During the
recently concluded Dukascopy trading contest in May this year, I traded my
favourite pairs using the chart pattern strategies that I have found to be more
than sufficient for trading success in both demo and live trading. This
strategy landed me the 23rd spot in the competition with only 16
trades for an accuracy rate of 63%.



 



As I review each
of the profitable trades during the month, I will explain the rationale behind
them using chart patterns such as Consolidations, Trend Lines and Counter Trend
Lines. These are the tools that I use to analyze the market without the use of
indicators or fundamental announcements since once accurately used, these tools
by themselves can correctly provide the signals for market direction, entry and
exit for traders.


KEY CHART PATTERNS
& SIGNALS



 



Breaks of
Consolidation



 



Once Consolidation patterns are broken with a strong
closed candle, trades can be made in the direction of the breakout especially
if it coincides with the major trend. Naturally, false breakouts are also
possible.



 



Breakout Equivalent



 



Whenever Consolidation Patterns are broken, they
usually end at the distance that is equal to the width of the pattern broken.
This is usually a good take- profit point.



 



ABC Signals



These usually indicate the start of a new trend especially at major turning points.



 



Trend Lines



 



These indicate market direction and breaks of these
signal a reversal in direction. I use these instead of the more commonly used
Moving Averages.



 



Candlestick
Formations



 



These chart patterns accurately predict market
direction once correctly identified. I have found these to be more reliable
than indicators since they provide me with a visual location for both entry and
stop placement. They also reduce the challenge of fine-tuning an indicator to
the right statistical parameters and obviate using several indicators to
provide a confluence of entry signals.



 



 TRADES 1 AND 2



 



EURO AUD & AUD
USD



 



These first two
trades were traded simultaneously to take advantage of the strong inverse correlation
that exists between these pairs that supported the technical setups.



 



AUD USD



 



This currency
pair was breaking the 4H Chart´s uptrend line and the Support of a 30 Minute Range
to signal the start of a downtrend. The sharp decline that took place also
reflected the reaction to the unexpected 50 basis points cut in interest rates
by the Reserve Bank of Australia.



 




  • Entry – 1.0397

  • Stop –   1.0428

  • Exit  
    -   1.0338

  • Profit – 59 Pips



 



 4H
CHART


30 MINUTE CHART


The trade was
executed with the stop loss being placed above the Resistance of the Range
while the trade was exited for a 59 pip gain when the currency started to move
sideways after the sharp movement short. This area also coincided with the
´Breakout Equivalent´ distance which is equal to the width of the range at
which point the breakout normally ends.



 



Not only did
this lead to a new downtrend, but it was also part of the movement that would
lead to the Pennant seen later on the Daily Chart.



DAILY CHART


EURO AUD



 



At the same time
as the Aussie Dollar was heading short, the EURO AUD was breaking the
Resistance of its 30 Minute Consolidation to resume the overall uptrend above
the Daily Chart’s uptrend line.



 

  • Entry – 1.2737

  • Stop –   1.2697

  • Limit- 
     1.2835

  • Profit – 98 Pips



 



DAILY CHART



At the first
bullish breakout candle on the 30 Minute Chart, the trade was entered with a
Stop Loss placed below the Support of the Pennant and the target set for the
¨Breakout Equivalent¨ distance. The strong reaction to the RBAs rate cut led to
the fast breakout to the target within the next few hours for a 98 Pip gain.



  



30 MINUTE CHART



 


TRADES 4 AND 5



 



USD CHF & EURO
USD



 



These two trades
also took advantage of the inverse correlation between them. Both were moving
within large Consolidations and were getting ready to move to the other end of
their respective boundaries.



 



USD CHF



 

In this trade,
the Daily Chart provided a strong bullish signal in the form of a Morning Star at the Support of the Daily
Pennant to signal the pending move to Resistance. Entry was done on the Daily
Chart itself with the Stop Loss placed below the candle. Exit took place at
Resistance for a small 47- Pip gain.



 




  • Entry – 0.9132

  • Stop –   0.9072

  • Limit- 
     0.9180

  • Profit – 47 Pips



 



DAILY
CHART


EURO USD



 



The Daily Chart
formed a bearish signal in the form of an Evening Star at the Resistance of the Pennant to
signal the start of the bearish break to Support. The Daily Candle was used
for entry with the Stop Loss placed above a high of the bearish ABC on the 4H
Chart that started the breakout. After a few days, the target was hit for a 140
Pip gain.



 



  • Entry – 1.3156

  • Stop –   1.3245

  • Limit- 
     1.3043

  • Profit – 140 Pips



 



DAILY CHART



4H CHART



TRADES 6 & 7



 



AUD USD & NZD USD



 



These two trades
took place at the start of the large bearish breakouts for both currency pairs.
The strong positive correlation between them provided added confirmation of the
direction.



 



AUD USD



 



The Aussie had
just broken the Support of its Pennant and provided a bearish signal for entry
in the form of Bearish Engulfing Candlestick Formation. The Stop Loss was
placed above the formation and the Limit set to parity for a 109-Pip gain.



 




  • Entry –  1.0108

  • Stop –   1.0226

  • Limit - 
     1.0000

  • Profit – 109 Pips



  



DAILY CHART



 


NZD USD



 

The Kiwi was
also providing traders with shorting opportunities during the large 600- Pip
breakout from its Pennant. In this trade, a Bearish Engulfing Candlestick
Formation provided the entry signal midway into the breakout.



 




  • Entry –   0.7875

  • Stop   –   0.7965

  • Limit -    0.7783

  • Profit –   92 Pips



 



DAILY CHART


TRADES 8 & 16



 



EURO USD & USD
CHF



 



EURO USD



 



This Euro trade
took place at the break of Support of the Daily Pennant as part of the large
800- Pip decline in the currency against the Dollar in May. The Daily Chart had
already formed a bearish candle to signal the start of the breakout and was
followed by a break of a range on the 30 Minute Chart. Entry took place at the
break of this range with the Stop Loss placed just inside of the range.



 



Entry –  1.2884



Stop -     1.2950



Limit -   1.2684



Profit -   201 Pips



 



 DAILY CHART


30 MINUTE CHART


USD CHF



 



Similar to the
Euro trade, this Swiss Franc trade was part of the large bullish breakout from
the Daily Pennant. Entry was at the break of a 30 Minute Pennant setup with the
Stop Loss placed below the Support of the Pennant. Given that the breakout on
the Daily Chart was headed to the ´Breakout Equivalent´ of the Pennant, the
profit target was set to just below this area for a 112-Pip gain.



 



Entry – 0.9587



Stop   - 
0.9527



Limit -  0.9700



Profit – 112 Pips



 



30 MINUTE CHART


DAILY CHART




CONCLUSION



 



Chart patterns
and signals such as the ones shown above can be seen across all currency pairs
and time frames and are very reliable ´indicators´ of market direction. They key
is to determine what is happening on the major time frames and trade the signals accordingly.