Hello Dukascopy Community!



It's time for another article,
this time about selling technique during downtrend (which entry point to use
and why and when to get out of position and why). I will also explain you why
buying dips in downtrend is not the best idea. At the end you will have another
practical example of CHART PRICE ACTION that is how to read price moves from
clean charts based only on support/resistance lines and tops/bottoms. Hope it
will make you improve your own strategies and maybe let you take a fresh look
on things.



USDCHF M30 TIME FRAME



On the chart below I put some
downtrend channel according to the rule I mentioned some time ago, that I
need 3 points to establish a potential trend channel.

On the next chart you can see same channel
but with corrective waves marked in blue. They may remind you of flag price
patterns. What is important here is that to draw each one of them I used 4
points of reference marked as green ellipsis (Of course as usual 3 would be sufficient). The red ellipsis is the breakout
point. The short thin red line that you see inside second corrective formation is
to show you that last top in that formation was not breached. That said, market gave me some kind of confirmation that the selling on this pair was not over
yet. I will describe that situation better later on. Also important part are 5
points of reference marked in blue which later on will be used as OPEN/CLOSE TRADE POINTS.

Next chart
(below) is the key one so pay closer attention.

As you can clearly see the trend is to
the downside so all the books and all the authors will tell you that best trade
here is TO SELL when price reaches channel
resistance line – not to buy the dips (If you manage to somehow find one, which
is it possible but in some cases really hard)



I marked 4 possible SELL entry points.
I named them as follows:



1.      
PROFESSIONAL
ENTRY



2.      
ADVANCED
ENTRY



3.      
STILL
LEARNING ENTRY



4.      
BEGINNER
ENTRY

AD 1.

QUESTION:



At this point you are asking yourself: Wait a moment …
Just few moments ago I read that to draw trend channel I need at least 3
reference points. So HOW the professional knew that good sell entry point and
at the same time third point of reference would be exactly where his entry
point was? 



ANSWER:



Answer is simple... he is PROFESSIONAL! But speaking seriously, he knew that downtrend started, he
assumed that corrective move may end where 4th green ellipsis was placed (as
most of corrective moves are ABC waves and he already had 3 points of reference
to draw blue corrective channel so 4th point would be good SELL
entry point even for smaller position), he also might have used FIbonacci
extensions to see that price reached 38.2% level. He put all those information
together and entered SELL with tight STOP LOSS and TAKE PROFIT at the
 GREEN
CHANNEL SUPPORT LINE.



Of course at that time it
was quite impossible to establish EXACT TAKE PROFIT level. He would leave it blank and adjust according to further price action.

To sum up, professional made 102 pips with narrow SL and adjustable TP. I called it PROFESSIONAL ENTRY because not many traders managed to see this setup in time and enter in the right moment.

AD 2.

Advanced entry was done roughly 30 pips below on a break of BLUE CORRECTIVE CHANNEL SUPPORT LINE. From this place our SL was placed above last top which is PROFESSIONAL entry point. TP would be divided in two:

  • Partial close at last bottom (BLUE 2)
  • Partial close at adjustable level after reaching GREEN DOWNTREND CHANNEL SUPPORT LINE
In this case gain would be distributed as follows:

  • 23 pips at first TP level and later on 48 pips or
  • 71 pips at second TP level at once
I called it ADVANCED ENTRY because it was well technically supported entry but already missed 31 pips comparing to PROFESSIONAL ENTRY.

AD. 3

Still learning entry level was made on a break of second dip in corrective blue channel. Same situation with SL and TP applies:
  • Partial close at last bottom (BLUE 2)
  • Partial close at adjustable level after reaching GREEN DOWNTREND CHANNEL SUPPORT LINE

In this case gain would be distributed as follows:

  • 15 pips at first TP level and later on 48 pips or
  • 63 pips at second TP level at once
AD. 4

Beginner entry level was made on a break of lowest dip (last bottom of the main downtrend -> BLUE POINT 2. TP and SL levels would be placed as follows:
  • SL level after coming back to blue corrective channel -> adjustable
  • TP level could be only one at GREEN DOWNTREND CHANNEL SUPPORT LINE
In this case TP would be 48 pips.
At this point please pay attention to green arrow and 27 pips mark. This is the place from which some traders would like to enter with BUY position. It would be technically correct as we placed BUY on TREND SUPPORT LINE but as price moves in three directions:
  • UP or,
  • DOWN or,
  • TO THE RIGHT,
we would wait a lot for relatively small gain... This is also why it is not always advised to make forced BUYS in DOWNTREND.

SECOND BLUE CORRECTIVE CHANNEL ENTRIES

The chart below shows you other set of entries (also marked with the same types of entry levels by letters P-professional, A-advanced, S-still learning and B-beginner). 
If you analyze closely you will notice that exact same types of entry were possible with second blue channel. 
The only difference is, that PROFESSIONAL trader could have entered at the moment of failed breakout attempt of last top within blue channel. If he did not, he would have same entry level as advanced trader. Analyze chart below:
- Professional entry level was made on a failed break attempt of second top in corrective blue channel. SL and TP applies as follows:
  • TP level at GREEN TREND SUPPORT LINE (BLUE 5) ->adjustable
  • SL level above RED TREND RESISTANCE LINE 

In this case gain would be 86 pips.

- Advanced entry level was made on break of blue channel support line.

SL and TP applies as follows:

  • Partial TP level at last main trend bottom (BLUE 4)
  • Partial TP level at 
    GREEN TREND SUPPORT LINE (BLUE 5) -> adjustable
  • SL level above RED TREND RESISTANCE LINE
In this case gain would be distributed as follows:
  • Partial TP level at last 
    main trend bottom (BLUE 4)
  • Partial TP 
    level at  GREEN TREND SUPPORT LINE (BLUE 5) -> adjustable
  • SL level above RED TREND RESISTANCE LINE 
- Still learning entry level was made on a break of second dip in corrective blue channel. Same situation with SL and TP applies:
  • Partial TP level at last  main trend bottom (BLUE 4)
  • Partial TP  level at  GREEN TREND SUPPORT LINE (BLUE 5) -> adjustable
  • SL level above RED TREND RESISTANCE LINE 
- Beginner entry level was made on a break of lowest dip (last bottom of the main downtrend -> BLUE POINT 4. TP and SL levels would be placed as follows: 
  • SL level after coming back to blue corrective channel -> adjustable
  • TP level could be only one at GREEN DOWNTREND CHANNEL SUPPORT LINE

QUESTION:

What can be done to put some fixed TP level, because I cannot stay in front of PC and observe situation all the time.

ANSWER:

You could do this for example: (forgive me .gif quality. Chart was too big to meet 130 kb requirements)

What I did here was: I copied first impulse wave from the breakdown point to the the point in which price touched green support channel line (First black rectangle). I later on put the same rectangle from breakdown point to have an idea of how deep the move may be. I missed the target by 4 pips... It might have been coincidence that the second move was almost exactly the same as first one but that's the thing about Forex trading. There is no certain profiting method. Sometimes one strategy will work sometimes not. You MUST BE FLEXIBLE and apply a bit of math -> there is one final goal -> to WIN -> how you reach it is totally up to you and your imagination/skills/technique.

Chart above demonstrates only one possible solution to timely-adjusted TP level. There are many more that come from other possible strategies or indicators that traders may use. I prefer not to elaborate too much on this one. At least not now.

Hope all the analysis was clear and well explained. Once again thank you for your interest and patience. Should you have any questions/opinions about this strategy do not hesitate to ask. 

I promised CHART PRICE ACTION but due to lack of free words (only 1500 available) I will be only able to write about it next week. 

Good luck in all contest and hear you next week!

Cheers.