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Curriculum Content

The forex technicals stage is the final analysis stage before you take a position. Technical analysis is not used to generate trading ideas, but merely to time your entries into trading ideas generated by economics and confirmed by sentiment. If you have an aligned economic and sentiment bias, the technical level must align with that bias and give you an entry signal to take a position. If alignment occurs, you know that your trade idea is probably correct and you should trade now.

Trend Bias

If you have a bullish economic and sentiment bias alignment in the AUD/USD pair, you want to see an existing or forming uptrend to take a buy trade. If you have a bearish economic and sentiment bias alignment in the AUD/USD pair, you want to see an existing or forming downtrend to take a short sell trade.

Trend & Patterns

The trend must exist on a Monthly, Weekly, or Daily timeframe chart. A trend on any timeframe below the daily chart is too short term to generate a reliable entry signal. If the trend does not yet exist, you should check to see if a reversal price pattern is in formation on the monthly, weekly, or daily timeframe charts. Note that the trend after the reversal price pattern must be in the same direction as your economic and sentiment bias. You can also scale into trends after a clear continuation pattern has completed. The most common technical patterns are shown below:

(R) Double Top:
(Bearish Pattern)
Measure resist peaks to neckline, project down from neckline break.

(R) Double Bottom:
(Bullish Pattern)
Measure support troughs, project up from neckline break.

(R) Triple Top:
(Bearish Pattern)
Measure resist peaks to neckline, project down from neckline break.

(R) Triple Bottom:
(Bullish Pattern)
Measure support troughs, project up from neckline break.

(R) Head & Shoulders Top:
(Bearish Pattern)
Measure highest resist peak to neckline, project down from neckline break.

(R) Inverse Head & Shoulders Bottom:
(Bullish Pattern)
Measure lowest support trough, project up from neckline break.

(R) Falling Wedge Reversal: (Bullish)
Measure lowest trough to peak,
Project up from resistance line break.

(C) Falling Wedge Continuation:
(Bullish Pattern)
Measure lowest trough to peak, Project up from resistance line break.

(R) Rising Wedge Reversal: (Bearish)
Measure highest trough to peak, project down from support line break.

(C) Rising Wedge Continuation: (Bearish)
Measure highest trough to peak, project down from support line break.

(C/R) Ascending Triangle:
Measure height and project up (down) from breakout of resistance (support).
This pattern can also be a reversal, and would fall across the line sloping up.

(C/R) Descending Triangle:
Measure height and project up (down) from breakout of resistance (support).
This pattern can also be a reversal, and would rise across the line sloping down.

(C) Bullish Rectangle:
Measure height of rectangle, project up from resistance line upper breakout.

(C) Bearish Rectangle:
Measure height of rectangle, project down from support line lower breakout.

(C) Bullish Pennant:
Measure flagpole before formation and project up after resistance line breaks.

(C) Bearish Pennant:
Measure flagpole before formation and project down after support line break.

(C) Bullish Flag:
Measure flagpole before formation and project up after resistance line breaks.

(C) Bearish Flag:
Measure flagpole before formation and project down after support line break.

Draw your support, resist, and trendlines while you look at the Monthly, Weekly, and Daily timeframe. Only high timeframes are reliable enough to be considered for your chart structure. Since you are trading long term trends, you need to rely on long term structure and price action.

Once a trend occurs on the M/W/D timeframes that align with your bias, you need to see price action generate reliable entry signal to enter on the Daily timeframe. Use the DPRE system, which stands for “Divergence, Pin-bar, Rejection, and Engulfing”. These four chart elements will get you into reliable entries generated in the trend direction.

Divergence

A Divergence is a reversal warning in a trend. A trendline drawn between two peaks or two troughs in price will slope one way, while a trendline drawn between two troughs and two peaks in the lower oscillator will slope a different way. This indicates that momentum measured by the indicator is changing while price attempts to push the same direction on dying momentum. Divergences only occur on oscillators charted below the price area like RSI, TDI, and Stochastics.

In a Bullish Divergence, price trend falls as indicator trend rises. A trendline drawn above price slopes down, while a trendline drawn below the price line in the indicator slopes up. The price trend may lose its down trending momentum and turn upwards, rising over time. Since the rate of supply is decreasing, it is easier for buyers to take trend control.

In a Bearish Divergence, price trend rises as the indicator trend falls. A trendline drawn below price slopes up, while a trendline drawn above the price line in the indicator slopes down. The price trend is might see sellers come in, and turn price momentum downwards. The rate of demand is falling; it provides a chance for sellers to dominate the trend.

Pin-Bar

A Pin-Bar is a candle body with a single wick attached to the top or the bottom of the candle. The body is the “bar” while the wick is the “pin”. The pin-bar is a decent signal that shows rejection of price levels.

If the pin-bar is bullish, the body is to the top, while the wick descends down below. It looks like a “Hammer” candle, with a long wick. This means that buyers came in and bought the lows of the day, pushing price upwards for the close. If price closed above the open the signal is stronger and the candle will be green/white. The longer the bullish colored body to the top, the bigger the rejection of the lows.

If the pin-bar is bearish, the body is to the bottom, while the wick rises above. It looks like a “Shooting Star” candle, with a long wick. The wick means sellers came in and shorted or sold the highs of the day, pushing price downwards for the close. If price closed below the open the signal is stronger and the candle will be red/black. The longer the bearish colored body to the bottom, the bigger the rejection of the highs.

Rejection

A price level Rejection is signaled by a refusal or inability to go a certain direction at a level. They exist both as continuations to a trend and as potential reversal warnings. This can be above a price level, where you will see failures to push up before falling. It can also be below a price level, where you will see failed attempts to push a price down before rising.

A Bullish Rejection occurs when sellers attempt to push price down, but buyers acquire all sold volume below the level. This results in a series of wicks to the bottom. Eventually those who wished to sell at that price are exhausted by buyers, and price moves upwards as demand buys up the asset.

A Bearish Rejection occurs when buyers attempt to push price up, but more sell-side volume comes in to transact above the level. The chart shows a series of wicks to the top, which may be long. The buyers are eventually exhausted by the sellers, and price moves down as sellers release supply into the market.

Engulfing

The Engulfing candle is a high quality entry sign. An engulfing candle happens when the length of a single candle’s body exceeds the full length of one or multiple previous candles in the opposite direction. This means traders on the most recent candle fully rejected previous candle’s movements. Opening on one side of previous candles’ bodies and closing on the opposite side of candle bodies is a complete rejection of prior price movements.

A bullish engulfing candle will fully absorb one or more previous candles’ bearish candle movements. The body will open below the previous candles’ closes and close higher, above prior openings. This engulfs the whole prior bearish price movement. The more bars engulfed, and the bigger the candle body, the stronger the bullish engulfing signal. It precedes a bullish upwards run.

A bearish engulfing candle will fully absorb one or more previous candles’ bullish candle movements. The body will open above the previous candles’ closes and close lower, below prior openings. This engulfs the whole prior bullish movement. A longer candle body and more bars engulfed results in a stronger bearish signal. A bearish run will follow.

When trading engulfing candles, you might not want to take a trade immediately. Price may attempt to retrace the engulfing candle before starting a new trend. Many good trades appear halfway into an engulfing candle body. Waiting for this entry also reduces risk, but there is the possibility that you will miss your trade waiting for a retracement that never happens before price moves in the anticipated direction.

Tying Technical Analysis Together

Since we are trading long term economic trends, we are looking to play trends on the Monthly, Weekly, and Daily timeframes. We will enter on the 4-hour chart for precision in the higher timeframe’s trend direction if it aligns with our economic and sentiment bias. Without Alignment, we don’t trade. We wait for predictions to come true. If not true, at least we don’t lose money.

We first mark our structure on the Monthly chart, then the Weekly chart, and finally the Daily chart if needed. This structure is important. We don’t buy near a resistance level, or short near a support level. We reduce risk by trading at a distance from an opposing support level.

We move on by looking at our economic and sentiment bias. If bias is bullish, we need an uptrend. If bias is bearish, we need a downtrend. If we see a bias aligned trend we can begin looking for an entry signal. If we don’t see one, we need to look at price patterns and divergences to see if one may be created. If we think one will be created, mark down the asset on a watch list and revisit it to see if the bias aligned trend forms in the future.

Let’s do a full run-through using “DPRE”. We start with divergences. If we have a bullish economic and sentiment bias in the AUD/USD pair, we want a rising trend. If we don’t see a bullish trend, we start at the Divergence level of the DPRE system. Do we see a bullish divergence? If yes, we entry hunt when the bullish trend starts. If it doesn’t start, we don’t trade and avoid losses from buying a bearish trend.

We’ll know the bullish divergence has started panning out when we see rejections of new lows with bullish pin-bars. This the PR part of the DPRE system appearing. This means the trend is turning, and a bullish trend will begin. Let it begin, knowing that the trade is slowly coming together. We’ll look each day to see if a bullish engulfing bar forms inside the bullish trend. This is when we can be fairly certain the time to play the trade has come.

Lastly we need the “E” part of the DPRE system. A bullish engulfing candle on the daily level is a strong entry sign. A bullish engulfing candle on the 4-hour level is less convincing, but in the context of a formed bullish trend it can be taken. We can take the trade immediately, or take the trade after we’ve seen a retracement partially into the engulfing candle. The DPRE system, especially Pin-Bars and Engulfing Candles occurring near a support level would strengthen our certainty of future uptrends. We can theoretically take a trade on the Pin-Bar if an engulfing hasn’t occurred, but it must be accompanied by movement in our anticipated direction first.

Note that we can reverse all of the above for a bearish economic and sentiment bias. We would need a downtrend, so if one exists we look for the PRE levels of the system. If not, we seek a bearish divergence. If our bearish divergence is confirmed with rejections of new highs and bearish pin-bars, we only need a bearish engulfing candle at the daily level when the new trend has formed. A 4-hour engulfing can help, but we need to enter with a preferably established trend.

We don’t have to enter all at once. We can enter the trend bit by bit to ensure the new trend is successful before trading. In the risk management section, we’ll learn that we have a maximum 2% of our capital at risk of loss in any position. If we want, we can use 1% of our capital on our first entry. Then we can use 1% again on our next entry. This would require multiple entry signals, but we can loosen the rules for our second entry. Instead of requiring a second bullish pin-bar/engulfing candle, we only need a retracement into the bullish trend and then a resumption upwards to re-enter. We’d buy a higher dip in the trend.

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