GroundStone Holdings Morning Newsletter

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Education post 5/100 – How to trade Head and Shoulders Pattern?

A head and shoulders pattern is also a trend reversal formation.

It is formed by a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder).

A “neckline” is drawn by connecting the lowest points of the two troughs.

The slope of this line can either be up or down. Typically, when the slope is down, it produces a more reliable signal.

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In this example, we can easily see the head and shoulders pattern.

The head is the second peak and is the highest point in the pattern. The two shoulders also form peaks but do not exceed the height of the head.

With this formation, we put an entry order below the neckline.

We can also calculate a target by measuring the high point of the head to the neckline.

This distance is approximately how far the price will move after it breaks the neckline.

You can see that once the price goes below the neckline it makes a move that is at least the size of the distance between the head and the neckline.

We know you’re thinking to yourself, “the price kept moving even after it reached the target.”

And our response is, “DON’T BE GREEDY!”
 

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Education post 6/100 – How to trade supply and demand zones?

Supply and demand is a trading and price action concept that analyses how financial markets move and how buyers and sellers drive the price.

On every price chart, there are certain price points where you can observe a sudden shift between the buyers and the sellers. Those areas are usually characterized by strong and immediate turning points, or an explosive breakout. We as traders call those areas supply and demand zones.

It can pay off to know how to spot such areas because just like the concept or support and resistance, supply and demand areas can add an other layer of confluence to our trading and help us find better trades.

Order absorption – why common trading knowledge is wrong
The scenario below is something we all have seen hundreds of times. It shows the classic price behavior around a support level. Common trading wisdom tells you that with each touch of a price level, the support area becomes stronger. This couldn’t be further from the truth.

What makes the price go down is an imbalance between buyers and sellers and there is more selling activity than buying going on. Each time the price reaches the support level, buyers enter the market and cause a bounce by outnumbering the sellers. Then, the price rises until sellers become interested again, outnumber the buyers and drive the price down. Although this is a very simplistic view, it explains how markets move.

But each time the price makes it to the support level, there will be fewer buyers waiting because, at one point, all buyers who were interested in buying have executed their trades. This is called order absorption. The screenshot shows that price bounced less high with each “touch” and eventually it broke the support level once there were no more buyers left and only the absorbing sellers remained.

When everyone has bought and when there are no buyers left, the support level will break and price falls until it reaches a price level where buyers will get interested again.

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Think of order absorption around a price level like a ball that bounces off the floor. Each time the ball hits the ground, some of the energy is absorbed by the floor. Thus, each consecutive bounce will be lower than the previous one until all energy is gone and the ball comes to a standstill.

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Identifying high probability supply and demand zones
Now let’s take a look at some charts and see how we can apply our knowledge to find trading opportunities.

The highest probability price levels are the ones with the greatest imbalance between buyers and sellers. What does that mean? Whenever you see a rally and then suddenly, without any prior warning, it reverses on the spot and drops like a stone – those are the areas of major imbalances.

The highest probability price levels are the ones with the greatest imbalance between buyers and sellers.

How-to-trade-supply-and-demand-zones-2.png
 

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Morning Technical Newsletter

EUR/USD:

Weekly Gain/Loss: +0.33%

Weekly Close: 1.1557

Demand zone at 1.1530-1.1550 hold the price today and push the price back to 1.1570 (daily high). Today we are looking for a long opportunity with price test of resistance at 1.1620.

Today’s data points: US retail sales m/m; US Treasury currency report.

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GroundStone Holdings

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Morning Technical Newsletter

EUR/USD:

The EUR/USD daily Forex chart has been in a trading range for 6 months. There have been many strong legs up and down, and every one of them reversed. Traders will continue to bet on reversals instead of a breakout of the 6 month range.

The current 5 day rally looks like a parabolic wedge. Therefore, the are probably sellers above the October 12 high, creating the final 3rd small leg up. If so, the bears will create a couple small legs sideways to down over the next week or two.

Less likely, this rally will continue above the September 24 high without a test down. Or, it will form a head and shoulders top where the September 24 high is the top. Then, the bears will get a break below the August low.

Overnight EUR/USD Forex trading

The EUR/USD 5 minute Forex chart rallied 60 pips overnight. It is now testing Friday’s high. But, the 5 day bull channel is tight. In addition, this is now the 3rd leg up (the 1st was October 3). Therefore, this is a parabolic wedge rally. That usually leads to a couple legs sideways to down. Consequently, despite the overnight rally, the odds favor sellers above Friday’s high and then a couple small legs down on the daily chart.

Day traders will buy pullbacks today and tomorrow. This is because a small 3rd leg up is likely early this week. But, they will begin to sell once the rally goes above Friday’s high. There will then probably be a test back down to 1.15 and the October 9 high.

Since October 9 was only a doji, it was not a strong buy signal bar. The high of a weak buy signal bar usually gets tested.
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GroundStone Holdings

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Morning Technical Newsletter

EUR/USD:
Despite an earnest effort to overthrow 1.16 (and surrounding monthly opening levels from October and September at 1.1604 and 1.1595, respectively) on Tuesday, the shared currency failed to sustain gains beyond 1.1621, consequently concluding the day more or less unchanged.

In light of yesterday’s push to fresh highs (red arrows), another retest of H4 support at 1.1543 (unites with a 38.2% Fib support at 1.1550) might be on the cards today for a possible long (small green H4 zone). Also worth acknowledging on this scale is the RSI displaying mild divergence just south of its overbought value.

Higher-timeframe technicals bring light to a weekly demand at 1.1312-1.1445, which, as you can see, is holding ground after a two-week bearish stint out of a neighbouring resistance area at 1.1717-1.1862. This is now considered a ranging market on this scale.

The daily support area at 1.1479-1.1583, although suffering a sizable breach to its lower edge in the early stages of last week in the shape of a bullish-pin-bar formation, remains in the fold. Bringing with it a notable history dating back as far as October 2017, the next upside target on this scale can be seen at resistance drawn from 1.1723 (sited within the walls of the noted weekly resistance area, as well as representing a nearby Quasimodo resistance based on the high marked with a red arrow at 1.1733). Traders may also want to note on this timeframe a bearish pin-bar formation took shape as a result of yesterday’s movement.

Today’s target: 1.1540

Today’s data points: EU economic summit; German Buba President Weidmann speaks; US housing figures; FOMC member Brainard speaks; FOMC meeting minutes; Treasury currency report.
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GroundStone Holdings

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Morning Technical Newsletter

EUR/USD:

Over the course of Wednesday’s sessions, the greenback witnessed a resurgence of bidding, lifting the US dollar index above its 95.50 mark and pressuring the euro to lower ground (-0.63%).

Yesterday’s FOMC meeting minutes for September stated all policy makers expressed the view of raising rates by 25bps. On the data front US building permits fell in September at 1.24mln vs. expected 1.27mln. The print triggered a marginal USD decline, though it was not really anything to write home about.

More on our website...
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BITCOIN:
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GroundStone Holdings

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Morning Technical Newsletter

EUR/USD:


The euro refreshed weekly lows vs. its US counterpart Thursday, despite an earnest attempt to defend its 1.15 handle amid London hours. The resultant rebound in US Treasury yields bolstered the USD market, though the US dollar index remains unable to breach its next upside chart hurdle: 96.000.

Down 0.42% on the day, the H4 candles conquered nearby Quasimodo support at 1.1460 in strong near-full-bodied fashion (now acting resistance), possibly clearing the runway south on this scale towards demand plotted at 1.1394-1.1423. Also worth noting is the RSI indicator is presenting a divergence/oversold reading.

Against the backdrop of intraday flow, the weekly timeframe is seen hovering just north of demand at 1.1312-1.1445. A closer look at price action on the daily timeframe, nevertheless, shows the unit firmly closed beneath its support area at 1.1479-1.1583. Further selling, therefore, could be on the cards towards the August 15 lows of 1.1301/support at 1.1285.



Areas of consideration:



In terms of market structure, the general sense is both H4 and daily timeframes suggest lower prices may be in store, whereas weekly flow indicates a rotation higher.

From a technical standpoint, selling whilst a market is trading nearby weekly demand is chancy. This is not to say H4 price won’t reach its H4 demand mentioned above at 1.1394-1.1423, though we feel it’s a little too early/ambitious to be targeting daily support around 1.1285 right now.


For traders looking to attempt a short at 1.1460 today, waiting for additional candlestick pattern confirmation might be an idea, be it H4 or H1. This will help avoid a fakeout/unnecessary loss; also show seller intent and provide entry/stop parameters.


Today’s data points: FOMC member Bostic speaks
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Education post 7/100 – How to trade ABCD Pattern?

The ABCD pattern (AB=CD) is one of the classic chart patterns which is repeated over and over again. The ABCD pattern shows perfect harmony between price and time and is also referred to as ‘measured moves’. It was developed by Scott Carney and Larry Pesavento after being originally discovered by H.M Gartley.

Within the ABCD patterns, there are 3 types as mentioned below.

Price and Time: Under this type of ABCD pattern the amount of distance and the time it takes for price to travel from A to B is equal to the time and distance from C to D
Classic ABCD: In this pattern, the BC is a retracement of 61.8% – 78.6% of AB, with CD being the extension leg of 127.2% to 161.8% (equal in price distance)
ABCD extension: CD leg is an extension of AB between 127.2% – 161.8%


Trading the ABCD bullish pattern

Swing points A and B form the highest high and the lowest low of the swing leg
When AB is identified, the next step is to plot BC
C must be lower than A and must be the intermediate high after the low point at B
C usually retraces to 61.8% or 78.6% of AB
In strong markets, C can trace only up to 38.2% or up to 50% of AB
Point D must be a new low below point B
CD must be 127.2% or 161.8% of AB or of CD
Buy at point D
Some variations to the rule include:

CD can be an extension of AB anywhere from 1.272% up to 2.00% and even greater
CD leg usually slopes at an angle that is wider than the AB leg
When there is a gap formed after point C, it indicates that the CD leg will be much larger than the AB leg
Appearance of wide range bars near point C is also an indication that CD will be an extended leg
In most cases, AB and CD are equal in time and price
If the CD leg is covered within just a few price bars as compared to the AB leg, then it is an indication that the CD leg will be an extension of AB
The opposite rules apply for bearish ABCD patterns. The chart below illustrates a Buy trade example where we notice that BC retraced close to 61.8% (at 59.4%) after which CD travelled close to 139.6% of the AB leg. After the D point has been identified, a buy order would be place at or above the high of the candle at point D.

Traders should note that the ABCD count should not be confused with the ABC corrective waves from the Elliott Wave count.

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Education post 8/100 – How to trade fibonacci retracement?

The first thing you should know about the Fibonacci tool is that it works best when the forex market is trending.

The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending up, and to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending down.

Finding Fibonacci Retracement Levels
In order to find these Fibonacci retracement levels, you have to find the recent significant Swing Highs and Swings Lows.

Then, for downtrends, click on the Swing High and drag the cursor to the most recent Swing Low.

For uptrends, do the opposite. Click on the Swing Low and drag the cursor to the most recent Swing High.

Got that?

Now, let’s take a look at some examples on how to apply Fibonacci retracements levels to the currency markets.
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GroundStone Holdings

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Morning Technical Newsletter

EUR/USD:
Weekly Gain/Loss: -0.39%

Weekly Close: 1.1512

Weekly perspective:

By way of two back-to-back indecision candles, the top edge of demand at 1.1312-1.1445 remains firmly in the headlights. In the event buyers regain composure from this point, price shows room to extend as far north as a resistance area coming in at 1.1717-1.1862 (capped upside since early June 2018).

According to our technical studies, this timeframe is now considered range bound (yellow zone). Areas outside of this border fall in at the 2018 yearly opening level drawn from 1.2004 and demand marked at 1.1312-1.1445.

More on our website.....

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APPLE:
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SPX:
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BITCOIN:
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GroundStone Holdings

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Morning Technical Newsletter

EUR/USD:
Over the course of Monday’s sessions, particularly throughout European hours, the euro surrendered ground to the US dollar (shook hands with its 96.00 mark once again amid risk aversion). Pressured by Italy’s budget situation and Brexit negotiations, price faded nearby H4 resistance plotted at 1.1542 and plowed through the 1.15 handle, which, as you can see, put up little to no fight.

According to our technical studies, longer term, the buyers potentially still have a hand in this fight. The weekly candles are seen cruising around the top edge of a demand at 1.1312-1.1445 and display room to extend as far north as a resistance area coming in at 1.1717-1.1862 (capped upside since early June 2018). In conjunction with weekly flow, daily support at 1.1462 (boasts notable history dating as far back as early 2015) is clearly a watched level on this timeframe at the moment. Although appearing fragile, scope for a rotation higher from here is still possible, targeting the 1.1621 October 16 high followed by resistance at 1.1723 (sited within the lower range of the noted weekly resistance area).

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GroundStone Holdings

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Morning Technical Newsletter

EUR/USD:
The single currency withdrew from highs of 1.1493 Tuesday, as the European Commission, the EU’s executive arm, told populist lawmakers in Italy it must make revisions to its draft budget proposal. Despite this, little change to the overall technical structure of this market was observed.

Longer term, buyers and sellers continue to battle for position around the top edge of a weekly demand at 1.1312-1.1445 and display room to extend as far north as a weekly resistance area coming in at 1.1717-1.1862 (capped upside since early June 2018). Technically speaking, this is considered a range bound market on this timeframe (yellow zone).

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BITCOIN:
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GroundStone Holdings

Active member
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Morning Technical Newsletter

EUR/USD:
Undermined by Italian budget concerns and a slew of disappointing flash Eurozone PMIs, the shared currency plowed lower against its US counterpart Wednesday, down 0.68%. After the EU took unprecedented action in rejecting Italy’s 2019 budget, finance minister Tria continued the nation’s confrontational and defiant stance against the EU, stating the budget is correct and sees no reason to present the EU with a new one.

Longer term, weekly movement is searching for bidders within the walls of demand at 1.1312-1.1445. Failure to support this area may result in the unit eventually shaking hands with demand plotted at 1.1119-1.1212. In terms of daily structure, support at 1.1462 – a level which boasts notable history dating as far back as early 2015 – was engulfed yesterday (now acting resistance) in strong fashion. According to this timeframe, the pathway south is now potentially clear for a run towards the 1.1301 August 15 low, followed closely by support sited at 1.1285.

More on our website..
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GroundStone Holdings

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Morning Technical Newsletter

EUR/USD

The slaughter continues with anything not labeled “USD.” We’ve broken pretty significant support in the EUR/USD pair, but there is significant support just underneath as well. I think the 1.13 level which acted as such support during the last meltdown should hold, unless of course something deteriorates rapidly. I think we are starting to get a bit overdone when it comes to the panic, as this is not 2008. Certain algorithmic programs will eventually kick in and start picking up things that are either overbought or oversold. Pay attention to bond yields in America, that’s probably the biggest driver of this in the future. I would anticipate some type of bounce, but I would also be very cautious about it. I think both the Euro and the Pound are just about untradeable.

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GroundStone Holdings

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How to trade double top pattern?

The double top pattern is one of the most common technical patterns used by Forex traders. It’s certainly one of my go-to methods of identifying a potential top.

Just as the name implies, this price action pattern involves the formation of two highs at a critical resistance level. The idea that the market was rejected from this level not once, but twice, is an indication that the level is likely to hold.

However, as simple as that may sound, there are a few critical things that must be present for this topping pattern to be useful (and profitable).

By the time you finish with this lesson, you will know exactly how to identify a double top as well as how to enter and exit the pattern to maximize profits.

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