A Detailed Case Study of a High-Probability Trend Trade Setup

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Welcome to our first Trendline Mastery monthly feature-length blog for calendar year 2017.  As a reminder, if you like what you see in our monthly article series and would like to dig a little deeper into the tools, techniques and concepts related to Trend Line Analysis, please be sure to also check out our public information pages as follows:

Either of these learning resources alone, and especially both used in combination, can greatly assist you as a trend trader.  If you should have any questions, please feel free to drop me, the author (Frank Paul), a line anytime via email, at frank@forexmentor.com.

Introductory Overview

I’d like to use the occasion of this month’s installment to provide an expansion and elaboration of the topical coverage reflected in the “Midweek Roundup” video (one of several weekly content streams comprising the Trendline Mastery Trader’s Club service)  posted for members on Wednesday, January 18th, 2017.

In that presentation, I included a Powerpoint overview outlining (quote) “A template of what I personally believe to be the safest, strongest, highest-probability trend trade setup that you will ever find”.  I began the presentation with a simple three-point definition of that trading template, comprised as follows:

  • A multiple-timeframe trend reading conveyed by Line Studies of the same bias is apparent on at least three consecutive timeframes.
  • Price retraces to retest one (or more) of those Trend Lines, typically on the 60m or 15m charts.
  • Drilling down to the next lower timeframe (relative to the one on which the TL retest occurs), a Support/Resistance event confirming the higher timeframe TL retest can be seen.

From there, several different options are typically available for entering the trade in the trending direction.

The detailed chart-based “case study” we used to flesh out this trading template in our January 18th Roundup video focused on the AUD/CAD cross pair during the NY session for the day prior – Tuesday, January 17th, 2017.  We won’t rehash the details of that particular trade opportunity here, and in fact it might be a good homework exercise for you to pull up a Top-Down chart template (comprising Monthly, Weekly, Daily, 4hr, 60, 15m and 5m) for that pair at that date and time, and see if you can glean for yourself what the appropriate chart analytics would have been to enable a winning long trade.  After that, you can compare notes with the analytics we presented in that now archived presentation (accessible via the member’s area for the Trendline Mastery service). That exercise alone might be very instructive.

To expand on, and further clarify, the list of ingredients that goes into this trend trade setup that I recommend so highly, I would like to present a more detailed case study here, focusing on a different pair at a different date- and timestamp. Specifically, we’re going to look at how the above three-point overview enabled a winning trend trade on the GBP/CAD pair during the 60m bar for 13:00 GMT (or 8am EST) on Friday, January 20th, 2017. Here too, it might be a good homework assignment for you to pull up your top-down chart template for that pair at that timestamp, and before even looking at the analytics referenced through the rest of this article, see if you can find them yourself, unassisted.  The more of this kind of practice you can do for yourself over time, the more quickly the concepts will become second nature to you, and the more confidence you will have in applying them.

Getting back to the three-point paradigm of our “best possible” trend trading template, bullet point #1 above says that we should begin by finding a “multiple timeframe trend reading…apparent on at least three consecutive timeframes”.

How We Can Use A Market Screener To Find A Trending Pair

Now before we even get to that point, you might be wondering how it is we can quickly and easily find pairs that convey such a bias, short of having to manually go through all timeframes across a portfolio of 10 or 20 (or more) pairs, given the fact that such an approach would likely convey a LOT of work, not to mention the tedium of having to spend time reviewing pairs which subsequently prove to be lacking in the desirable market profile.

To cut down on the amount of time it takes “hunting” for such pairs, I highly recommend the use of automated market screening tools.  Though it is beyond the scope of this article to address that topic in detail, I can at least allude to one available market screener technology, and explain how I customize it with my own coding for my own trading, for the purpose on focusing first and foremost on pairs that would appear to offer trend trading potential, while simultaneously bypassing pairs that do not.

The particular market screener I use in my own trading is the Proscreener tool available with the ProRealTime charting platform.  Though there may be other similar tools available in other charting platforms that I’m not aware of, this is the only one I’ve ever personally used. Simply put, it works well enough for my own purposes that I simply have no need to look at similar features available in other charting platforms. Then again, to satisfy your own curiosity on the subject, you may wish to do some further research (perhaps a Google search on the phrase “user-customizable real-time market screening tools for Forex trading”?) to see if you can find some other offering that fulfills the same objectives.

Again, without getting into deep detail on this supplementary topic, the market screener I use with the ProRealTime platform is designed to flag pairs that satisfy a Triple Screen RSI condition. By the term “Triple Screen”, I’m referring to either a like bullish or bearish directional bias across three timeframes simultaneously: Daily, 4hr and 60m.  That directional bias is conveyed by very simple readings on the RSI (Relative Strength Index) indicator: Above a numerical value of 50 qualifies as generically bullish, while readings below 50 qualify as generically bearish. It doesn’t really matter, most of the time, what the slope of the RSI reading is on the current bar versus last (whether up or down), only that it is on one side or other of the midline value of 50 on all three timeframes.

With this screener running in real-time, the output window for my coding will be a simple list of all pairs from among a larger pre-defined portfolio that show either a bullish or bearish Triple Screen, together with a simple identifier for which of the two possible bias readings. (If a pair in question does not satisfy the Triple Screen filter, it simply does not show up on the output list, and thus I don’t have to potentially waste my time and energy looking at it; at least until such time as its status may change).

I cannot overstate this important qualifier: A live Triple Screen reading means absolutely nothing, in and of itself, as a signal to take action.  All it means is that we have a certain configuration of simultaneous indicator readings across three specific timeframes that happens to occur very often coincident to (not causal of) an actual trending market; and if so, in which direction – down (bearish) or up (bullish).

Validating A Market Screener Result

Once we have a screener result for a pair, the first and most important step in trying to find an actual trade is to validate that screener in relation to user-discretionary Top-Down Trend Analysis.  I use the term “trend” in this case with a fairly broad scope in mind, because the analytical tools that come to bear include not only the obvious (i.e. Trend Line Analysis), but also horizontal Support/Resistance analysis (based primarily on prior reaction Highs and Lows), and Fibonacci-based Uptrend and Downtrend Continuation patterns, which are most helpful in the context of reading Market Flow. Interestingly, as you put these few pieces of the puzzle together in complementary fashion, you can see how they help address the same thing: The Swing Point patterns outlining an Impulse Wave and ensuing Retracement, for example, can be outlined with Trend Line Analysis.

In any event, the kind of corroborating Top-Down Trend Analysis I’m typically looking to do, once a screener result has been attained, attempts to weave together a consistent “narrative” as I begin my analysis on the Monthly chart, then zoom in successively on the Weekly, Daily, 4hr and 60m charts.  An ideal scenario would be where the currently intact diagonal trend line in force on each of those timeframes is the same type: either Demand lines or Supply lines (for more information on how to define, annotate and interpret trend lines, please see the Trendline Mastery foundation course: www.forexmentor.com/trendline/).

But that ideal Top-Down scenario is not the only one you can work with: Any combination of the above-cited technical elements across these timeframes is acceptable, as long as they all have the same trend implication at the same time. So, you might see on the Monthly chart, for example, a bullish break of a prior multi-year Supply trend line. As you drill down to the Weekly chart, you might see an in-force Demand trend line that formed as price broke up through the prior Supply line on the Monthly. And then, when you drill down further to the Daily chart, there might be an Uptrend Continuation pattern move underway; nicely corroborated by intact Demand trend lines on the next two drill-down timeframes, the 4hr and 60m.

The above type of scenario is not the only conceivable way to define a high-probability trend. At the risk of giving credence to a somewhat crude proverb, “there’s more than one way to skin a cat”. And, indeed, if you’re aware of some other method that is easier or more meaningful for you to work with, and if that other method is helping you to realize trading results that are sufficiently positive, then by all means stick with that other approach. The reason why I emphasize Top-Down Trend Analyses in my trading education presentations is twofold:

  • It represents that consistency of approach that is so all-important in trading (i.e. I don’t want to have to make up a new trading approach each time I sit down to trade), and
  • It empirically happens to represent the strongest definition of a truly “trending” market available. Try to do so on the basis of a one-off MACD reading on a single timeframe instead, and I guarantee you will realize both more losses and fewer profit opportunities than by acting on trades that reflect the little extra effort in terms of chart analysis that Top-Down Analysis entails.

Another discretionary variation of the above which needs to be mentioned is that, sometimes, early on in the process of a major trend reversal on the two highest timeframes (Weekly and Monthly), you might not have an actual “trend” yet apparent, whereas Line Studies make the case more definitively on the Daily and lower timeframes. You will definitely encounter this situation from time to time, but instead of being flustered by the conundrum that the lower timeframes tell you that you should be thinking about a trade but adherence to the strict Top-Down rules of engagement prevents you from doing so, you can take the attitude that as long as either a recent or in-progress high-level Support or Resistance event is playing out on both the Monthly and Weekly charts, which is specifically compatible with the in-force trend readings on the lower timeframes, then you have enough to work with.

For example, if bullish Demand Trend Lines cannot be plotted on the Monthly and Weekly charts (yet), but instead, major support events can be seen on both, that’s good enough, because a Support event higher up is definitely compatible with the start of an uptrend on a lower timeframe. And conversely, of course, a Resistance event higher up is compatible with the start of a downtrend on a lower timeframe.

Case Study Of Our High-Probability Multi-Timeframe Trend Trade Setup

So with that general preamble out of the way, let’s turn our attention to the actual chart example I have in mind, GBP/CAD (bullish) into the NY session open for Friday, January 20th, 2017.

1) Monthly Chart

Let’s begin with the Monthly chart.  This extract represents an example of the kind of imperfect yet “good enough” trend corroboration that can occur as the Monthly lags the lower timeframes from a recent turn of some kind; as opposed to the more ideal scenario whereby we might see some form of trend line analysis here that agrees with what’s happening lower down. (And the reality is, even though we talk about “top down” analysis, the fact is that sometimes you might have to cycle back and forth iteratively to make sense of a somewhat ambiguous situation on one chart that only becomes clearer in relation to what’s happening on another).

As of the bar shown on the far right side of the GBP/CAD Monthly chart extract shown below, though there is still a Supply trend line technically intact, there is some indication that price is on track to break that line, as per the more recently formed Demand trend line connecting the Monthly low for Oct. 2016 to the higher low for Jan. 2017.  Both of those connecting lows represent comparatively massive rejection wicks, the first of which represents a retest of a prior Support Zone (captured with the pairing of horizontal dashed green lines) extending all the way back to Mar. 2013.  Though there is no clear “uptrend” yet evident on this chart at the time the Jan. 20th trade materialized, there is at least ample evidence of major support kicking in below, which provides a useful frame of reference for Demand Trend Lines appearing on the lower timeframes at that point.

Chart Capture #1: Monthly Chart Shows Recent Support Events

2) Weekly Chart

As we drill down from the Monthly to the Weekly, there is a hugely conspicuous Candle Reversal pattern of interest forming on the second bar from the right (which incorporates the Jan. 20th timeframe).  On the close of that Weekly bar (even a day or two ahead), we see a Bullish Engulfing Bar – a massive up close which makes its Open from below the lowest low of the prior week’s bar, and makes it Close above the highest high of the prior week’s bar.  That hugely bullish momentum push aligns with the second rejection wick low on the Monthly that allows us to draw a new Demand trend line on that timeframe.  It also seems to form the second low of a fairly typical 123 Bottom Reversal pattern. (We could have used our more typical “ABC” labeling scheme for outlining a Fibonacci-style retracement, but at least this alternative representation proves that many analytical variations strive to show the same thing; even if by differing jargon).

Though we could not draw bullish trend lines on the Weekly as at the point of the bar occupying the #3 position in the chart capture below, there was something trendline-related that did occur on that bar which had bullish implications regardless, and that was the upside break of the prior Supply trend line drawn with the dashed diagonal from the high (@ .7121) representing the #2 position of the anticipated 123 Bottom reversal.  That event was not quite confirmed as of the timestamp of the Jan. 20th trade, but then again, just based on the strength of the Engulfing Bar pattern alone, there was enough real-time confirmation to suggest that a recent support event had probably marked the end of the prior downtrend on this timeframe.

Chart Capture #2: Weekly Chart Shows Two Bullish Reversal Structures

3) Daily Chart

As we drill down from the Weekly to the Daily chart, we start to see a trend more clearly, by way of the Demand line connecting the low of the bar denoted by the first green arrow to the left (for Jan. 16th), to the low of the bar of the very next day (second green arrow).  Though this line has only two consecutive connection points, price at no time deviated from that trend bias during the daily session for Jan. 20th as well as the Monday of the week following, allowing for at least a Day Trade long, if not a slightly longer time horizon.  Though the RSI readings on the relevant bars on the Monthly and Weekly charts were still bearish as of Jan. 20th, the relevant Daily chart reading (per the timeframe captured with the dashed vertical line) was bullish, following a crossover above the 50 line from below, confirmed on the Daily close for Jan. 19th.

At this point of our analysis, then, we see a bullish Demand trend line in force on the Daily chart, which seems to be validated by significant Support events in the immediate background evident on the next two higher timeframes. If these bullish metrics are further conveyed as we drill down to the lower timeframes, we might very well end up with a reasonably strong top-down bullish bias.

Chart Capture #3: Daily Chart Shows An Intact Demand Trend Line

4) 4hr Chart

As at the 4hr bar for 12pm GMT on Jan. 20th (denoted by the dashed vertical line in the chart extract below), we can see a clearly bullish RSI reading nicely corroborating the Demand Trend Line drawn from the first green arrow (low for 1/16/4:00am GMT) to the second green arrow (low for 1/17/8:00am GMT). At the timestamp of the dashed vertical line, price is continuing to respect the Demand line in question. On closer inspection, one should quickly realize that this trend line has the same coordinates as the one we just looked at on the Daily. That redundancy is not a problem; only if price was reflecting an oppositely biased Supply trend line on the 4hr would we have an inconsistency representing a retracement or possible trend reversal on this timeframe.

With the completion of our scan of all four of the above-cited higher timeframes, we can see enough indication of mutually compatible analytics to confirm a high-probability uptrend. (By the qualifier “high probability” in this case, we mean an uptrend that could reasonably be expected to produce at least one more viable Uptrend Continuation setup ahead of even the earliest indication of an unexpected top reversal).

Chart Capture #4: 4hr Chart Also Shows An Intact Demand Trend Line

On the basis of the above analyses of the Monthly down to 4hr charts inclusive (let alone what follows on the lower charts), we’ve fulfilled point #1 of the three-point paradigm mentioned at the beginning of this article.

5) 60m Chart

As we zoom in to the 60m chart for a closer and more detailed look at price action on the live edge of trading as of the 13:00pm GMT bar on the day in question, we notice two things. Firstly, a relatively recent Demand Trend Line has formed, by connecting the lows for 1/19/1:00am GMT and 1/19/7:00am GMT. Closer to the live edge, that trend line was retested almost to the pip on the low of the 60m bar for 1/20/10:00am GMT. The second thing to notice on this chart, as of the 1pm bar that Friday (denoted by the dashed vertical line in the chart capture below), is that price is hovering just above the trend line. In cases like this, we have no specific guarantee that price will specifically blip downwards again by just enough to test the line, but if it’s at least a possibility, then it’s worth anticipating a potentially pending trade setup and entry.  (As it later turned out, the low of the bar in question did, in fact, perfectly retest the line before price continued its rally to an interim top which formed on the Monday following).

At this point, we have the basis for fulfilling point #2 of our three-point paradigm for a high-probability trend trade, as we have grounds to anticipate a 60m Demand Trend Line retest.

Chart Capture #5: 60m Chart Conveys A Potentially Imminent Trendline Retest

6) 15m Chart

The 15m chart capture below sports two parallel vertical lines, which serve to denote the start and end points of the 60m bar for 13:00 GMT. This is the bar during which we’re anticipating a possible trend line retest on the 60m chart. Inside these points of reference, we can see price briefly spiking down to a support area denoted two different ways: Firstly, by means of the dashed green line at the price level of 1.6387, and secondly by means of a shaded rectangular zone which simply picks up recent repeated hits of support nearby.  This ‘natural’ Support Zone forming on the 15m chart, in close proximity to the level representing a touch on a trend line on the next higher timeframe, seems to convey a powerful barrier to the downside, preventing price from slipping lower.  Theoretically, a trade entry trigger could easily have been executed on as price once more dipped into this support area (on the low of the 15m bar for 1/20/13:15 GMT), but we’re going to extend our Top-Down Analysis to incorporate one more chart view – the 5m – to see how an RSI crossover signal occurring in conjunction with all of the above provided a good signal to enter the trade precisely and with limited risk.

Whether execution is taken from a trigger event occurring here or on the next lower timeframe, at this stage of the analysis, we’re trying to address point #3 in the above-noted three-point paradigm.

Chart Capture #6: 15m Chart Shows A Support Zone Forming Nearby

7) 5m Chart

The 5m chart capture below sports two different vertical lines, each of which align with the open of the first bar following a preceding bullish crossover (RSI crossing back above the midline from below). In other words, as bullish RSI crossovers occurring in close proximity to concurrent support events on both the 15m chart (retests of a horizontal support) and 60m chart (retest on the intersection point of a pre-existing Demand Trend Line), they both serve as actionable long entry signals.  The first of the two (on the open for 1/2013:35 GMT @ 1.6437) ended up being slightly early, as a drawdown of 23 pips occurred shortly thereafter, before price started to rally again later.  (If the size of this drawdown seems excessive in relation to the practice of using tight stops, let’s keep in mind that higher ADR pairs such as this one typically require proportionately larger stops to withstand potentially greater volatility).  The second entry trigger (denoted by the dashed line to the right) was for the open for 14:05 GMT @ 1.6439. That one also entailed an initial drawdown, but not enough to trigger a stop loss placed just below the support zone notated on the 15m chart, as price later regrouped and headed in the direction of the prevailing Top-Down trend bias.

Chart Capture #7: 5m Chart Yields A Bullish RSI Crossover Entry Signa

We won’t devote any further analysis to this case study covering the issue of exit strategies. Suffice to say, price continued on with the uptrend into the session high for the following trading – Monday of the following trading week – for a maximum floating profit in the range of about 200 pips, after which a substantial downside retracement unfolded.  Depending on one’s own personal profit taking preferences, the worst-case scenario would have entailed a breakeven stop trigger as the lowest low of the retracement did touch the above entry points two days later, whereas any shorter-term trade horizon executed before the onset of the pullback would have allowed for successful profit taking.

As a result of having gone through all conventional timeframes representing a proper Top-Down Analysis, we can see how we were able to apply the three-point paradigm of a high-probability trend trade as prefaced at the beginning of this article. We used Line Studies on at least three consecutive timeframes to denote a strong trend bias. We then found a minor downside retracement culminating in a retest of a Demand Trend Line on the 60m chart. We then drilled down further, to find a corroborating Support Zone on the 15m chart, and even further down, to the 5m chart, to execute on a RSI crossover signal in close proximity to the support events on the next two higher timeframes. Though there was some drawdown to contend with initially, the setup and entry parameters described above proved robust in relation to the upside action that subsequently ensued.

I hope the above case study example is instructive and helpful, and that its reference does a satisfactory job fleshing out the details of the three-point paradigm of the “highest probability trend trade setup” we cited at the beginning of this discussion.

If you should have any questions or comments, please feel free to direct them to me via email: frank@forexmentor.com.

Good Trading,

Frank Paul

Frank Paul at Forexmentor.com

Frank Paul at Forexmentor.com

I am well known for my ability to deliver clear and concise explanations of complex trading topics.   I am the force behind a series of comprehensive, yet practical, forex courses and training programs at Forexmentor.  (Forexmentor links to www.ForexMentor.com.)

“…purchased at least two of your courses and I must say that I greatly appreciate your methodology and willingness to share with others. One of the things I appreciate most about you is that you are not like some of those money grabbers out there who is so quick to sell you a system for huge bucks. I believe you are a very genuine person who would want to see me or anybody succeed in their Forex Trading career. Thanks again, Omar.”

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