Picking the Correct Entry Level: Technical Analysis
Hello, traders. Welcome to the Pro Trading Course, and the third module, “Swing Trades: Follow global macro trends.” In this lesson, we are going to learn how to pick the correct entry level for our swing trades. We are going to learn how to analyze the charts, and of course we are going to use the elements that we have learned on this module, and follow global macro trends.
So we are going to jump right into the charts, and we are going to take the crude oil chart as an example of how we’re going to do things. All right, we already know that crude oil is in a very strong downtrend and that the OPEC has not yet agreed on a seating on output of oil. So what we’re going to do here, we are going to be looking for short opportunities. Now, let me get rid of this rectangle and this vertical line.
Now, we have right here the 27.50 low, and we’re going to go to a daily chart actually, all right? And we are going to look for lows on the chart. That’s the first thing we’re going to do, all right? So we are going to go all the way back, and we are going to look for lows in the chart. The reason we’re looking for lows in the chart is because what we’re going to do here is we are going to use these low’s as a potential entry point, all right? Well, the reason we are going to use these lows as potential entry points is because, first of all, we are never ever going to be trading in the middle of a trend, all right? This is not how we do things, and this is absolutely the worst risk-to-reward scenario that you can have. So the first thing we’re going to do is we’re going to look for highs and lows. So we have a high here, we have another high here, all right? Those are our highs, and this is another low that we have on the chart, all right?
Now, let’s assume that we are looking at this level right here, all right? Let’s go back to the forward chart. And what we’re doing here is we are looking for opportunities to go short. So let’s assume that we are looking at price action around…well around these levels, okay?
Now, right here we had a break of the 54.67 level. And as you can see right here, price came all the way right to the 49.27 level. Now, what we’re going to do here is we’re going to wait for this, all right? This is the spot that we are going to be waiting for. And as you can see we are only using highs and lows for the entries, for the moment being, all right? Because what we’re doing here is we’re going to wait for our retracement and retest back of this level of support, or this low as a resistance.
Of course, we are not only going to be using this, but we are also going to be using a Fibonacci retracement level. And where does the level start? Well, the level starts with the high right here, and goes all the way to the low right here. Of course, we are going to use the default settings on the Fibonacci, and as you can see right here, the 38.2 confluences perfectly with the…the 38.2 Fibonacci retracement level confluences perfectly with the 49.27 level, all right?
Now, we are going to get rid of all of these other Fibonacci levels that we are not going to be… All right, so here we go. And as you can see right here, let me just make this Fibonacci level shorter, all right.
Now, where are we going to be taking profits? Well, that’s easy. We are going to be taking profits at the next level of resistance, all right? I’m sorry, the next level of support right here, all right. So this is going to be around a 500…a 600, I’m sorry, tick trade. And our stop loss is going to go above the previous high. Why is it going to go above the previous high? Because if we break with the down structure, well, our trade idea is no longer valid. And where is that previous high you say? Right here. You have to draw a trend line, and by doing so, what you’re doing right here is allowing the down structure to be more visual, all right?
You can see right here that we broke with these trend lines to test the 49.27 level, but what we are trying to do here is just looking at the previous high, because if you don’t draw a trend line you can’t be using the previous high. Well, you can’t be using this one at the previous high, when actually the previous high is this level right here, okay? So this is where your stop loss is going to go. And well, you can say that this is actually a very big stop loss or a very wide stop loss, but if you have a very wide target, you can’t have a two-tick stop loss because you are going to be getting stopped out at every single trade that you take. So this is how you’re going to be choosing your entries, your stop loss, and your target when you swing trade.
Now, let’s have a look right here at the Japanese pound, Yen. And what we’re going to do here, we’re going to do the same thing, all right, looking for lows because we are in a downtrend. If you are in an uptrend, you are going to be looking for highs, all right? Now, we are going to be looking for this or we are going to be putting in horizontal lines right here. And we are going to go ahead and put on a Fibonacci retracement level from this high to this low, all right?
Now, we are going to put this Fibonacci level. And what we are going to do is we are not going to be using the 38.2. We are going to be using 50 and the 61.80 in this case because as you can see right here, the best placement for the Fibonacci is the 50 or the 61, not the 38.2. Remember that you are always going to be looking for confluence between your levels and the Fibonacci levels, all right? And right here we are also going to be using a trend line. You are always going to try to use trend lines in your charts. And the reason you are going to try to use trend lines in your charts is because…well, if you have confluence between a level, a Fibonacci retracement, and a trend line, well, you have a hyper ability setup on your hands. And remember we are just swing trading right now. We are not day trading, so we are going to be holding these positions for quite a while.
So what we’re going to do here is we’re going to be waiting for price to come back to one of these levels. And the best level that I think the price can come to is this one right here, all right? Yeah, just let me put on a rectangle right here. So let’s see what happens, okay? What happens is that price comes all the way to this level, as you can see. We came back to the 159.67 level, but we rocket to the upside, and right here…we came back to this big, big, big level, all right?
Now, we have the 50 Fibonacci from this high to this low. This is the big Fibonacci level, but we are also going to be using small Fibonacci levels. What are small Fibonacci levels? Well, small Fibonacci levels are levels that are from smaller strings. And in this case, we are going to use this high to this low, all right? And I’m going to change colors and show you the levels that we are going to be using.
Now, you can see right here that the 76.4 and the 88.6 level are all the way around this area that we have painted with the rectangle. Now, this is a very important zone because we have the overall 50 Fibonacci level, we have the 88.6, and we have the 76.4. So what we’re going to do here, we’re going to eliminate the 76.4, and we are going to focus on this, all right, the confluence between the 88.6, the 50, and this huge level of, in this case, support because it hasn’t been tested as resistant just yet. What happens then is that price tests these levels, and right here we are going to go short, right? This is our short entry right here on this black line, all right?
You can use a pending…well, a pending order or you can use a market order when you see the rejection of this level. Now, the stop loss is going to be above this high. Why? Because if we break with this high, we’re going to break one with the 50 and the 88.6 cluster, we’re going to break with this level of resistance, and we are going to break with the up structure…I’m sorry, with the down structure. So we are going to place our stop loss above this high. Now, this is going to give us a very wide stop-loss because this is the pound Yen and even wider stop loss. And as you can see this is a 230 pip stop loss, but it doesn’t matter because you have to…well, you have to trade with what the market is giving you, and right now the market is giving you a very wide stop-loss.
What happens here is that you have to be able to calculate the right position size so you don’t go above your determined risk parameters, and you are going to be taking profits right here at…well, this is your first target, all right? The 159.70 is going to be your first target for an almost 1:2 risk to reward ratio if you follow because this is a 388 pip target, and you are going to wait for the break of this small structure. And if you look closely, you can see that this looks a lot like a bear fly. And what happens then is that after price hits this area, this strong zone, where you are definitely going to find sellers, price drops immediately to our first targets.