Here we have a 5M chart of the GBP/USD. During the day before the current screen shot the Pound increased its gains on the dollar and then after a last high momentum run up was turned around and continued to channel down going into the days London session. As I have talked about in previous articles the forex market is comprised of humans that drive price. Being the large run up in price the previous day no doubt many were taking some profit if not all, as well as some speculating short on the GBP/USD. In terms of supply and demand, the supply outweighted the demand and thus a retracement against the bigger and stronger upmove. However at point #1 there is a clear double bottom formation before our trading session starts, somewhere around 10PM EST.

GBP/USD

This double bottom signaled a possable end to the retracement against the stronger underlying uptrend, but we still needed more confirmation to signal a trade. At point number 2, you have a arrow pointing to a reversal candle formation also known as a hammer formation. The psychology behind this candle is quite simple. The bears tried to make one push down and couldn’t find any sellers and thus the price was rejected and a reversal candle formed. At that point the market now made a higher low, another confirmation point that is added to the candle formation, as well as the previous double bottom.

At point number 3 we are finally at our trading hours, and the European session is 10 minutes away from beginning. Look at the candle formation….its another hammer like point number 2. After this and when the following candle broke point number 3 candles high by 3 pips we went long. Being that there was a decending trendline I took half profit at +15 pips and took the other half off at +30 for a total profit of +22.5 pips overall.

To recap why we entered and to point out a few personal tips for your own trading lets look again at the reasons for entry. One we had the overall strong trend in the direction of a long, a very clear double bottom going into our trading session, a higher swing low, another higher low, and at both swing lows a reversal candlestick formation, and price confirmation when the GBP/USD broke the high of the last hammer candlestick formation. Thats a total of 6 trade signals that provided one great oppertunity right at the open of the European market when the volume starts to really pour in. When you combine the power of candlestick patterns, double bottoms or double tops, higher lows/highs or lower highs/lows, overall trend, and raw price data all into one trade the probability of sucess is very very high. In addition to that the risk/reward was over 1/1 on this trade which allowed for a very tight stop loss. Start looking to combine stratagies and if you do it properly your sure to see greater sucess!