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A common misconception is that in order for a trader to be profitable, we MUST buy very close to the bottom of the market, and we MUST sell very close to the top of the market.
There are times when this is very helpful, but a quick look back over any market will show you that this generally is not the only option.
Chart 1 below shows the US Dollar / Japanese Yen currency pair (FXUSJY in ProfitSource).
Chart 1
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We can see that the Dollar / Yen has retraced and found resistance at an important 50% milestone of a previous range. Chart 2 looks at some basic Price Forecasting from David Bowden’s Number One Trading Plan manual.
Chart 2
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The first range out from the June 2007 top has so far proven quite useful in calling future turning points. Based on this, the 200% milestone of 92.87 should also be an important level to watch.
Chart 3 takes a smaller picture view, looking at a more recent range.
Chart 3
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The 100% milestone of this ranges gives us 92.86 to watch, only one point off the 200% milestone from the example above. We can see that this level is an important area to watch, so the important question is “How do I trade this?”
As I mentioned at the start of this article, we don’t necessarily need to be in right at the exact turning point in order to make our money. In fact, let’s take a look at a similar turn on this currency pair from February 2008. Chart 4 below shows that although a turning point came in on February 14, we wouldn’t have missed much if we were out of the market until the first or even second lower swing top, on February 27. That’s nearly two weeks of waiting, and we still captured most of the 1000 point move.
Chart 4
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The market made its top, but it didn’t just fall away. It retested its old high first. WD Gann said the safest place to sell is the first lower swing top. Another way of putting this is to sell when the market fails its “retest”.
Let’s apply this to the current market. Chart 5 below shows the current bar chart of the Dollar / Yen, with a Swing Overlay.
Chart 5
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We can see that the market has made a potential turn, on a price resistance level. We can also see it has given us two lower tops, having failed the retest of the old top.
The January and June 2007 highs were similar examples on this market.
I could highlight many examples of trading the retest on this market alone, but I’ll leave that for the keen student to find on their own market.
Be Prepared!
Mathew Barnes
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