Burn, BURN! BURN!!! How to Stay out of Trouble with Bollinger Bands and Not Succumb to Amateur Sunday Whipsaw Burn

Last and this mornings Euro have reminded me of an old SNL skit with Steve Martin and Bill Murray, "What the hell is that?"

When "that" happened I took a look at the ForexFactory Euro Forum around 21:30 EDT and was dismayed to find purely amateurish dialog, explanations, and Mr. Dumas trading practices going on from the Asian session through the Euro Session on into the USD session.

The simple explanation as I pointed way before others, is that a inter session gap is typically filled before continuation.  The question should not have been why did the Euro fall so sharply as much as why was there a gap up to begin with.  To be fair to the forum, some experienced traders do post that unpublished fundamentals having to do with China, Oil, Euro state in monetary trouble etc.

The point is You must do your own DO DILIGENCE in order to succeed as a trader.  Remember the Patience is a Virtue Post.  I am a technical trader, which means I am mostly consumed with charting rather than news.  I know for my own improvement I need to improve my awareness of current fundamentals, but typically I trade on upper time frames that just are not affected much by fundamentals, in that a spike from a market news blast typically within hours is exhausted and the currency returns to where the technicals places it. If the stop loss is placed properly there is no worry.  Get below the 4 hour and you will be susceptible to Fundamentals and need to plan accordingly.

Given the last 18 hours, I can guess that there are many a newbies, amateurs and gamblers accounts that have been decimated.  How can one stay out of trouble?  A useful tool is to use the standard Bollinger Band and observe all time frames below your trading time frame as an early warning system.

The standard Bolling Band is made from a Standard Deviation about a Simple Moving Average, or SMA, typically this is a 20 SMA with a standard deviation of 2. What you want to do is have patience by waiting for the Bollinger band to complete it's "pinch" and undergo an expansion or ballooning.  This expansion indicates that volume is flowing in increasing momentum and causing a breakout.  The pinching of the Bollinger Bands is an indication of consolidation that is occurring do to the over extension of a lower time frame.  Ideally one waits until all time frames are sync'd together which is a good indication of the start of the illusive Eliot way.

To the left is a stack of semi synchronized time frames starting with the 5M on the bottom to the 1H on the top.  You can see how each time frame is synchronized to a breakout that occurs between 07:45 and 08:00.   This gives a high probability of a long entry at 08:00 on the 1 hour.

I personally like the 15M in determining exits, and i especially like Bollinger Bands for giving a heads up indication of what is about to happen. In this case notice how the 15M upper Bollinger band is closing over the top of the candle.  This indicates that a consolidation is likely to occur.

On a long trade, look for a negative decrease of slope to indicate potential.  A horizontal to negative slope signals that this leg of the trade is over. Confirmation is indicating by the engulfing Candle.

So for this particular trade. A 1 hour entry would be made on the 08:00 EDT open 1.1997 and an exit would be on the close of the 15M exit of 1.2054 at 11:45.  For FX Solutions with a locked in spread of 3 PIPs, a 54 PIP profit would have been realized.

This example shows an easy way to create a Trend Trading Signal of high probability.  The trick to it's implementation is learning when to enter and exit, and to WAIT for the indicator to fully synchronize and complete before jumping the gun.