well trained yet flexible trading bias which is based on reality rather than wishful thinking.
- The triangle of trading helps translate that road map from the analysis into confident actions.
Triangle of Trading: Decision Zones and Triggers
What is the triangle of trading? It composes of three parts:
- Locating decision zones
- Establishing a trigger
- Entering the setup
Image: purple lines show decision zones of this patterns, triggers are candlestick patterns at the decision zones.
Triangle of Trading: Finding Decision Zones
We need to review our analysis and locate the areas where it makes “sense” to trade, both from a probability point of view and a reward to risk ratio perspective.
The first 2 steps are:
- Look for points of confluence and decision zones.
- Find the wide open space on the chart.
Here are the definitions we use:
- Decision zone: price reaches a zone where it must reveal its true intent of movement.
- Point of confluence: multiple S&R levels are at or near the same level.
- Wide open space: price has space to continue with trend till next decision zone. Please check our video below for more info about the open chart spaces.
We prefer taking trades at decision zones because this increases the chance of a substantial movement in price. Decision zones help our trading in a couple of ways:
- We avoid taking setups that are too close to support and resistance.
- We wait for price action to confirm the direction at the decision zone.
Here is a simple chart that explains the decision zone and potential wide open space.
Image: these smaller decision zones are marked in orange. The break above the resistance shows the potential for bullish breakout. Wizz (purple lines) show where the next target is and hence how much space is offered.
Basically, this helps us avoid bad trade setups and take setups that follow the market’s movement, rather then trying to predict its movement.
Here are a few more practical examples:
- Bounce: do you price bouncing at a strong support level of 1.10? A round level often causes a larger retracement / reversal and this could be worth trading as a bullish bounce.
- Breakout: price is breaking a key support trend line? This could cause a continuation of the trend and we are interested in taking a bearish breakout.
- Wait: do you see price continuing with the strong up trend but approaching key resistance? We might want to avoid taking longs right into the resistance and prefer to wait.
As you can see, decisions help us look for bounce and break setups but also avoid bad setups into support.
One more important note: the decision zone does not have to be a key round level. It could be as simple as a breakout of the bull flag chart pattern.
Image showing SWAT triggers: green arrows are main signals, purple arrows show minor confirmation signals.
Triangle of Trading: Waiting for Confirmation and Trigger
Once we have one or more decision zones in mind, it’s time to be patient and wait for price to reach the zone before trading it.
Once price reaches the zone, we can look for a trigger and confirmation pattern, which is when price action is confirming a breakout or bounce.
The best way to measure triggers is by using candlestick patterns or our ECS systems (like ecs.SWAT and ecs.CAMMACD). Candles provide direct information about the expected price movement at the decision zone.
We basically use confirmation patterns and invalidation levels for each decision zone:
- Confirmation pattern: confirms a particular price direction in the decision zone.
- Invalidation level: the expected analysis is not working out and invalidated.
Here is how we use these concepts step by step:
- We need price to reach a decision zone or point of confluence first.
- Our analysis tells us if we are interested in a break or bounce or perhaps both.
- Then we measure if there is space (till the next support or resistance) to take trade when price breaks or bounces.
- Once price reaches the zone of interest, we wait for trigger and confirmation patterns and setup invalidation levels.
Triangle of Trading: Taking the Entry
Last but not least, it is time to take an entry once the trigger and confirmation pattern has arrived.
There are a dozens of options how to enter but here are some ideas:
- Immediately upon the trigger / confirmation pattern.
- A retracement of the trigger candle.
- A break of the low or high of the trigger candle.
- Zoom in to lower time frames to trade patterns or candles there.
- Use to lower time frames to trade break or bounce of trend lines, Fibs, Fractals or moving averages.
- Also zoom out to higher time frames to trade an interesting candle.
Triangle of Trading: Summary
The three steps to taking action are:
- Setup decision zones.
- Wait for triggers:
- Look for confirmation patterns
- Setup invalidation levels
- Setup target
- Calculate if there is sufficient space for trade
- Take entry.
Let’s show a live example on the NZD/USD 4 hour chart.
Image showing NZD/USD decision zones.
Decision Zone: The Fibonacci retracement tool (blue) is placed on a swing from the daily chart. Price has reached a 50% Fibonacci support level.
Bullish potential: the 50% Fib could cause a bullish bounce or reversal.
Bearish potential: if price breaks below the 50%, it could also be a bearish breakout.
Outcome: with the NZD/USD price made a bullish bounce and later on a bearish breakout.
Trigger: the 50% Fib is a decision zone but waiting for the trigger is the next step. The trigger could be a candlestick pattern on the 4 hour chart or a break above the resistance trend line or below the 50% support.
Bullish trigger: there was a bullish break setup at first which is indicated by the candle breaking above (green arrow) the resistance trend line (orange line).
Bearish trigger: later on, this was followed by a bearish breakout (yellow arrow) below the support trend line (blue line).
Bullish 2nd trigger: any bigger upside breakout was never activated because price never broke above the resistance trend line.
Entry: the entry is sometimes the same as the trigger. But here is where traders can apply more caution as well by zooming one time frame and trading pullbacks and breakouts or by waiting for a retracement of the breakout candle for instance.
After the entry has been completed, trade management becomes important but this is a topic for a new article.
Until next time and many green pips,
My twitter: @ChrisSvorcik
More info on our ecs.SWAT course and trading system
Elite CurrenSea Twitter: @EliteCurrenSea
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