After starting off the year being voted most boring pair to trade for Jan. and Feb., the EURGBP has woken up out of its slumber by the bulls on parade which today have taken out the yearly high and key resistance at .8407 with a closing print of .8456.  This is a strong breakout bar with good clearing distance suggesting this is the Real McCoy (at least for now).

Bulls can watch for a possible breakout-retest of either the daily resistance level at .8407 as mentioned above, or take a look at the intraday 1hr chart which offered a slightly different picture showing a pause right around .8433 which was a SH in the breakout move, caused a brief consolidation, the another breakout bar followed by a with trend pinbar rejecting off this level so intraday traders can look for a long here. targeting just shy of .8500 which we believe is the next upside resistance.

Gold – Intraday Pinbar Sparks Breakout

After starting the day consolidating towards yesterday’s highs and just below the key resistance at $1762.90, Gold was stuck in a bull flag but then created a great intraday price action setup to get long and participate in the breakout by forming a pinbar which actually gave a false break trapping intraday traders short on the break of the flag, then rocketing up $25 in a matter of hours.  Many of our price action traders caught this setup for an almost 4:1 R:R ratio exiting on the close of the bar and have now exited the trade.

In terms of how to get in now, we are looking for a breakout-pullback to the $1762.90 level previously mentioned but with price hanging around the highs suggests very little profit taking thus likely higher prices.

If you found the price action commentary and insights useful, please make sure to click the ‘Like’ button at the top of the page.

For those of you looking to trade intraday price action, feel free to check out our Advanced Price Action Course where I teach rule-based systems and pattern recognition techniques for trading price action.

Also make sure to check out our most recent article on Price Action Pattern Recognition.

Silver has been stuck in a very contrived range since Jan. 26th confined within a $1.50 range for a long time.  However, on Thursday last week a Pinbar False Break formed off the range low which was actually ideal, as it broke the range low, but then created a false break and eventually a pinbar.

This trapped intraday traders who went short on the break so to cover their shorts, they had to exit via a buy order.  The pair climbed just above $33.50, then pulled back to the open of the pinbar which gave a great trigger.  Many of my price action traders got in on this one having less than a $.50 stop and an almost 2.5:1 R:R ratio with the range high just getting hit so well done to them.

Price action has been impulsive on this latest run up, so look for a breakout-retest setup should the highs be broken strongly.  

AUDUSD – Possible Breakout – Retest

Since the 9th of this month, the Aussie has been playing ping pong between 1.0815 and 1.0648 with piercings beyond this level, but no closes.  The price action rejections off the north side of these two levels have been much more violent and consistent but the longs off the lower end of the range haven’t been slouches either, just not as impulsive.

As we speak, price is possibly breaking out of the range so traders should watch for a breakout-retest setup. Should we get a really bearish close here, especially below the range support, then we can see price unwinding to 1.0573 in a hurry.  To be honest, we would be impressed if this level holds as the price action has been quite impulsive with only one blue candle in the last 8, so only 4hrs of buying in the last 32 which leans toward a break of the range.  But there may be enough buyers there to hold the line.

Should the buyers hold the line, then watch for a possible pinbar setup after the close of the candle and look to target 1.0750 and 1.0800 for a nice 3:1 R:R play.

ANSWERS TO YESTERDAYS POST

As promised, I would post the next 3 bars in the chart, along with the 4 patterns I spotted from yesterday’s chart.  Many of you came up with some nice responses and spotted some really good patterns in the price action so well done to all.

Here is the chart below again to refresh your memory with the last candle shown.

Now that you have seen the chart again above, here are the four patterns I spotted along with the strategy I formed form these patterns.

1)  Every time a bull candle forms, the following candle is a bear candle
2) For the last 3 bull candles that formed, none of them took out the prior bear candles high
3) Out of all the 6 bull candles that formed, only once did the following bear candle break the high of the prior bull candle (1 did technically by a half a pip)
4) Using the information above, if I had sold on the open of the first candle after a bull candle, I could have placed a stop 3pips above the high of the prior bull candle, and targeted a 3:1 Reward to Risk Ratio every time which would have played out.

Strategy: Based on the four patterns above, on the close of this bull candle, I will short on open, and since the bull candle has not taken out the prior candles high, I will place my stop 3pips above the bull candles high, with a 3x target.

Here is how it played out in my simulator

This was a trade I took in my trade simulator over the weekend as I was doing practice recognizing price action patterns and behaviors.  It is very easy to get caught up in the patterns we already trade and this can lead to us often forgetting to look for new patterns, or spot behaviors that repeat themselves. I had one system setup available, but because I wanted to hunt for other possibilities, I looked for patterns which gave me an opportunity to trade this better than my system had allowed.

By constantly looking for new patterns, we will notice things we never saw before and this can lead to new insights and abilities in reading price action so hopefully this makes sense and you found some benefit in this.

One more small point.  Imagine trading a 5min chart or less.  Ask yourself honestly, would you have had time to spot this, process all the information and data, and been able to form a strategy around it?  One of you came up with a pretty close scenario, but nobody found a tighter stop, nor was even able to isolate the other patterns.

I’ve been doing this a long time, and am constantly analyzing price action for patterns, not just systems, but behaviors that are happening in the market real time which can often afford me unique opportunities outside my systems entries.

My guess is most people would not have been able to spot this trading real time, in a live market if they were trading off of a 5min, 1min or tick chart, let alone formed a strategy based on this.  For the really experienced, possibly and probably, but if you are still in the learning process, just think about this, and how much more powerful your trading would be if you had the time to spot these unique opportunities, that can come up on a daily basis.

Food for thought, but I hope you enjoyed this exercise in pattern recognition,  and I thank you all for participating.

If you found the price action commentary and insights useful, please make sure to click the ‘Like’ button at the top of the page. 

For those of you looking to trade intraday price action, feel free to check out our Advanced Price Action Course where I teach rule-based systems and pattern recognition techniques for trading price action.

Although this has its benefits to spotting key formations in the market which can lead to good price action setups, we can actually get stuck into a routine of just looking for patterns with relatively fixed variables. This can actually hinder our overall pattern recognition skills to spot newer patterns and this is one of the most important skill sets of a trader – pattern recognition.

I have talked about methods to build this pattern recognition ability, such as brain gyms, like Lumosity as a way to build up the neural connections and spot patterns more easily in the market as one method. Another is going back and looking at historical price action, and in I thought this would be a good exercise for you to work on a particular chart I am writing about in my book.

The Exercise

First off, you will need a watch or a something that keeps track of time as you will want to time yourself on this.  If your phone has it, set the stopwatch feature whereby you hit go, and it starts counting the time.  You will also need either a sheet of paper and pen, or a word document open to type your answers.

What you are going to do is for the next several minutes (as much as you need) look at the chart below and tell me what patterns you see in the market.  Not what kind of bars you see, (pinbar, inside bar, etc.) as that does not take too much skill and is something that can be easily learned.  Practicing something that is easily learned does not breed new neural connections which is what we want to do here.

What you are looking for is patterns in the price action behavior, what do you notice about the price action, what patterns are you seeing that repeat themselves.  There are actual behaviors in this chart you are about to see that repeat themselves.  This is what you are looking for – patterns in the behavior.  They can be of any kind, but ideally, the ones you find that are most useful for trading.

Remember, if something happens once – its an occurrence.  If it happens twice – its a pattern. If it happens three times, its a program derived from minimally one pattern.  So what you are looking for is anything that repeats itself 2x or more.  Thus, take as much time as you need.

Write down or type all the patterns you can find in this chart.  I am going to cover up the name of the pair, and the dates, but I will tell you what the time frame (1hr chart).  There is one line on the chart which is a 20ema which can be used if you so wish in your discoveries.

Keep in mind, I have gone back anytime in the last 30yrs to find this chart, so even though the prices may seem like they offer a hint, there are a lot more possibilities of pairs that had these prices so try not to think about the pair.  You are just looking for patterns in the price action behavior.

With that being said, get your stopwatch, pen/paper or word document open.  As soon as you begin, start your stopwatch and begin to write or type as many patterns as you can see.  Once you are done, then mark down the time as you will need this later.

Ready?  Begin with the chart below.

Ok, now that you are done, make sure to write down the time and how long it took you to find all the patterns that you did.

The next step is to look at all the patterns and price action behaviors, then come up with a few strategies based on what you noticed.  This is because I am going to show you the very next candle in the chart, and if you really did a good job at isolating some key patterns, you probably have at least one strategy for the next candle (regardless of what it is).

Once you see the following chart with the next candle in this series, the go back to your list of strategies, and decide what you think is the most appropriate for the new candle.  Make sure you have written all the rules for the strategy, such as your entry, stop and limit.  Position sizing is not important – just that you can isolate a pattern, make a trading strategy off this, then apply it on the next candle.

Ok, so you should have all your strategies and rules in place for taking (or not taking) a trade on the next candle, which you will see in the chart below.

So this is the chart one bar later.  To make it a little easier for you to make a decision, I have decided to provide the data on the last blue candle with the black dot above it which has the following pieces of data;

Open: .8275
High: .8285
Low: .8260
Close: .8280

One more piece of data, the low on the red candle prior was .8259.

So armed with all that data, along with all the patterns you recognized in the price action, and with the strategies you came up with, take a moment to figure out what is the best strategy to trade this blue candle. You can either decide to;

a) trade this blue candle
or
b) not trade this blue candle

If you decide to do A and trade this blue candle, then what you are going to do is decide what is the best strategy to trade it.  This means having all the rules for entry, along with placing your stop and limit.  Now here is the kicker;
Whatever strategy you use, has to be out of the position in 3 candles.

Why?  

Because these are the last 3 candles for the week, and the market will close for the weekend which is also a holiday weekend and there is a G20 meeting which will have a major impact on the market.

So, that is the challenge.  Come up with a strategy that you think is best to trade this pair now that the blue candle is closed.  You have to be out of it in three candles so you can be out for the holiday weekend, hopefully in profit with a smile on your face.

With that being said, I am going to post the next three candles tomorrow on the following page around this same time;
http://2ndskiesforex.com/strategies-for-forex-trading/forex-signals/

You will want to look for the post which will be called ‘Forex Trade Signals and Setups Feb. 21st‘

In this post I will provide the chart with the next three candles, and then you can compare how your strategy did and share with me what your strategy was, rules for entry, stop and limit, and what the final result was.

What I am going to do is share with you my strategy, what patterns I isolated to come up with it, and how it played out.  I will give you a few details ahead of time, but want to explain the background to this challenge:

I came to this chart as I was doing some practice through my charting program, which will take any pair, hide the dates, the actual pair, change the numbers on the prices, but will correlate them to the real historical price at that point in time.

Then what it does is challenge you to trade that chart in that point in time bar by bar.  If you want to trade at the end of the bar, you do, if not, you don’t.  It does a very good job at giving you real practice in reading price action because you are trading bars as they come in real time, just like real trading.

Sure, its not real money, but the point is to learn to find patterns in the price action which is a great exercise to do, especially when the market is closed on the weekends.

Now here are some points I’d like to share;
1)  When I started looking at this chart, in < 1 min, I was able to isolate 4 key patterns, even though there were many more
2) from these 4 key patterns, in < 1 min, I was able to come up with a trading strategy for the next bar if it had certain characteristics
3) with this new blue bar, I was able to trade it having a R:R ratio of 3:1 based on the strategy I came up with

And I will leave you with that for now.  So make sure to come back tomorrow to the link I shared above, to see the next 3 bars, and how your strategy did.  Then make sure to leave a comment how your strategy did, what was the entry, stop and limit, or if you didn’t trade at all.

Remember, there are no points for cheating, so only honesty here.  It really does nothing for your trading process if you are;
a) not honest, and
b) only try to inflate your ego by looking cool on this post

Remember, in a week or two from now, this post will rarely be seen, and nobody will really care how you did so skip the ego part of trying to look cool, and just be honest with what you did and how it played out.

The whole point of this is to be an exercise whereby you;
a) test your pattern recognition skills
b) see how quickly you can come up with the patterns
c) see how quickly you can formulate a strategy (or strategies) based on the patterns you noticed in the price action

This is about as close to what you are doing in real trading – spotting patterns, finding opportunities, and trading the right edge of the charts as they come to you, bar by bar.  You have to make decisions based on what you see and what you think will happen.

But in reality, nobody knows what will happen with the next bar – and that is the friction we all love (or dislike) in trading.  Its the mystery, of what will come next, of not knowing, but seeing if we can find the answer ahead of time by being a detective and looking at all the available clues.  Some of us are closer to Sherlock Holmes, and others are closer to Inspector Clouseau.
Regardless of where you are at, the mind has a neuro-plasticity to it which means you can learn to be an expert in spotting patterns and key price action clues from charts just like these. In an article I will write on this Thursday, I will discuss some key things you can do to improve your learning process, so you can enhance your pattern recognition skills, along with tailoring your educational process to help accelerate your learning curve to trade profitably and successfully.

I look forward to your responses tomorrow.

Kind Regards,
Chris Capre
Twitter; 2ndSkiesForex

If you liked this article, make sure to click the ‘Like’ button at the top of this article

And also check out my latest article called Ode to the 4hr Charts whereby I share an entire years trading report of one my students and how they made 110% in year, just from learning two of my strategies.

After consolidating for the first few hours of the London open, the Cable in a matter of a few hours shot up almost 150pips in early NY trading.  This is the first time it has closed above the 20ema on the 4hr time frame since Feb. 13th, where it shortly after closed below and resumed the downtrend as noted in the chart below.

This time however, we think the pair has other plans as the abnormally large bullish candle likely took out stops from the bears that were riding this trend, at the very minimum caused profit taking for those that shorted near the recent highs at 1.5915.  In fact, I’d guess any sellers at that price have likely closed their shorts based on what they saw in that extremely large candle.

So what does this mean for now?  

Well first off, take a look at the intraday 3min time frame chart below.  Notice once price got started, it never really gave up control to the sellers.  We know this since price action has closed so close to the high and remained there, telling us the bulls have done very little profit taking and plan on taking it higher since they have not left the market yet.

Also, price is hovering around the R3 Pivot (last pivot for the day).  This is generally touched only 6% of the time, and the fact its not only touched it, but hovering there represents the extremity of this move.  There were several entries to get into this move, even if you missed the initial punch.

Take a look at the breakout-pullback of the swing high from the initial move marked on the chart.  Notice the breakout-bar had good clearing distance but pulled right back to where the swing point was.  This was a great setup to get back in long and many of our intraday price action traders got into this with a very tiny stop targeting the R3 pivot making over +40pips in a couple of hours so hopefully you did the same.

With that being said, we expect higher prices, but warn a little caution about the weekend coming and position paring.  We would not want to be holding longs into the weekend, and would want to be out before the London close.  Aggressive bulls can look for intraday longs at 1.5780-ish or pullbacks to 1.5762, looking for a retest of the highs at 1.5812 and an eventual breakout, targeting the 1.5850 area.

For those of you looking to trade price action, visit our Advanced Price Action Course where we teach rule-based systems for trading Price Action, offer lifetime membership, trader forum access, and a private follow up session with me.

If you found the price action commentary and insights useful, please make sure to click the ‘Like’ button at the top of the page.

Did you know about our contest for our 5-year Anniversary?  Visit the Competition Page to learn how you can get some great prizes.

110% gain for 2011
124 Trades, 74 winners, 50 Losses
59.67% Accuracy Rate
Largest Win: $14,360
Largest Loss: $8,180
Max Win = 43% larger than Max Loss
Max Consec. Wins: 16
Max Consec. Losses: 6
Max Consec. Win Streak 2.66x Larger Than Max. Consec. Loss Streak
Largest Trading Position: 1M

Overall, this could make the grade for a professional trader.  In fact, I know many that did worse (a lot worse) then him and would be happy with his results.

The 4hr Charts

There has been a lot of talk and garbage being spoken about trading off the 4hr charts, how its trading as a hobby, how you’ll only be an amateur, how if you want to be a professional trader, you need to trade off the 1m, 5min, 15m, smaller time frames.  Ridiculous, but we are going to demonstrate why.

I’ve been wanting to show people the power of trading the 4hr time frames for a while. Although I have many students doing it, nobody is solely trading off the 4hr. They usually add the daily, or 1hr and have a mix of time frames and systems.  In comes Tony.

Do you remember Tony?  I wrote about him in the Pyramid of Trading article whereby I talked about him back in early Oct. At that time he was up 76%, and ended the year up 110%. Meaning, he gained another 34% in the last three months – impressive to say the least.

Tony had one thing going for him which was the best edge one could have - discipline.  Tony had very little experience, no business/finance degree, just a desire to learn, patience and discipline.  He came to me in late 2009 wanting to take some private mentoring sessions.

I taught him less than a handful of systems which he learned well and practiced on in 2010.  By the end of the year, he settled on his two favorites:
Price Action
& my Shadow System.

He learned his risk parameters, his style, how he wanted to trade, what was the best pair for him, then went for it.  He settled on trading the AUDUSD only on the 4hr time frames using those two (Price Action & the Shadow System).

I am going to show you his entire trading report, which averages about 10-12 trades a month with the max being 16 and the least being about 8.  You already have the stats above so lets show you the entire trade history for 2011.  I have covered his personal details and acct number to protect his privacy, but all the trading is there which you can see below.

Screenshot 1

Screenshot 2

Screenshot 3

Screenshot 4

Screenshot 5

Screenshot 6

So there you have it, an entire year of trading.  To recap his performance;
110% gain for 2011
124 Trades, 74 winners, 50 Losses
59.67% Accuracy Rate
Largest Win: $14,360
Largest Loss: $8,180
Max Win = 43% larger than Max Loss
Max Consec. Wins: 16
Max Consec. Losses: 6
Largest Trading Position: 1M 

This should finally put to rest the ridiculous talk and idea you only have to trade one time frame or smaller time frames to be a professional or highly successful trader.

All of this is thanks to Tony for sharing his results with me.  He traded only on the 4hr time frame for an entire year.  A lot of his trades were done in a day, but many went a few days, with several going 4-6 days holding time.  All he traded was Price Action and my Shadow System on one pair for an entire year. Disciplined, patient, and highly profitable.

How many educators show results from their students, especially of this caliber?  I believe I am one of the few, and Tony will not be the last. Maybe the next person is you – hopefully it is.

To also separate myself and end the debate, at the end of this year, I’ll show you audited results from an account I opened up just to demonstrate I am not just a good teacher, but a good trader as well.  I will publish the audited results from a professional accounting firm, on my site so you can all see I am the real deal.

I have no idea how i’ll end up for the year, but whatever it is, you will see it.  Even though my fund has an 8+yr audited track record (which should be proof enough), this will settle it, as it will only be my trading, only me pushing buttons, not anyone from my trading team, or any account from my fund. Just my own individual account opened just for this.  This should end the debate.  Hopefully then I can stop answering questions about my legitimacy, focus on trading, and teaching people who are serious about learning to trade successfully.

There are 3 things I live and breathe every day and have been for over the last 10yrs;
Yoga
Meditation
Forex Trading

I make my living and have been for almost a decade from trading.  I study it every day and every moment I can get a chance.  The only thing that is right up there with the three things I listed above is Teaching People to Become Successful Traders.  I’ve seen every kind of trader you can imagine (from time frame to profitability), and there is no one person who holds the monopoly on the truth of trading and the learning process.

And to the rest of you with open minds and a serious desire to learn, this demonstrates you can be a profitable and highly successful trader, regardless of your time frame, system or background.  With the right effort, discipline, and patience, you can be a profitable and successful trader as well.

Ode to the 4hr Charts and profitable trading.

Kind Regards,
Chris Capre
2ndSkiesForex.com
Twitter; 2ndSkiesForex

After posting an impressive 600+pip gain for the year, the pair has posted its first 4 out of 5 day bear close along with its first touch of the daily 20ema in over a month.  What should be noticed is how price rejected off the daily 20ema almost to the pip, then closed up 60+pips off the lows.  This makes the rejection off the 20ema larger in price action then the selling in the body as can be seen in the chart below.

Looking at the 4hr chart below, one can see a very long pinbar which created a false break of the prior swing lows  and gravity point we discussed yesterday. Many of our price action traders got in on this short hitting the target making close to a 100pips on the day so hopefully you profited from this as well.

What should be noted now is the pinbar false break likely trapped some traders on the break of the lows while also likely means medium term traders bought off the daily 20ema.  This offers traders a good play by taking a small pullback into the 1.0660 – 1.0640 region with stops below the pinbar low, while targeting minimally the SH (Swing High) which offers a good 2.5:1 R:R play or the MSH (Major Swing High) which offers more than a 3.25:1 R:R play for the bulls.  Bears can wait for pullbacks to the MSH with tight stops above targeting the SH labeled in the chart and the daily 20ema which offers a fantastic 6.25:1 R:R play.

For those of you looking to trade intraday price action, visit our Advanced Price Action Course where we teach rule-based systems for trading Price Action.

If you found the price action commentary and insights useful, please make sure to click the ‘Like’ button at the top of the page.

Did you know about our contest for our 5-year Anniversary?  Visit the Competition Page to learn how you can get some great prizes.

After starting a pretty strong uptrend back on the 17th of Jan., price was hovering around 1.2650 before it launched up almost 700pips in less than a month gaining 66% of those days.  Price then consolidated between 1.3040-ish and 1.3224 for 7 days but then broke out with a vigor suggesting likely sustained break which can be seen in the chart below.

But then things got a little peculiar.  First off, the breakout bar although strong and closed near the high, had very little clearing distance suggesting it may not have taken out the stops above nor given the market confidence it had done enough damage to the bears.  Then, it formed a doji as the first daily candle after the breakout which is generally not the best breakout continuation signal.  The following candle was almost a doji with a slightly larger body, but nothing too impressive.  So where did all those bulls go from the big breakout bar? (See chart below)

Price action then sold off  to close last week suggesting the breakout bar was actually an exhaustion bar and there was nothing left in this upmove.  With the Greek tragedy coming to a temporary conclusion this weekend via austerity measures (read kicking the can down the road into a cul-de-sac), one would think this would be bullish EUR vs. the USD.

Today I think was the kicker with the inverted pinbar also being an inside bar (see chart below).

Generally with such a strong down bar from friday, being followed by a combination inverted pinbar / inside bar for Monday’s close, and pulling back into the prior range/consolidation, i’m expecting this to break Friday’s lows, minimally touch the daily 20ema where it may run into some buyers.  But should this fail to hold, then we will likely see a move back to 1.3041 and the first daily close below the 20ema since Jan. 18th.

Brave or hardy bulls can look for price action triggers off the 20ema, but ask yourself if you really feel inspired to buy in the middle of a prior range which price just broke out of only to pull back into.  Bears on the other hand can wait for a LH (lower high) to short near the 1.3280/3300 barrier with stops above the recent SH (swing highs) which would definitely confirm minimally a consolidation since the bulls cannot take out the prior highs and thus a likely balance between both sides with neither having massive control.  This would naturally lend to a pullback to the 20ema and aforementioned 1.3041 range lows.

AUDUSD – Short Term Suggests Pullback to Key Level

After maintaining an impressive run to start the year having every daily close above the 20ema (32 in total) and climbing almost 800pips off the yearly lows, the AUDUSD closed last week with its largest open to close loss for the entire year after two prior bear closes.  This likely caused some profit taking in the medium and longer term bulls part of this impressive run.

What we should be looking at is the last 4 daily candles (see chart below), which are bear doji, almost bear doji but 2nd bear close, followed by strong bear close, and yesterday being a bull close but an inside bar with a rejection near the prior daily high.  The back to back doji-like closes were nothing, but the strong bear close to end last week definitely was the bears communicating they had more confidence and came in with greater force.  The temporary bullish EURO news hurt the USD and helped AUD climb yesterday, but the rejection at the prior daily highs might be a tell-tale sign the bears are still out there willing to sell higher prices.

With that being said, price has closed in the middle of friday’s close and also in the middle of the inside bar (not the best location for a directional play).  Drilling down to the 4hr chart below, we can see the impulsive price action selling from friday with the 5 consecutive bear candles, followed by a SDB (shortened double bottom) at 1.0639.  The fact that the bottom for both those candles were rejection lows off the exact same level communicates this will likely be a gravity point for prices to fall to in the near term.

What is also interesting to note is how on the 1hr we can see this same SDB (shortened double bottom) pattern on back to back candles.  Considering the same pattern was spotted on the 4hr formation, one would expect these bottoms to be a little more spread out on a lower time compression like the 1hr. However, they were back to back so the turn-around was quite rapid.  Notice the pinbar as the 2nd candle in this SDB formation which then produced a HL (Higher Low) that started the impressive 130+pip run up.

With that being said, 1.0639 is clearly a gravity point so should price fall and you already be short, we expect prices to reach this level or just shy of it (perhaps prior HL point 1).  Should this gravity point be broken with vigor, then we could see a strong unwinding of the pair below 1.0600.

If you found the price action commentary and insights useful, please make sure to click the ‘Like’ button at the top of the page. 

For those of you looking to trade intraday price action, visit our Advanced Price Action Course where we teach rule-based systems for trading Price Action.

Also make sure to check out our article on Your Brain, Trading and Finding ‘The Zone’

Ever heard of the name Anders Ericsson?  Perhaps not, but i’m guessing you heard of the name Malcolm Gladwell, author of the bestselling books Blink and Outliers.  Gladwell in his last book Outliers was trying to figure out what separates highly successful people from the rest in any field.  In it, he discussed the 10k hour rule, which was actually from the research of Anders Ericsson at Florida State University.

Anders conducted a critical research project whereby he found it normally takes 10,000 hours of practice at a skill to become an expert in any discipline.  During this time, your central nervous system will string together new circuits and connections that eventually give you the tools and abilities to execute your skill with mastery.  Ironically, he also found it was done without a conscious consideration of the action – the athlete or performer was just doing.

What he discovered in his research was a Zen-like intense concentration, whereby the experts completely focused on the activity.  It was in these moments that the experts in their field were achieving peak performance by entering a state called ‘the flow‘, originally characterized by Csikszentmihalyi in the 1970′s.

10,000hrs to Become an Expert Trader? 

I know, many of you are saying, ‘10,000 hours would take me years, perhaps a decade to get to that‘.  In response to that, I have a few questions;
-What if you could accelerate your learning curve and learn how to enter that state before 10,000 hours?
-What if you could enter that state every day while trading?
-What do you think this would do to your trading?
-Would you put in the effort to develop this?  

We are going to talk about what you can do to leap-frog the 10,000hr process in this article and take years of your learning curve.

Before we talk about what you need to do to enter the state of flow and effortless concentration, we are going to discuss the four key features that characterize the state of flow.  They are;

1) An intense and focused absorption that makes you lose all sense of time

2) Autotelicity – a sense that the activity you are engaging in is rewarding for its own sake

3) The ‘Sweet Spot’ – this is where the task at hand in relationship to your skills are perfectly matched

4) Automaticity – the ability to do something automatically

Let’s get into each one and see how we can relate them to trading.  Then we will talk about what you can do to shortcut this process and decrease the number of hours you need to be studying charts to become an expert in reading the charts.

#1 An Intense and Focused Absorption

One would almost think this would be enough to enter that flow, but all four are required to enter this zen-like state in trading.  If you train in yoga and meditation consistently day in day out, then this will come a lot more naturally because you are already practicing the craft of focus and concentration.  But if you are not, many things will come into play and affect your concentration.

For example;
-Did you have an argument with your partner, spouse or child lately?
-Did you completely process everything from yesterday and are totally present with what you are doing today?
-Did you wake up and properly stimulate your central nervous system to be prepared for your trading day?
-Are you still focused on a recent loss or mistake?
-Did you drink coffee earlier that morning, or alcohol the night before?
-Are you taking phone calls or talking with others while trading?
-Are you checking email or watching TV during the trading session?  

If you answered yes to any of these, it’s highly likely your mind is not 100% absorbed in the markets as they will all inhibit your ability to concentrate.

But lets say you have not had any of these come up.  Do you really think you are totally focused and absorbed in concentration?  If so, then take a simple test:

Sit in a  chair with your spine upright, in a very relaxed and quiet room, no music or tv or anything going on, just you sitting in a chair with your eyes gently focused forward, and try to concentrate solely on your breath. Just follow the inhales and exhales completely.  Try and see if you can follow 20 breaths (one inhale and exhale = one breath) without having a single thought other than your breath.  Try and see if you can follow them so perfectly you are never once taken off the focus of your breath, that you are so immersed in the experience of your breath, nothing diverts your attention.

Go ahead and try and let me know how far you got (take a moment here).

Finished?  How did you do?

I would be willing to bet most of you did not get past 5 breaths.  Yep, 5 breaths without;
a thought about your experience
without moving to scratch an itch
or have a question about whether you are doing it right
about whether you can do it or not
without hearing that song in your head
or thinking about the one thing that person said which bothered you
or that one thing you got to do later today
or that bill you have to pay
or the money you need
or whatever…

In fact, I’d be willing to bet many of you did not even make it to 20 without losing count, let alone make it to 5 breaths, perhaps even 2 or 3.

Remember, all you were asked to do is focus on your breath (inhales and exhales) solely for 20 breaths.

Now ask yourself the following questions;
-If you cannot focus on your breath while sitting in a quiet room by yourself with no noise or stimulation going on, how can you be absorbed or concentrated on the markets?
-How could you be totally focused and not let those emotions interfere with your trading?  
-If you could not stop the radio of your mind and its constant stream of thinking while sitting still trying to do one task, how could you spot the subtleties in the price action communicating to you the market is going to turn or make a big move?  

Of all the 4 characteristics, the first one is the hardest.  The most common misconception of the whole 10,000hr rule is not just to absorb enough information so you become a master.  It’s to develop the concentration needed, along with the repetition of a task that leads to confidence and allows one to relax their mind.  All of this is to develop that zen-like absorption and penetrating concentration to achieve peak performance.

But what if you practiced something which solely focused on developing that concentration?  What if you practiced yoga, meditation, or any activity which developed this skill set?  Wouldn’t that cut down the time you needed since your concentration and awareness would be sharper?

Someone recently shared a great Abraham Lincoln quote where he said, ‘If I have 8hrs to chop down a tree, I’m spending 6hrs sharpening my axe‘.

If the markets are a tree, your mind is the axe, so sharpening this tool will help you reach your goal faster than anything else.  In fact, awareness, focus and concentration are the three things which will accelerate any skill, task or endeavor you engage in.  They will reveal information faster to you, help you take in more, focus on the key things and yield insight more naturally.  To learn a few techniques which can help you with this, click on my article Building A Successful Trading Mentality.

#2 Autotelicity

This refers to doing something for its intrinsic value, and not so much for the external rewards it may provide.  For example, do you play football so you can become a multi-millionaire, or do you play the game because you love it so much, you’d play it for free if you had all you needed to make a living?  Simply put, if one pursues an action for intrinsic reasons, then one’s actions are intrinsically valuable because one is motivated to pursue the action as its own means to an end, or for its own enjoyment – not for what it brings.

To put this in a question – do you trade because you absolutely love it, that you really want to learn it inside and out?  Or do you trade to become financially abundant and independent – who doesn’t?  Therefore, the latter is an inferior motivation since it is something you’d want naturally (financial independence).  Are you really wanting to be a professional trader, or are you trying to escape your financial situation and state of existence?  The former is ideal, the later is less helpful, but still can be used.

Doing it for the latter reasons will translate into the experience, that when you run into obstacles or excuses why you did (or did not do something), you will accept those excuses as reality instead of doing something to change them.

It will mean your motivation for doing something is not the love of it, but hating (or disliking) something in your life you want to change, avoid or make sure doesn’t happen.

Ask yourself which of these two is why you are wanting to trade.  Are you doing it because you really believe deep down inside you can do this, that you have to do this, regardless if you are successful or not?  Think about which of the two you will put more focus, effort and attention to?  Then ask yourself which of the two you are.  Nothing will be more important than being honest with yourself here.  If you find in all honesty the latter is your answer, you can still become successful, but either a) you will have to trade with that intention in your mind (via aversion to your current financial state) or b) your motivation will have to evolve into an more subtle appreciation for trading.

#3 The ‘Sweet Spot’

This comes out of the work by Csikszentmihalyi where he discovered a person was most likely to enter this state of ‘flow’ and masterful play if the task at hand was challenging enough in direct relation to their abilities.  So, if the task is too hard for your current level, then it will be mentally frustrating and you will get emotional during the experience.  If it is too easy, you will get bored and not stimulate your brain and potential fully.

This is actually critical in terms of your trading.  If you are an absolute beginner, I do not recommend live trading, nor trading ultra short time frames (less than 15mins).  Why?  Because you will need to read subtle price action clues with very little time, make decisions really fast, have precision in your execution, while having little or no room for error.  Sound like something a beginner should start with in any field or craft?  I didn’t think so.  Do you start learning how to be a professional archer by shooting at 18meters, 70meters, or 3? With that being said, I recommend starting at the 1hr, 4hr and daily time frames to hone your skill-set.

First things first – build your skillset, learn how to read price action, get hundreds of trades under your belt, then decide what type of trading you want to do.  If you challenge yourself too hard in the beginning beyond your abilities, you will likely incur some big losses, or many in a row, then get frustrated, and be unable to enter any ‘sweet spot’.  You want to be able to stretch yourself, but only in a controlled growth fashion.  This will allow you to enter that flow as your concentration will be challenged, yet you will have the ability to do the task successfully.

#4 Automaticity

This is the ability to do something automatically, to the point where it requires none of your mental resources (or so little) that you can use the rest of your mind for finding the best trading opportunities.  Your brain is like a computer processor, and if you are using resources for one or two other tasks, then you will have less processing speed for the task at hand.  That is why multi-tasking is the worst thing you can do when trading as it actually reduces your overall IQ.

So shut off the email, turn off the cell-phone, unplug the landline, close your email program, and just focus on the markets when trading.  Give all your energy and focus to that so you can have your full natural intelligence dedicated to trading.  This will help you spot the best trading opportunities and make the best trading decisions.

What Else Can I Do?

If you have all four of these characteristics present, then you can more naturally enter the ‘zone’ or zen-like concentration.  But there are some additional things which will help you get there.

While studying experts, Csikszentmihalyi found something unique in their brain activity.  First, he noticed less activity in their pre-frontal cortex.  This is the part of the brain typically associated with higher cognitive processes such as working memory and verbalization.

Although that may seem like something you want highly active, what it really pointed out was during their states of zen-like concentration, the experts across all fields were able to silence their self-critical thoughts which allowed automaticity to take hold and thus have more resources dedicated to their craft.

As traders, we have actually had this direct experience.  Ever had the experience of  ’analysis paralysis‘? This is your pre-frontal cortex working overtime – criticizing every idea and thought to the point it paralyzes you.  Ever had a perfect trade come up, but your mind came up with all kinds of ‘reasons‘ and ‘excuses‘ or ‘ideas from other experts‘ about how the market was going the other way?  This is exactly that kind of pre-frontal activity which actually inhibits your trading.

Complimentary to this, Chris Berka looked at the brain-waves of olympic archers and professional golfers.  What they noticed was a few seconds before the archer released the arrow, or the golfer hit the ball, they observed a small spike in the ‘Alpha Band‘ = 8-12hz frequencies, and ‘Theta Band‘ = 3-7hz frequencies.

Alpha band frequencies are linked to a lower heart rate and a greater sense of calmness and relaxation, while Theta band frequencies are associated with deeper levels of concentration, meditative absorption, a heightened awareness of the sensory field, and a shift in the relationship to thoughts, feelings and the experience of self.

As Berka noticed in her studies, the spike in the alpha waves represented more focused attention on the activity, while other sensory inputs are suppressed, accompanied by a slower breathing and lower pulse rate, all leading to greater concentration.

To compliment this, Gabriele Wulf (a kinesiologist at UNLV) examined the way athletes move.  She noticed that if swimmers focused on an external stimuli, like how the water moves around them, instead of how their limbs are moving, their performance, speed and technique increased because the conscious thought of the pre-frontal cortex was turned down or off, and thus didn’t interfere with the process.

It allowed the automaticity to take over what it could so one could have more resources to doing the task with grace, effortlessness and creativity.  It should be noted, that it takes time to produce consistent alpha waves in the brain.  How much time?  A lot less than the 10,000hours needed to achieve a sense of mastery and flow of your craft.

In fact, if you can learn how to develop consistently stable alpha waves, you simply short-circuit the need to have 10,000hrs of chart time.  This is because your focus, concentration and awareness will all be sharper than usual.  You will spot more details in the price action, find better opportunities out there, and be less inhibited by emotions and critical thoughts.

In other words, you are removing all the obstacles for having the same mindset as an expert in any field does, thus shortening your learning curve to successful, effortless and masterful trading.  It is spending the first 6hrs sharpening your axe to chop down the tree in two hours, instead of hacking away at the tree for all eight.  Which path do you think requires more effort? Which path helps you cut down the obstacles to your success faster and will lead to more successful trading?

I look forward to hearing your comments and reflections on this.

Kind Regards,
Chris Capre

If you enjoyed this article or what we do, please make sure to share/like/tweet this article, and click the ‘Like’ button for 2ndSkiesForex at the top of this article.

Related Articles;
Building a Successful Trading Mentality
Awareness, Negative Habits and Concentration
Poker, Concentration and Trading
 

For the year, the AUDUSD has had an impressive run which shows in the numbers;
-19 Bullish Daily Closes (out of 29 or 65% Bullish Closing Ratio)
-Only 2x Were a Bearish Close Followed By Another Bearish Close (1st week of the year)
-Since then, every single  Bearish Close has been followed by a Bullish Close
-Only 5 Out of Those 10 Bearish Close days took out the prior daily lows

All of these stats by themselves are impressive and communicate how consistently the bulls have been in control. From a price action perspective, it should be noted for the last month, anytime we get a daily bearish close, the next day is an up day.  Also, when we get a bearish close on a daily basis, it only has a 50% chance of taking out the prior day’s low, suggesting the selling can 1 out of every 2x be somewhat tame and not take out many bulls in the process.  Thus, all this communicates control and consistency on the part of the bulls.

One statistics we’d like to point out is on the daily charts, over the last 10yrs, the AUDUSD has at a maximum floated above the 20ema (not touched it) for 34 consecutive candles.  Currently, we are at 22, so we still have more to go before we hit our historical max.  However, we are getting into the twilight of this move before we expect a pullback to the 20ema.  So if we continue to see price float above the 20ema for another 7-10 candles, then we will expect a pullback shortly after.

And rightfully so, taking a step back on daily charts below, we can see we are coming into some lofty levels for the pair.  We have three key swing points above, such as;
1.0842 (today’s high)
1.1010 May 2nd, 2011 high
1.1082 All-Time High July 27th, last year

So we are definitely coming into thinner air for the pair.  Until we get a signal this trend is over, we will look for pullbacks to get back long on the pair, perhaps 1.0750/30 on an intraday level.  Also close to the 20ema on the 4hr time frame may offer some good with-trend plays.  As for targets, besides yesterdays high, you have the list above, but expect price action to saunter along at a casual pace.  Why?  We don’t expect too many bulls to be excited about piling on new positions, or new traders coming on board at this stage in the game, so watch for pullbacks and price action clues to get back into the trend.  Any strong reversal bars will likely trigger profit taking for all who’ve been along for the ride, which could cause a sharp and fast drop in the pair.  If we see back to back bear closes, or 1.0575 taken out, then we’d expect losses to accelerate and profit taking from a large portion of the stale longs still in play.

If you appreciate our price action commentary and insights, please make sure to click the ‘Like’ button at the top of the page. 

For those of you looking to trade intraday price action, visit our Advanced Price Action Course where we teach rule-based systems for trading Price Action.

Also make sure to check out our article on Intraday Price Action Trading.

After holding the 180pip+ range for the last 12 days, the EURUSD has finally broken the stalemate.  We actually just wrote yesterday pointing out some intraday clues as to why we thought it would break out north and this scenario ended up playing out.

What should be noted from a price action perspective is the nature of the breakout and the key points to be noted;

1) Take a look at the last 3 candles prior to the big impulsive candle labeled 1, 2 and 3.  Notice how they held a virtual straight line in the sand below?  This was communicating the bulls were absorbing the offers yielding almost no ground.  This was the first  clue the breakout was likely going to be north.

2) The second clue has to do with the fact this was done in the middle of the range.  This was communicating the bulls were confident enough to buy the pair at a worse price (not at range support) but were confident they could hold the line, so they bought it higher up.

3) Lastly, the breakout bar.  This was an impulsive candle suggesting massive participation on the bulls part.  In fact, this is the largest  bull candle on an open to close basis.

The bulls most likely took out any stops and we suspect this is a sustained break as a look at the intraday price action in the chart below suggests price is holding well above the prior resistance and closing near the highs.  This tells us there was little profit taking so we expect this market to continue north.

Traders can look for a breakout-retest setup on the 1hr time frame and watch for a price action trigger to get long there, targeting 1.3330 and 1.3415.  Stops should be towards 1.3150 which offers a nice R:R (Risk-t0-Reward) ratio.

If you appreciate our price action commentary and insights, please make sure to click the ‘Like’ button at the top of the page. 

For those of you looking to trade intraday price action, visit our Advanced Price Action Course where we teach rule-based systems for trading Price Action.