Forex Strategies for Base Building Phase 04/22/09

There are four phases in a full price cycle: base building, the advance, top building, and the decline. Different phases in a forex cycle require different forex strategies. Recent price action of British pound is a textbook example for trading during base building phase.

Monday (4/20/09) was the third down day for British pound, also a WS7 (wide spread 7) day. For swing traders, it's the time to collect their pips. For day traders, it would be unwise to chase any breakdown signal to naively believe they are following the trend. It's equally unwise to fade the trend too soon.

On Tuesday (4/21/09), there are two big bearish candles(see hourly candlestick chart) which took Monday's low. Impatient bulls were threaten to close their long positions, either by stop hitting or out of scare the trend will continue. To add salt to the wound, both breakdowns were fake. In that case, reckless bears got burned too. It is proved that chasing a breakdown after the third down day (WS7) is not a rewarding strategy.

After the second fake breakdown, pound made a rally, the dip from the rally made a higher low, which offered a nice spot for long entry.

On Wednesday (4/22/09), in light of Annual Budget Release, pound was hammered down 262 pips in two hours, and took Tuesday's low. The same scenario happened again - bold bears and bulls got burned dearly.

To summarize the forex strategies for base building phase,

1. chasing a sudden breakdown signal is not a high probability strategy

2. bottom guessing usually got burned during base building

3. Better wait for market out of base to make any commitment

Day Trading Rules - Trade What You See Not What You Think

Thursday for euro was a NR7/ID (narrow range 7 & insider day). Since euro already stayed in a top range for 5 days, such kind of volatility dried up would indicate a high probability trending day on Friday. For a NR7/ID, there is no need to predict which direction market will breakout, cause either direction is possible. We just need to follow what the market is leading us.

The first short signal was given at breakdown Thursday's low. On hourly point and figure chart, it's a double bottom breakdown at 1.3500 confluence with the break of support trend line. The second short signal was given at breakdown the bottom of the top range, on hourly point and figure chart, this was a breakdown at major support at 1.3433.


1st downward target: 3356 (average daily range)
2nd downward target: 3265 (average daily range + 1std)
3rd downward target: 3174 (average daily range + 2std)

The major downward movement happened in London session. In US session, euro found support at its daily 2nd downward target. By the way, Friday formed a WS7. This was a classical NR7 setup. Detail information about NR7 setup can be found in Linda Raschke's Street Smarts: High Probability Short-Term Trading Strategies or Toby Crabel's book.


Cable made a similar breakdown at the bottom of its top range. Before the breakdown, cable already made a series of lower highs and lower lows, on point and figure chart, cable formed a downward channel, the short signal was given at the double bottom breakdown at 1.4533, confirmed by the breakdown from the channel at 1.4433, then followed by the breakdown from the support at 1.4400.



Yen met the same resistance from 99. Last week on hourly point and figure chart, there was a triple top false breakout. This time we got a double top false breakout. History does repeat itself.

03/09/09 Forex Market Comments

GBP/USD: Last Friday formed downside pin bar, if market breakdown Friday low, we have a short swing setup. Around 4:15am, pound broke trend line and Friday low, the downside momentum is decisive. A very nice trending day for pound. Today is a WS7 day and made a new low in 20 trading days (L20).