Week 25: Reference Points

I’ve mentioned a few times on this blog that I trade price action patterns but people seem to have misunderstood this as visual chart patterns (i.e. triangles, head and shoulders, etc) especially after I showed one of the trades I made last week. The price action patterns that I use do not look the same. I don’t see a visual pattern on a chart and place a trade. I used to do this and I’ve written posts about them but I don’t do this any more because those types of patterns come in various shapes, sizes and in different market cycles. There are many permutations so using visual patterns is not the best way to achieve consistently mainly because there are many other factors in play.

The way I validate opportunities to make sure they are all similar is through reference points. These are certain price action cues that appear consistently on every market (fx, commodities, indices and stocks) which provide an anchor for market movements. By having a reference point, I have a clue on which direction I should be trading in and comfort in knowing that the probability of movement in that direction is in my favour.  After I have my reference point, only then can I start to look for opportunities and combine a potential entry with other factors for confluence.

This blog post probably won’t make sense to 80% of readers but at least it’s some insight into one of the key aspects of my trading strategy. Having a reference point is important if you are developing a checklist style entry system otherwise you are aiming at a target that not only keeps moving but also changes shape. Reference points are a modular approach to developing a trading strategy which has many advantages.

Thoughts on the Trading Week

The screenshot above shows a trade that was taken on GBPJPY.  It wasn’t a particularly exciting trading week but it also wasn’t too bad. There were a lot of opportunities on Monday and Tuesday but then things started to die off towards the Friday. I took a few trades and missed a couple of good opportunities but was happy to finish the week positive.

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