This strategy is meant to show the simplicity and power in simply looking for two things: a key level in the market (horizontal line) and an obvious price action signal. Some of the biggest moves in any market are signaled by a price action setup that formed at a key level, as well as some very lucrative short-term moves as well.
What I mean by “fading” is trading against current momentum from key levels at extremes. We are looking for a rotation back to value as I teach in the course. For this particular strategy we want to see an obvious price action signal as our entry trigger, combined with a key level. Let’s look at some examples to learn more:
In the chart below we are looking at the daily GBPUSD, we can see a very key and obvious horizontal resistance level through about 1.6175. Price had made significant rejections at that level two previous times recently when on November 1st a very well-defined pin bar setup formed showing rejection of the level.
Now, every price action signal is a little bit different, and that’s why we need to use discretion when trading these setups, so I don’t really believe in “perfect” setups, but as far as pin bars go, this pin bar from November 1st is about as “perfect” as they come. It had a good sized tail that was clearly protruding from the surrounding price action as well as rejection a very key level in the market at 1.6175; the market also had the exact same open and closing price.
Next, we are actually looking at the GBPUSD daily chart again, but this time it’s a zoomed out view. I wanted to show you guys just how powerful a price action signal at a key level can be. Note the key long-term resistance at 1.6300. Why is it “key resistance” you might ask? Well, basically it’s because it caused price to stop and make a significant move in the opposite direction…or rather a large longer-term move.
Thus, when price retraced back to that resistance in mid-September, we would have wanted to have our eyes peeled for an obvious price action sell signal to “fade” the up move from a key resistance. As we can see, a very obvious pin bar sell signal did form there on September 21st:
In the AUDJPY daily chart example below, we are taking a look at an example of this “fading key levels” strategy that did not work. It’s important to show trades that failed too, because you aren’t going to win every trade, even ones that look “perfect”.
This pin bar at a key support level had all the makings of a good pin bar “fade” trade, but as we can see price broke higher only briefly before falling again and moving down past the pin bar low.
It’s worth noting that soon after that price did shoot significantly higher, and we could have gotten in on this large move from a subsequent pin bar that formed on October 15th, which kicked off the current uptrend in this market. So, the point is that if we stick to our edge, our winners should eventually out-pace our losers:
Edited by Nikolai Jenkson Source