The world of trading is portrayed by Hollywood as a rapid fire environment that is always quick and moving, with a currency or commodity always available to sell or buy. But the truth is, there is a lot of watching and waiting that does not always materialise into a sound trading opportunity.
I like to compare the trader to the cheetah. It’s the fastest mammal hunter on the planet, averaging 60-plus kph during a sprint. But this speedy feline can die of hunger if it misjudges its timing and fails to make the kill. Yes it can run fast, but it’s a sprinter not a long distance runner and cannot maintain that rapid pace for long. Therefore the cheetah takes its time and stalks its prey, looking for the best opportunity to strike. It waits, patiently, for the unlucky animal that might wander away further from the herd, or one that is injured. In other words, the cheetah is looking for a high success rate on each attack and will not strike if the odds are not in its favour.
As traders we need to do the same. We have to scan our markets for opportunities (watch the entire herd), identify the markets with the highest possibilities of turning into a trading opportunity (the weak/injured animal), and wait (stalk the prey), not jump in ahead of time (striking before the animal is in range). There is little point in chasing an already over-extended market (the strong fit animal). Instead, we need to wait patiently for the right set of conditions that are pre-defined by our trading strategy. And only when all these conditions are met, stacking the odds in our favour for a high probability positive opportunity, do we place an order (strike).
Let me take you through an example. We had a pretty strong run on the GBP this week, with strong selling pressure on many crosses. Let’s examine the GBP/JPY. We can see that the monthly chart is in a strong down trend, followed by a nice pullback into the sell zone, with last month’s candle closing small and bearish, and this month already breaking the low of December’s candle.
When we drill into lower timeframes, we see a nice down trend on the mid timeframes as well as on the daily, which is a nice trending market to look for trading opportunities. The screen shot below was taken yesterday after the sharp selloff.
That confirmed the down trend isn’t yet over-extended. Now let’s take a look at the 4hr trend on the . The timeframe chart below, shows it is over-extended, as well as showing a beautiful downtrend. On this timeframe we can also spot the level around 142.36 (dashed line), where we have seen a couple of touches in the past.
Now let’s add some Fibonacci studies to the 4hr chart. We can see below that this level clusters quite nicely with the 61.8% retracement level. This prey is getting tastier.
Currently the market is still in the process of pulling back, and I do not know if indeed we’ll get the pullback to this level, or on which timeframe it will best present itself - if at all. But I do know, that if it does, I’ll be there, ready to strike.