The Forex Chronicles

5 Hourly Inside Bar Candles on the USD/JPY – 19 May 2023

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Introduction

I have always been a big fan of inside bar set-ups because these provide you with a low-risk, high probability entry point that can potentially have high rewards.

You can either trade them on the shorter time frames, such as the 5 or 10-minute charts, for example, to scalp a few points, or you can use them on the 1 hour, 4 hour or daily time frame to target even bigger moves.

The reason why they work so well is because you get a wide trading range with the initial candle followed by a series of smaller indecisive candles that all trade within the range of this first bar.

So when the price does eventually break above the high or below the low of the first bar/candle, the move can be quick and decisive as it will often quickly gather momentum and continue moving in the direction of the breakout.

USD/JPY Set-Up

I wasn’t at my computer during the Asian and pre-London trading session on Friday (19 May 2023), but as I was reviewing my charts this weekend, I noticed what would have been a really great set-up on the 1 hour chart of the USD/JPY pair.

There was a large red candle at 1.00 AM UK time right at the start of the Asian trading session on the USD/JPY pair, followed by four very small candles that all traded within the range of this initial candle between 2 AM and 6 AM, as you can see below:

Trading Opportunity

With a narrow triangle forming on this inside bar set-up, it was only a matter of time before the price broke upwards or downwards out of this tight range, and when it did occur the hourly breakout candle closed at 7 AM, just when volume starts to pick up before the London market opens.

Therefore it was always likely to continue moving, and in this case if you had taken a short position at the close of the breakout candle at 138.28, you could have ridden it down to the 138.00 whole number or closed a partial for 28 pips profit, where it ended up finding support.

You could also have zoomed into the 1 or 5-minute chart to get an earlier entry point during the 1-hour breakout candle once it looked likely that this breakout was likely to continue.

Final Thoughts

Of course it’s easy to talk about these profitable set-ups after they have occurred, but the point is that these inside bar formations occur all the time, and when you a get a long extended set-up of 5 hourly candles in this case, the odds of success are extremely high when the breakout does eventually happen.

Therefore you always want to be scanning the charts of various pairs (on various time frames) to try to visually spot them when they are setting up because they can be very profitable to trade.

Crude Oil Intraday Set-Up – 19 May 2023

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Introduction

Many forex traders will tend to focus all of their attention on the major forex pairs, such as the GBP/USD, EUR/USD and USD/JPY pairs, for example, but the oil markets can be just as profitable, if not more so, when day trading.

That’s because you can often get 200-300 point swings in a day, and there is generally lots of volatility during the London and New York trading sessions, which makes it easy to find one or two high quality set-ups.

One such set-up presented itself yesterday on US crude oil yesterday (19 May 2023), as I will now discuss in more detail.

Previous Price Action

Going in to Friday, I knew that Thursday had been an inside bar on the daily chart of US crude. Therefore I was expecting Friday to potentially be a more volatile day with a wider trading range.

My bias was towards the downside because I was looking for the price to break below the Thursday low of this inside bar, and make a sustained move downwards to erase some of the upward momentum of Monday and Wednesday.

Early Morning Price Action

The low of the inside bar was $71.54, so this was the key level that I was looking at, but as you can see from the shaded rectangle that I drew on the chart, the price was trading in a narrow range during this time and was nowhere near this key level. Therefore a breakout was looking unlikely at this stage.

The price did break out of this channel at around 9.15 AM (London time) but was still around 70 points short of this key level even at the low. So it wasn’t really worth trading the breakout at this time.

Failed Breakout

This attempted breakout ultimately failed, and the price came back into the early morning trading range, before breaking upwards outside the high of this range.

When this happens, you have to accept that your bias towards the downside may be wrong, and it may be worth considering trading an upward breakout of the inside bar instead (which stood at $72.96).

Weekly Resistance and Inside Bar Breakout

Looking at the daily chart, I was aware that there was very strong resistance around the $73 level from Wednesday and Thursday, and indeed from previous days earlier in the month, and this was reflected in the price action because the upward momentum started to stall as it got towards this level.

I knew that we could get an attempted breakout into higher ground if we could stay within 20 or 30 points of this key level, and so when the large red candle on the 5 minute chart failed to result in a pullback, and instead started to trade in a very narrow range, it was time to sit up and take notice.

Taking the Trade

I have talked about 5-minute momentum trades on this site before, and how they can be very profitable in the right trading conditions, and this looked like being one of them.

The 10 and 20-period EMAs were now very close to each other on the 5-minute chart and this new trading range was sitting right on the high of the previous trading range.

It was just a case of watching the price action and waiting for a strong green bullish candle breaking upwards outside of this very narrow range.

Here is a zoomed in view of what happened…

After two inside bars followed by a green breakout candle, I took a long position on the close of this candle at 72.87 with a stop under the previous candle low of 72.73.

My stop was therefore 14 points, and I was hoping for a profit of at least 2 times my risk, ie 28 points.

In the end I closed out my entire position at 73.25 for a profit of 38 points and a risk/reward trade of around 2.7 after I had moved my stop loss up to this level and was stopped out, which I was more than happy with.

I was hoping that the upward momentum would continue for a much bigger move, but even after I was stopped out, the price only reached a high of 73.56 and the breakout quickly fizzled out and reversed sharply later in the day as longer term traders banked their profits from previous longs earlier in the week.

Final Thoughts

The point of this article was not to brag about having a profitable trade on US crude oil yesterday (I have just as many losing trades as winning trades, just like most traders), but merely to walk you through my thought process regarding this potential set-up, and to demomnstrate the profit potential of these momentum trades from tight trading ranges on the 5-minute chart.

These high probability set-ups don’t come around that often each day, but you need to keep an eye out for them because they can be fairly profitable when they do come along, and because the price is breaking out of a narrow range, you can keep your stop losses small and go for bigger wins of 2 or 3 times your risk, which are the trades that we all want to find.

The Average Daily Trading Range of the Major Forex Pairs in 2020

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Volatility in 2020

Every year I take a look at the average daily trading range of not only the various different currency pairs, but also a variety of other markets such as stock market indices, commodities and cryptocurrencies.

This is useful to know because it can tell you which markets currently have low volatility, and are therefore possibly worth avoiding from a trading perspective, and which markets are moving the most on a day to day basis and providing a lot more trading opportunities.

This information takes on greater significance in a year like this when we have had a major global pandemic wreaking havoc on the markets.

So as we are now nearly halfway through the year and starting to see economies return to some sort of normality, now is a great time to look at the ATR (average true range) of these markets (as of 15 June 2020) to see how they have each been affected:

AUD/NZD – 60
AUD/USD – 91
EUR/CHF – 57
EUR/GBP – 59
EUR/JPY – 99
EUR/USD – 78
GBP/JPY – 141
GBP/USD – 107
USD/CAD – 108
USD/CHF – 64
USD/JPY – 63

FTSE 100 – 143
DOW JONES – 635
S&P 500 – 67
NASDAQ – 210

BRENT CRUDE – 214
US CRUDE – 153
GOLD – 22

BITCOIN – 390
BITCOIN CASH – 11
ETHEREUM – 12
RIPPLE – 1
LITECOIN – 2

Currency Pairs

If we start with the currency pairs, it is not entirely clear just from these numbers, but volatility has slowly gone back to previous levels.

There was a big spike up in March and April for all of the major forex pairs as trading volumes surged and prices moved strongly in both directions as panic buying and selling hit the markets, but this volatility as since subsided as we enter the summer trading months, which are traditionally less volatile anyway.

Another surge in volatility cannot be ruled out, particularly if we see a second wave of infections and / or another series of lockdowns, but for now the major pairs are experiencing less daily movements than a few months ago.

The GBP/JPY is still one of the most popular pairs amongst traders with an average daily trading range of 141 pips, but the GBP/USD and USD/CAD are both good markets to day trade or swing trade with a daily movement in excess of 100 pips, and the EUR/JPY and AUD/USD are also fairly volatile right now as well.

Stock Market Indices

With regards to the major world markets, we have seen a much more pronounced upswing in volatility, which remains to this day.

The S&P 500 currently has a trading range of 67 points, which means that it is averaging a swing of more than 2% every day, while the Dow Jones has a staggering average trading range of 635 points, making it very popular with day traders.

Even the FTSE 100 is moving 143 points per day, whereas it would typically move a lot less than 100 points under normal market conditions.

So the indices are well worth considering for those short-term traders who want more movement or volatility than many of the forex pairs can offer.

(If we fast forward to 2023, we can see that 2020 was very much a golden year for day traders of stock market indices because as of June 2023, the S&P 500 was averaging 40 points per day (27 points less than 2020), while the Dow Jones, for example, now moves an average of 269 points compared to 635 points previously and the FTSE 100 index now moves an average of 58 points compared to 143 points in 2020).

Commodities

Many long-term investors turn to safe haven commodities when the market is dropping (or sell their existing gold holdings to invest into beaten up stocks). So it is no surprise that gold is now quite a high volatility market with an average range of 22 points.

Similarly, with the collapse of the oil price and the subsequent recovery as economies start to open up again, the volatility of the oil markets has gone up dramatically since the start of the year, although it has started to fall since the peak in March and April.

Cryptocurrencies

The major cryptocurrencies are notoriously unpredictable and will see spikes in volatility throughout the year, but these too have been affected by the global pandemic.

There was a big sell-off in March across the whole crypto sector which obviously led to a big increase in volatility, but there was another upward swing last month, and even now Bitcoin, for example, is still moving 390 points per day on average.

Of course this alone doesn’t make it a great day-trading instrument because spreads are still fairly large with most brokers, but it is still worth noting how much this market moves, even if you are a long-term buy and hold investor.

Closing Comments

2020 has been a very bad year for many long-term investors, but for short-term swing traders and day traders, it has provided plenty of opportunities with lots of wild price swings every day.

The markets have certainly calmed down a little, particularly the forex markets, but it is clear from the average daily trading range figures above that there is still more than enough volatility in the stock market indices, commodities and crypto markets for people to potentially make money.

If you are interested in day trading yourself, it is important to use a broker that has tight spreads and fast execution, and FXTM satisfies both of these criteria, with spreads starting from 0.1 points on ECN accounts and 0.5 points on Standard accounts.

Oil Update – 24 May 2020

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Recent Breakout

At the start of this month, I highlighted the price breakout that had occurred on the daily chart of WTI Crude, and suggested that the price may well continue moving up towards the $30 level.

If you follow the oil markets, you probably already know the outcome, but in this article I thought I would provide a quick update to show you what has happened since that time.

This was how the price chart looked when I wrote my last blog post:

WTI Crude Breakout - 4 May 2020

And this is how the price has moved since that original inside bar breakout:

Oil US Crude Daily Chart - 24 May 2020

As you can see, this has turned out to be a very positive breakout trade for those who decided to take it because not only did the price move up to the $30 level, but it actually broke straight through this level, which would ordinarily provide some resistance because it’s a significant round number, and was trading above $34 a short while ago.

Inside Bar Breakout #2

If you didn’t manage to take this trade, the market provided you with a second opportunity to ride this upward trend because there was actually a second inside bar breakout that occurred shortly after the first one.

Oil Chart May 2020 Inside Bar Breakout 2

Zooming in to the recent price action, you can see that after the initial price breakout, there was a fairly large red candle followed by five consecutive inside bars where the price traded within the range of the initial set-up bar, indicated by the two lines.

This was basically telling you that there was a period of indecision after the initial breakout, but when the price broke above, and crucially closed above the upper line on 14 May, traders immediately jumped on board with new long positions and drove the price higher to its recent highs.

The breakout candle closed at around $28, so this would potentially have offered a gain of more than $6, or 20% for those people who traded this second inside bar breakout.

Closing Comments

The point of this article is not to brag about how I called this breakout correctly because I am definitely not in a position to do that. I am not an oil trader myself and didn’t actually take a position on it.

I just wanted to re-emphasise how effective inside bar breakouts can be, regardless of which markets you prefer to trade.

If you can find a price chart where you have a large set-up bar / candle and several consecutive bars / candles that all trade within the range of this initial bar, the odds of success are very high when the price does eventually break out of this narrow trading range.

This is particularly true on the longer time frames because if you take the daily chart, for example, 5-10 consecutive inside bars represents 1-2 weeks of consolidation and indecision, which is a long time in the trading world.

Therefore any resulting price breakout is likely to generate a lot of interest and will often have a lot of volume and momentum behind it when it eventually occurs.

Bitcoin Still In Upward Trend After 2020 Halving

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Bitcoin Halving

It has been quite a quiet week on the markets so far, but it has been interesting to keep an eye on the Bitcoin price in recent days and weeks because of it’s recent halving.

After every 210,000 blocks are mined, approximately every 4 years, the reward given to miners is halved.

In the past this has ended up having a positive effect on the price, and I think many traders are expecting to see the same pattern emerge this time as well.

Price Action

In my last blog post about this particular cryptocurrency, I highlighted a possible breakout that was looking increasingly likely as the price was trading in a symmetrical triangle with an ever decreasing range.

As you can see in the price chart below, the price of Bitcoin did eventually break out of this trading range, and after closing strongly above this triangle at around $8775, the positive momentum of this breakout helped the price go as high as $10,000 before it started to run into some strong resistance:

Bitcoin Price Trend Post Halving

So this would have yielded some decent profits for anyone brave enough to trade this particular breakout.

Bitcoin Price Action Post-Halving

The price of Bitcoin dropped over $1000 over the weekend as traders got jittery over the high price of Bitcoin and the possible effect of the halving, but after it went through yesterday, the price has remained relatively calm, and has actually traded slightly higher.

The price has formed a base around the $8500 level and has been moving towards the $9000 level.

Furthermore, if you go back to the chart above, you can see that the long-term upward trend, as indicated by the rising trendline, remains intact.

The price has briefly dipped below the trendline but it seems to be offering strong support because it hasn’t yet closed below this line.

This will encourage many long-term Bitcoin investors, many of whom will be hoping that previous post-halving price rises will occur once again.

Final Thoughts

Whether the price of Bitcoin can break through the psychologically important $10,000 level and start a new upward trend remains to be seen, but for the time being at least, the long-term upward trend remains intact.

I still think it is too early for Bitcoin investors to relax though, particularly those who bought recently between $9000 and $10000.

If the price were to close below this trendline in the coming days and weeks, the downside potential could be significant.

We saw over the weekend how quickly the price fell $1000, and with so many traders observing this same trendline, any sustained selling pressure after a downward breakout could easily take the price back down into the $7000’s or lower.

Disclaimer:

Please remember that Bitcoin and other cryptocurrencies are highly speculative instruments, and it is possible to lose all of your capital.