Using the market bias and price action, here’s a technique you can use fairly reliably.
First, we will use that fact that when the market in stocks is negative, the resulting risk-off trade will cause the dollar to strengthen. Second, will we strictly adhere to the maxim of “buy low and sell high,” which in this case, because the bias is negative, “sell high and buy low.”
The candles where the Fib has been placed covers the fall in EUR/USD which occurred 2 hours after the dismal report on Unemployment Claims was released. As you can see, EUR/USD actually rose after this report, exactly the opposite of what you would expect to see happen. This likely happened for either 1 or 2 reasons (or perhaps even both):
- There were a lot of stop orders that the banks wanted to wipe out
- There were a lot of sell orders clustered around 1.2890 or so from the large players, and banks moved the price to accommodate them
In any event, my bias was short the pair, especially given the news and that S&P futures were declining. We did have a clue that price might fall as seen by the large bearish pin bar candle to the left of the Fib. For now, let’s assume that we missed the pin bar and the decline covered by the Fib-What do we do next?
Well, the bias is still short so we want to sell. But let’s also remember that the goal here is to “sell high and buy low,” which means that we want to see price retrace the decline to a certain level. The question now becomes where.
My first rule is to look for a retrace to the 61.8 Fib level and if price had gotten that high, I would have taken a short. As it turned out, price only retraced to the candle labeled “A” but at that point, you have no way of knowing whether price will go up or down. So when price retraces to “A,” all I am doing is waiting for a retrace to the 61.8.
As we can see, price ends up taking a downturn from candle “A” so my next plan of attack will be to go short if price returns to that level because what I am looking to do is to sell from some established resistance (sell high).
Finally, price does retrace back to the level of candle “A” and at that point, you can look to go short with a target at the bottom of the Fib (we can have a reasonable expectation that price will decline that much because we have seen recent sellers in the market take it that low).
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