SHARP BEARISH REVERSAL AHEAD FOR EURO AUD?

Over the next few days, we are likely to see this pair continue the current Bearish Reversal that has surprised many Bullish Traders over the last 24 Hours. Even though the pair started to breakout above the Pennant Setup on the Daily Chart, the Bull Candles are now being taken out by a Sharp Bearish Candle.

Although we are still technically Bullish - the pair is above the Resistance and Uptrend Line- the size of the Bearish Candle indicates that a False Breakout Reversal is shaping up to be the more likely scenario in the days ahead.

EURO AUD DAILY CHART ANALYSIS

In analyzing this pair in the video, I use the steps outlined in the previous blog article that describes that describes how to use Japanese Candlestick Signals and Trend Lines (https://drfxtrading.blogspot.com/2017/10/how-to-analyze-your-forex-charts-with_10.html). These are much better at identifying market direction and reliable trading opportunities relative Statistical Indicators, especially when done on the Larger Time Frames.

OVERALL MARKET SETUP

From the Daily Chart below, we can see that the pair is in a strong Uptrend and recently attempted a Bullish Breakout above the Resistance of the Pennant Setup.

Despite the start of this Breakout, we now see that a reversal has now started that has taken out 2 of the Bullish Breakout Candles..

Given this scenario, we are now faced with the important question that arises when it comes to pullbacks in Consolidation Breakouts - will the Breakout Continue or will we see a Reversal that takes us back inside of the Consolidation?

FALSE BREAKOUT REVERSALS

In the 1st Part of the Trading Manual, you will see several examples of False Breakout Reversals. However, the one below is perhaps one of the most common you will see in these types of situations...

In False Breakout Reversals, the market will attempt a breakout at one end of the Consolidation but then reverses to head back inside and break out at the other end. In this example above, the market does so with a single but sharp and large reversal candle that aggressively takes back to the other boundary. In other scenarios, you will see ABC Signals or Double Tops/Bottoms that can also lead to these types of reversals.

BUT WHY DO THESE REVERSALS TAKE PLACE?

Great question. As you will see in the Manual, there are many reasons for this reversal. These include,

The Pair hitting a Major Resistance/Support Point

The Breakout coincides with Overbought/Sold conditions of the Pair

The Breakout Candles were too weak

In a market that is full of uncertainty, we can never be 100% certain as to the real cause of these pullbacks. However, reversals at major Resistance/Support points are very common and given that the current Reversal has taken place at a strong Resistance Point, this could be the factor that leads to a False Breakout on the EURO AUD...

SO WHAT DO WE DO NOW?

Now that we have established the overall setup of this pair and that it is possible that this reversal will continue, should we now begin opening up short positions? No just yet!

WE ARE STILL BULLISH!

Despite this reversal, we must respect the fact that we are still technically in an Uptrend and above thets when it comes to analyzing trends and reversals.

This means we must still assume the possibility of a U-Turn with strong Bullish Signals that resumes the Uptrend. If these are strong and clear enough, then we should start trading Long.

BEARISH SCENARIO

To start trading short, we are going to need a more convincing signal. Even though the current Bear Candle is strong, it is not enough to get things going, especially since we are still Bullish.

Double Tops and ABC Signals are the 2 most common signals that can be given here before the market actually breaks back inside that can provide us with the Entry Signal...

...if neither is given above Resistance, we will then need to wait for another Bearish Candle a Bearish Engulfing Candle or a Counter Trend Line Setup and Break below the Resistance...

NEXT STEPS AFTER SIGNAL GIVEN

In sync with my Methodology, we will first have to wait for the Daily Chart to give us the appropriate Bullish or Bearish Signal before trading on the 4 Hour Chart.

This Daily Chart and 4 Hour Chart relationship is based on what I discovered about the links between the Larger Charts and the Smaller Charts. Specifically, there are pairs/combinations of Larger and Smaller Charts where the signals and movements of the Larger Chart, controls what takes place on the Smaller Chart...

From the Monthly all the way down to the 1 Minute Chart, this is the nature of the relationship between the time frames of the Forex. This means that you

...have to wait for the appropriate signal on the time frame that controls the time frame you use for your trade entry. If not, then the signals you see on the Smaller Chart has a lower chance of being successful...

This means we need to know what the appropriate signals are based on what is taking place on the charts that we are using for our strategies. In the case of my Methodology, this implies that we need to ensure...

1. The Right Candlestick Signal is given by the Daily Chart

2. The Overall Setup is Clear and Strong

3. The Signal given on the 4H Chart is in sync with the Daily

4. The Appropriate Stop Loss Area is chosen on the 4H Chart

Once these criteria are met, your Swing Trading Setup will have a very high probability of being successful, since we would have accurately predicted the direction of the market over the next several days.

_______________________________