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EUR/USD Bottoming Pattern-Chart Analysis

EUR/USD Bottoming Pattern-Chart Analysis
April 26
03:36 2012

Here is a daily chart snapshot of the forex pair Euro and U.S. Dollar (Symbol: EUR/USD) spanning March 2011 to March 2012.  This chart includes several technical indicators:

  • 8 period simple moving average (blue line)
  • 20 period simple moving average (red line)
  • 200 period simple moving average (green line)
  • Bollinger Bands (purple lines)
  • Relative Strength Index (RSI) (dotted line)
  • Volume (dark blue bars)

The Walkthrough

After opening a new chart, a trader should first asses the type of trend. The trend can either be up, down, or in a range. Determining the type of down trend will help the trader avoid risk and maximize profit. In the above chart of the EUR/USD the overall pattern is a downtrend.

After understanding the type of trend the next step would be to check for the strength of the trend.

On this chart we see that the down trend is relatively week and has a sideways component to the trend. Meaning the market is in a down trend but pulls back in a sideways range. So the trader should avoid entering positions during pullbacks and stick to trading with the trend to prevent racking up transaction fees.

The fees may be small at the outset, ranging from 5 to 10 US dollars, but these can add up rather quickly when intraday trading a chart that has a weak trend.

One way to take advantage of this trading opportunity is to wait until the downtrend is over and look for a key reversal area. But be careful as this may require more patience from the trader since they will have to wait until the entire trend is over before entering a trade in the new direction.

Looking closer, we see the down trend comes to an end making a new low, highlighted in the orange circle. At this point, even more patience is required as the trader is looking for the best entry point.

Good entry should mean that the trader can use a small stop loss as the downtrend is over and the market should begin to turn.

If a trader entered at the first yellow shaded area the next point of exit would be at the second orange circle where the market finds support. Another point of exit would be at the 200 period simple moving average as this is typically an area of resistance.

Keep in mind that because this is a daily chart time frame, the trader will have to swing trade. If the time frame is bigger, than the trader must consider holding onto positions longer for the trade to reach its full profit potential.

The Lesson

These are small steps that will help the trader see maximum profits and very little losses. But the key is to avoid entering a trade if the trend is not strong and instead enter as the trend is bottoming out.

This is usually signaled by the market producing a major reversal candle, the price coming into major support or resistance, or the price making new lows or new highs.

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