Nugget 4--Understanding a trend II
When the trend becomes stretched
In nugget 1, I alluded to an obvious strong R point for the EUR/USD. In that case, it does not mean the euro is going to reverse trends, nor does it mean the trend is overextended. All it means is that at that point it will make an excellent entry for short that should net no less than 200 pips.
The AUD/USD paints a bit of a different picture. This pair is about ready for a huge reversal. The whole idea is finding and discerning when it is going to happen. The daily chart is showing the aussie flying way to high above the cloud. View it as an airplane flying too far above a cloud. The altimeter shows that the plane needs to come down, because of the high altiude. The altimeter on this chart is also showing the same thing. There is always a gravitational pull towards the cloud.
The weekly chart looks even nicer. If you count the lines forweard when the cloud has sloped downward, you will count 6. The weekly chart will be flying 1,000 pips above the cloud in 6 weeks if we are at today's level. Even further into the future shows the cloud turning bearish as there is a crossover of both senkou spans.
Personally, I can only think short when I think of the aussie because of how imminently close we are to what promises to be a huge reversal. The pair has become what I would call overextended or stretched. It is all a matter of finding an entry and taking a long ride south. If all it does is hit the top of the weekly cloud, that's circa 1,000 pips. Based on 10% margining that is a 100% gain from current level. It means at 10%, and let's say there is 10K in the account, 1 lot would be put on that trade, and a gain of 10K. That would take weeks to evolve, but there has been much talk about 20% per year, 5 % per week. This is only one trade as we peer into the future.
Strong obviations on the higher TF's make for quicker and speedier gains. Some don't like to stay in a trade and hold it for weeks. Another way to do it is wait for the break on the TF in question, and then hold it into the next candle of the TF, and bail out for some very quick and tidy gains.
Just as an example of the above. I am curently long the GBP/USD. I got a strong signal on the 8-hour chart, along with a confluence of other events. I am just waiting for the first strong break and then getting out. WR1 is on the radar, which is 1.5918. This trade is on a much smaller scale than what we see happening with the AUD/USD. In orer to define an entry for the aussie, it could be helpful to scale down to a lower TF and finding an entry. Afterward watch for momentum. If there is none, get out, take the small gain, and wait for the next leg to finish. I don't mind taking the small 20 and 30-pip gains while waiting for the bigger picture to evolve. Even the smaller trades will be 2-3% while waiting for the Real Deal to happen.
In the very immediate future there is a strong confluence of events happening. I forgot to accompany my yearly S&R's on this chart, but I'll post the YP--YR1 zone on the next post. Notice the red line on the 4-hour chart. That is my WR2 at .9742. Another mark to look for is .9739, and that will be seen on the next chart.
My S&R's are not only helpful S&R indicators, but they have been formulized to find the period within a period that a trend has been stretched or to indicate where a bounce or reversal will happen. The yellow line at the bottom is the MR3 at .9382. When the 3's are broken, that is a strong implication heading into the next TF. This means the MR3 will not be touched next month. That is a sign, needless to say, of a strong trend, but also another sign the trend has been stretched. It's these conditions that the markets provide some ideal entries for quick pips.
Also, around the corner is something that shows even more the copious amounts of opportunities the markets provide. Sometimes, I am in a position of just trying to make a decision on what pair I want to trade. As an example, isn't it good to know the GBP/CHF is headed back up to the daily tenken at 1.5609. Unbelievable! I might close the NZD/CHF early just to make room for this pair. OTOH, there are many more delicacies on the forex menu.
This is why in order to get the gains I have talked about, the trader needs to have a methodology that will give strong indications of when there is nothing left in a trend.
BTW, the stochastics is an indicator I use, only to show when reversals might happen, but I also use it as a momentum indicator.