Identifying a Bargain

Bargain days are a recurring theme you will see in almost every trading methodology I use. Traders often jump into trends at a price that doesn't represent the best possible value for their trade. This is usually referred to as chasing a breakout or entering at the top of a rally or selloff. Bargain days represent an opportunity to join an existing trend at a much cheaper price. They are often referred to as pullbacks and are formed when the market has moved against the prevailing price action or trend.

The idea is simple and is rooted in the theory of how supply and demand drive prices higher or lower. Within the context of any trend there comes a point where the traders who are driving the trend lose interest and the trend slows. This pause allows the other side to gain control and push the market in the opposite direction of the prevailing trend. Eventually the participants in the original trend notice the cheaper prices and begin to enter the market again. When the prevailing trend has paused and the market is on sale, a bargain day is usually close by.

Selecting the Best Bargain Days Each methodology taught in this book will explain how to identify a bargain day for that specific trading strategy, because the rules do vary. Regardless of a strategy's nuances, all bargain days are represented by a pullback against the prevailing price action or trend. Figure 3.18 illustrates several bargain days in uptrends and downtrends using a USD/CAD daily chart from 2009. Bargain days fit with the bargain-hunting principle, never pay full price. Looking for a bargain day will help reduce the risk you must take to join an existing trend and

FIGURE 3.18 Bargain Days during Various Trends MetaTrader, © 2001-2008 MetaQuotes Software Corp.

increase profits by avoiding entries at the top of a selloff or rally. You will see bargain days in action in Chapters 6 though 9.

Wicks and Tails Are Important A good bargain day will have either a wick or a tail, depending on which way the trend is expected to continue. The length of the wick or tail is not as important as simply having one, although the longer it is, the more support or resistance may be present. The importance of a wick or a tail lies in the level of support or resistance provided as the bargain day came to a close. Without it there is little evidence through price action analysis that the market actually found traders willing to stop the direction of the bargain day, and the market may move further on the next trading day. If you are looking to sell a currency pair, the bargain day should have closed above the indicator and have a visible wick on the candle. If you are looking to buy the currency, the daily or weekly candle should have closed below the indicator and have a visible tail.

Always Consider Support and Resistance When you consider a potential bargain day, do not do it in vacuum. Even if the bargain day has a decent-sized wick or tail, that doesn't mean that the market isn't done moving against the trend. You can see that clearly demonstrated in Figure 3.18, which shows that not every bargain day is one you should trade. The bargain day alone is not a signal to trade; it is a signal that there may be a support-and-resistance opportunity coming soon. When you see a bargain day, you should look for a support-and-resistance opportunity to join the existing trend at a bargain price. Use everything you have learned about support and resistance to determine whether there is an opportunity to trade. If you don't see obvious opportunities, move on, because not every bargain day will yield a trading opportunity.

Wait for the New York Close Daily candles tend to be slightly different from chart to chart, depending on your data feed and the time at which your software considers the end of a trading day. I prefer charts that close daily candles at 5:00 p.m. Eastern Time. This ensures that the daily candle on your chart accounts for the full range of trading that occurred during the London and the New York trading sessions that day. For most traders this won't be an issue, but if your daily candles close at another time, you might consider changing your settings or switching software.

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