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Trading Tip 15: When to Fade a Correction *repeat of Trading Tip 1 with an
The key to any strategy is to be able to put it into practice in real time. We all know that trading rarely operates like a textbook so it is important to understand the logic behind a strategy and why it works so you will know when to employ it. I call this common sense approach and you will see why as I explain when you should fade a correction.
The Strategy
You will be hard-pressed to find this in a trading book or course as this trading tip comes from my many years of experience trading in the forex market.
Simply put it is better to fade a correction or counter-trend move that takes place early in a session (i.e. European or NY session) than one that occurs later in the day, One reason is the market is better able to absorb flows earlier in a session when there is full liquidity and participation. In other words, the trend is not likely to reverse unless key technical levels are taken out. Unless this occurs, buyers are likely to be found below the market in an uptrend and sellers are likely to step in above the market in a downtrend.
Here is the logic: Once a correction runs out of steam and the weak longs or shorts taken with the prevailing trend (i.e. longs in an uptrend or shorts in a downtrend) are squeezed out, the market has less capacity to absorb fresh buying or selling, as the case may be, with the existing trend. This is why you often see the market snap back in the direction of the trend after a correction runs out of steam. It is also why looking to fade an early in the session correction tends to be a high-odds trading strategy. .By fade I mean looking for levels to buy when an uptrend corrects lower or sell when the downtrend corrects higher. .
On the other hand, a retracement that occurs later in the day, especially in the NY session, is more difficult to fade as the market has less capacity to absorb the flows and fresh buyers or sellers are less likely to emerge. In this case, those looking to fade a correction should be prepared to hold the trade into the next trading day.
Summary:
Early in the session correction => Look to fade the move => Expect a snapback.
Late in the day retracements => harder to fade unless you plan to hold the position into the next trading day.
As with any trading pattern, the overall picture needs to be taken into account and whether key technical levels and/or indicators have been violated that would change the risk. As long as this does not occur, corrections that take place early in a session offer trading opportunities for the reasons explained above.
This is a strategy you can put into action as you understand the logic behind why and under what conditions it should work.
Here is a real-time illustration of when to fade a correction and when to avoid it.
ADDENDUM:
Why did XAUUSD surge higher?
The obvious reason is a run to safety ahead of the April 2 reciprocal tariff announcement.
The other reason is applying the same logic of when to fade a correction to longermterm charts,
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3 day retracement attempt.
• Shook out erak longs
• Left market with lkess abikity to absorb fresj buying,
• Rest is historyPlease feel free to contact me with any questions or comments.
Trading tip 11: Take a Pause and Review: Stops as They Drive the Forex Market
Let me start by saying the forex market is on a never-ending quest to run stops. Master this concept and you can learn to beat the market.
Look at this chart and tell me whether you woud have been able to identify in advance where stops werel ying.
Ad in this chart you can see where there were stops (i.e. low of the day)
While there are stops in all markets, it is easier to identify those in forex and use that knowledge to your advantage.
One reason is that the only rate feed used by everyone is in forex. The only difference one might see is in the spread quoted by a broker. Otherwise, everyone involved in forex are essentially looking at the same chart levels.
The more who look at a specific level the more significant it becomes.
It is therefore easier to identify where stops might be lying vs.CFDs, where rate feeds can vary between brokers, ecen those uswing thw same symbol.
In this tip, I am going to refer you to previous tips: (scroll down)
Trading Tip 3: Use stops and Live to Trade Another Day
Trading Tip 3A: Watch Out for Stops and Use Them to Your Advantage!
And to this video, which I suggest watching or watching again.
If you then have any quextions, postask away.
Trading Tip 10: Treat Forex Trading as Being in Episodes Not Trends
Most technical traders refer to momentum moves as trends. I prefer to look at the price moves as trading in episodes.
Like a streaming television show, an episode has a beginning and an end. It is no difference in trading except that is where the similarity ends.
The Forex Market trades in episode
The forex market trades in episodes on all time frames. The longer the time frame, the longer the episode is likely to be and vice versa.
What I mean by an episode is a period on a chart where a currency, for example, is trading in an uptrend, downtrend or in a consolidation range.
Don’t get caught trading an old episode
This is a critical concept to understand for if you are trading an old episode when a new episode has begun then you will find yourself on the wrong side of the market.
Anyone who has traded in the forex market, knows how fickle the price action can be. By getting in sync with the current episode, you can take advantage of this knowledge rather than having it take advantage of you.
With that said, many traders find themselves trading the old episode as it is often hard to switch gears, even when charts tell you it is time to do so. An example is looking to sell a rally after a currency has bottomed or looking to buy a currency after it has topped out.
What a difference a day makes
Look at this chart and ask yourself whether you would have been able to switch gears from an up episode to a down episode.
It is important to identify when a new episode begins and when it ends. It is also important to be aware of the broader trend as counter trend moves (e.g. retracements) tend to end more abruptly than moves with the overall trend.
So, the question you should be asking is how to stay one step ahead of the market rather than one step behind.
Think if it this way. Getting in sync with the current episode will find you swimming with the current rather than fighting it by swimming against it.
Why You Should Treat Forex Trading as Being in Episodes Not Trends
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Trading Tip 9: The Monday Effect
This is a trading pattern I doubt you will find elswhere
This is a term I coined to identify a forex trading pattern that I watch out for each week. I call it the Monday Effect and when it plays it, there are usually significant moves in the market. So, you need to be aware of the Monday Effect, which I reveal in the following article…
The Monday Effect occurs when the low or high for a currency is set on Monday and the market reverses direction in the latter part of the week (i.e. Thursday-Friday). This “Effect” can be especially strong when the low or high is set in early Far East trading but it can work no matter what time of day it occurs.
Whatever the reason, Monday Effects do work. I jot down the highs and lows each Monday and leave it next to my platform as the week winds on. If the high or low is broken or occurs on a non-Monday, I cross off the risk of this pattern for the week.
If the market starts to distance from the high or low, I raise my alert as you often see stops build from those underwater. Think about it. The farther a market moves from a Monday low/high for the week, the less likely to see major stops being run unless those levels are taken out, leaving the other side more exposed.
Note, the Monday Effect is like a setup and as with any setup, you look for signs that it will materialize into a trading pattern
Classic Monday Effect Week
..Trading Tip 8:A Warning to All Traders: Your Stop May Not Be a Stop
Anyone who has survived the forex trading wars and is still trading knows how important stops are to preserve capital and staying in the game.
As I noted in Use stops and Live to Trade Another Day
Stops are a necessary evil for any trader who wants to stay in the game. Some traders may try to avoid using stops but all it takes is one surprise headline and the game is over..
Stops are like an insurance policy to protect against a trade not working out. A stop is also protection against a surprise or an unexpected event
When a stop is not a stop
However, there are times when a stop is not a stop but an invitation to lose more than planned or even to see an account wiped out.
In the history of trading there are times when a currency, for example, gaps in a straight line and stops are executed far away from where they are placed. While not the norm, there are enough instances to have left the floor littered with blown accounts.
The one that comes to mind occurred on January 15, 2015 when the Swiss National Bank pulled its bid supporting EURCHF at 1.20 and what followed was a true black hole. No stop was safe and in fact many traders found themselves with negative margins when their positions were closed out, some as much as 20+% away from their stop level.. The range for that day was 1.2020-.8643 with most of the move occurring in minutes although there is a debate as to where the actual low was depending on the broker.
Source Quantitative Finance
While this was an extreme case to say the least it underscores when a stop is not a stop. Whether a stop is executed 50 pips, 100 pips, 200 pips or more from where it is placed, the results can be disastrous depending on the amount of leverage used
Time for traders to beware
This brings us to today’s market where attention is clearly focused on the results of the US election. As liquidity thins with trading driven by election headlines, even if you call the vote correctly you could easily get stopped out on a false start as news algos will rule the market. The issue is not getting stopped out but at what price.
A Warning to All Traders: Your Stop May Not Be a Stop
Now, to be clear, I am not suggesting to trade without a stop loss. Just be aware that the next few days will not be business as usual. There is a reason why implied options volatility has soared in currencies like the EURO and Mexican Peso to levels not seen since the 2016 U.S. presidential election.
So as a warning to all traders, especially those relatively new to the game, your stop may not be a stop as you are used to but don’t trade without one. Either reduce your leverage and widen your stop or sit back, enjoy the fireworks and look to trade once the dust settles.
Addendum: Feb 3, 2025
This USDCAD 5 minute chart is a good illustration of when a stop isn’t a stop in a news headline driven market.
Note, the last candle where stops were likely run on both sides.
Ask where stops were filled in this 5 minute candle.?
1.4584 => 1.4g24 _. 1.4520 => 1.4572 (close)
A Warning to All Traders: Your Stop May Not Be a Stop
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Trading Tip 7: Why You Should Drill Down on Your Charts
As I have noted many times, identifying the side to trade is more than half the battle in putting on successful trades. In this regard, one way to do this is by drilling down on your charts as I will explain in the following:
The term “drilling down” means starting at longer time frame charts and then moving down to shorter time frames to find opportunities to trade on what I call the “strong side” of the market.
In this article I will show how I drill down using my Amazing Trader (AT) charting algo
The process is designed to look for confirmation of a trend or episode on multiple time frames, and then find an AT ladder pattern to trade. Note, an AT ladder pattern is characterized by rising red lines (uptrend) or falling blue lines (downtrend)
Down AT Ladder Pattern: USDJPY 30 minite chart
Drilling down time frames:
Daily => 4 hour => 1 hour => 30 minute > 15 minute => 5 minute depending on what time frame you prefer to trade.
If you see AT ladders building in the same direction on say daily, 4 hour and 1 hour charts, you can assume there is an imbalance tilted in that direction
What the means for trading is that the institutional type traders who trade larger size and use longer term time frames will be looking to buy dips (ladder up) or sell blips (ladder down).
What this means for you is when multiple longer-term time frames confirm each other (I.e. AT ladders pointed in the same direction), you can identify the side to trade from, which is where big money traders are looking to do the same.
You then drill down time frames until you see an AT ladder pattern on the time frame you prefer to trade (e.g. 30, 15, 5 minute) and employ the ladder strategy to trade (explained in detail when you subscribe).
Here is an illustration from a video I created awhile ago with insights that have stood the test of time.
NOTE, you don’t trade blindly as you need to be aware of any levels, especially on longer term time frame charts, that would dampen or reverse the current episode.
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6: Trading Tip: Why the Hard Trade is Often the Right Trade
This is a great tip because this is one of the keys to trading. It is the most logical approach but in the heat of battle, often the most difficult to implement. Master this and you will see a difference in your trading.
I will explain why.
Many traders look to take the easy way out by looking to buy low or sell high but as I will show you, this is often the wrong way to trade. This is not a way to trade with the odds on your side and the way to become a successful trader.
Have you ever been sitting in front of your screen and all of a sudden a currency dips or spikes by 30-50 pips?
My gut reaction and I assume yours as well is to buy the dip or sell the rally hoping for a quick turn.
It is a gut reaction that I have to fight to this day, which is to take what looks like the easy trade that often turns out to be the wrong trade.
Have you ever had the right position, say in a downtrend, take your profits only to see the currency fall another 50 pips?
What do you do then?
Do you re-establish the short position 50 pips below where you just got out or look for a level to buy for no other reason that you cannot sell at the lower level?
Many traders look to do the latter, which is again the easy to enter but often the wrong side to trade.
In these cases, you may find out the hard (to find a good entry with a reasonable stop) trade is often the right trade.
What is the hard trade?
- The hard to find a good entry level trade
- The hard to find a trade with a good stop
- The hard for you to pull the trigger trade.
Markets rarely give you an ideal entry level and when in a trend, finding a good one may be even harder to find.
This lures many into buying or selling at what looks like a bargain price only to see it turn out to be a sucker bet.
Of course, there are exceptions but as a rule, the hard (to find a good entry) trade is more often the right trade.
Look at these charts. There was a nearly straight line move up with no obvious place to put a stop. The farther it moved from the low the harder it was to find an entry with a reasonable stop. The second chart shows a oine way move wiuth no retracement.
The easy trade would be to try and pick a top before there is a reason to do so.
This may sound simple but I believe it is one of the keys to trading. Master this and you will see a difference in your trading.In future articles we will discuss how to find an entry with the hard trade that in hindsight afterwards will in fact turn out to be the right trade.
Contact jay@localhost
4. Trading Tip: How to Use Retracements to Your Advantage
Retracements are a necessary evil. They are a market’s mechanism to shake out weak longs or shorts when positions get too over extended on one side or the other.’
See why retracements are important
Let’s say we are in a trend. The market gets overbought or oversold. It needs a shakeout. By shakeout I mean the market needs to squeeze out the weak hands, the weak shorts or weak longs before it can go after a new high or low….
…the currency (or any market) needs to do now is make a new retracement low or high (as the case may be) before buyers/sellers come in and resume the trend.
The point here is when you have a retracement and it stalls, beware of the move back in the direction of the overall trend as the market has less ability to absorb the flows than before the market corrected.
Textbook case: EURUSD Retracement
As this chart shows, it was a textbook case in the EURUSD, which plunged to a 1.0682 low after the U.S. election results. It then retraced sharply to 1.0833 but did not go far enough to break the downtrend. It then reversed in favor of the trend to break to a new low.
The key takeaway is when in a mature trend or one that has moved too far, too fast a retracement is necessary to setup a move to a new low or high. Keep this in mind when trading in a trend. View a retracement as a necessary evil that is needed before a trend can resume. BUT don’t ignore what charts are saying when a market retraces.
In this regard , keep an eye on longer term technical levels that would either keep the current trend intact or break a level that would change the technical picture. Following this logic will allow you to take advantage of retracements rather than letting them take advantage of you.
Addendum: November 13, 2024
To further prove the logic of what I discussed, See the following chart where a mini retracement that took out stops and weak short EURUSD positions was followed by a move down to a new low.
Trading Tip 3A: Watch Out for Stops and Use Them to Your Advantage!
This is one of my favorite forex trading tips and the basis for much of my trading.
The forex market is driven by a constant quest to run stops. This may be just my opinion but it is as close to fact as I can tell.
I cannot emphasize enough how important this is to understanding how the forex market works.
While I am not privy to the way all of the algos work, I assume some are programmed to be on a seek-and-destroy mission, which is to probe for stops.
I am not talking about your stop but stops in general as they tend to be bunched around the same levels.
Master this concept and it may change the way you look at trading.
The point is once you recognize that the forex market is on a never-ending quest to run stops, you can put the price action in perspective.
Think about it.
If you have a feel for where the market will look to run stops, it can give you a clue which side of the market is more at risk.
This is true across all time frames but especially true for intra-day trading. You do not need an order book to get a sense of where stops may be resting. It is a skill you can develop over time.
When stops are run
When you see a large wick in a candle or an outsized long bar on a chart, more times than not it is caused by a run-through stops.
On the other hand, when you see an obvious level for stops that trades and quickly reverse without a large wick or long bar, it may, and I emphasize the word “may,” indicate either there were no stops or that they were easily absorbed.
When there are no more stops to run
When there are no stops left to run, a currency will either reverse the direction of trade sideways in a narrowing range. This may explain why the market tends to die off during the US afternoon as there are no stops left nearby to go after.
This is not to suggest basing your trading on guessing where stops are resting and hoping that they get triggered.
However, adding this to your trading mix should help you assess the risk and the strong side of the market at any point in time.
Addendeum:
Look at this EURUSD chart from Jan 6, 2025 to see wherestops were run on a news headline.
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3. Trading Tip: Use stops and Live to Trade Another Day
Stops are a necessary evil for any trader who wants to stay in the game. Some traders may try to avoid using stops but all it takes is one surprise headline and the game is over.
I recall one of our old-time Global-View.com Forex Forum members saying something like this:
Use a stop and that is exactly what you will find the next morning when you are stopped out.Of course, he was being factious but the reality is that you are damned if you do and damned if you don’t use a stop. However, with that said, in the end, as the title of this article says, use a stop and you will live to trade another day.
Use Stops: Live to Trade Another Day
One of the major flaws that retail forex traders have is a reluctance to take a loss. Losing is part of the trading business and many traders, especially new ones, do not like to admit they are wrong. This may sound obvious but I have also seen experienced traders get stubborn, lose discipline, and override their stops.
This leads many to not use stops on the assumption (or hope) that the market will come back to them. This may work during range markets or consolidation but when the pattern changes to a trend or sharp move in one direction, those trading based on hope can see their accounts wiped out.
Don’t underestimate what I am saying. I have seen it happen too many times.
So, traders beware. Don’t think you can outlast the market, especially when in a leveraged trade as your pockets are not deep enough. Accept losses as a cost of doing business and hopefully your gains will exceed your losses. In any case, using stops to protect your capital means you can live to trade another day.
But there is something you can do about it by learning how to trade on the strong side of the market where your stop is less likely to get triggered. Stay tuned for another article where this will be discussed.
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