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.

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 (more…)