–][– Forex Thoughts –][–
The Beauty of Hindsight in Trading
Below is my second blog post in my ‘Forex Thoughts’ section. If you missed my first one, you can read it here: ‘Poker & Trading: What It Takes To Succeed’
I thought I would turn my next ‘Forex Thoughts’ blog onto the subject of hindsight having spotted some moves that looked like a no brainer. Although this is the very nature and beauty of hindsight, looking at the set up before we knew what would happen and trying to anticipate price direction, is a totally different and much more difficult thing to do in live trading.
I remember seeing a short video of Tom Dante (trader on Twitter) where he was taking the mickey out of the way some trading ‘experts’ would post videos and highlight the areas where you should have clearly sold (or bought in reverse) right at the very high of a trend and ride it down for profit to the very low of the move, essentially picking tops and bottoms. And this got me thinking about how looking back at price movements it seems very easy to say where you think price would have gone next.
Although looking back at previous price action is a good way to learn and formulate a strategy, manual back testing can be difficult and can trip beginner traders up. You unwittingly create more favorable results by saying ‘oh I would have got in here, place my stops here and got out up at X price’ (something I’ve found myself doing at times), to fit the trade to that particular scenario. It seems easy and logical on paper but in the live market it is a lot more difficult to replicate.
Everyone is trying to guess where price will go next and make predictions based on their own strategies; it’s just that when people are right they and others believe they are good at predicting price, but then when they are wrong the opinion goes the other way. Of course traders try and find the highest probability trades that will go in their predicted direction and this is where experience and consistency comes into play, but you don’t need to be right all the time to make money in the market.
Curtis Faith, an original trading Turtle and author of ‘Way of The Turtle’ said in his book that people would ask him which direction market ‘X’ will go next, and he would respond with an honest answer of he doesn’t know and to an extent doesn’t care. This was because he doesn’t care if he is right or wrong, he cared about whether he made money or not. Sam Barry of LFX said a similar thing when I interviewed him, he said “If I am honest my role is to make as much money as possible for a given level of risk. That to me is a trader”. Click Here
Went a bit off track there, back to hindsight…
The power of hindsight is good for analysis (essentially looking at historical data to formulate and test a strategy) in terms of price leaving clues as to where it will go next. But trading would be easy if we knew where price was going to go, only after moves have happened does it become clear it was going to happen and the clues we look out for become clearer.
So the reason for writing this blog post was because I saw a few examples of the ‘power of hindsight’ in action when I was reviewing some charts one evening and thought I would break them down to understand them better.
The first is the recent upside break we have seen in the Aussie Dollar. At the beginning of the year the Aussie had been making new lows down to 0.685 where price starting putting in a reversal. Now looking at it, we can see it was a nice little trend upwards, and although there were a few horizontal resistance areas along the way, price managed to reach the key 0.725 zone.
It first reached this area at the start of February and had a reactive bounce off the level, as well as being rejected from the trend line area of TL-1 (see picture), which had been keeping price above it in 2015 until it broke through at the start of 2016. Again this is another example of hindsight and spotting the obvious break of a TL type set up. It had also bounced off a downwards trend line (TL-2) from highs of December 2015. So no wonder we saw a reactive move from sellers with three areas of confluence.
Now price has been rejected from this 0.725 area it tried pushing back down, however wasn’t able to sustain the downside and bulls came into the market and created two nice pin bar in the process of pushing price back higher. Now we have a new trend line formed (TL-3) which price was being contained above.
Late Feb saw price once again push up against the 0.725 resistance and once again came into contact of the underside of the old upwards trend line, TL-1. Again we saw a bit of an explosive rejection moving back down to TL-3.
At this point we have seen price move steadily up, held above a trend line and price being held below the horizontal resistance of 0.725, forming an ascending triangle on the daily charts. Price is gradually winding itself up within this structure pattern, waiting for an explosive breakout.
We got this explosive move on the 2nd March 2016. We saw a ‘power candle’ form with a strong close above that 0.725 resistance. As well as breaking this zone, price also closed above TL-1 and TL-2 trend lines. If you had got in at the close of this candle and targeted the 0.755 support turned resistance area, you would have made over 250 pips. Of course consideration of where you put your stop will tell you whether this is a worthwhile trade in terms of risk/reward. This is where moving down to the lower time frames helps.
As well as gaining a better understanding of the moves that occur during the day, we can also look to gain a better entry and more precise stops on the lower time frames. I opened up NinjaTrader and dove down to the 4hr chart for the AUDUSD.
There are a number of things to note here when we look at where price broke the 0.725 level. First off the LFX Psych Momentum has turned bullish a few candles previously, secondly the LFX Order Flow Trader indicator is also printing bullish. Another point of confluence is the volume Point of Control (POC) on the weekly level, although this was mid-week it has indicated that the point of control in volume is down at the 0.715 area, and because price has moved up from here it suggests that most of those orders taken around that level were buy order. This ties into what the OBV is doing, we can see it has been slowly rising from when price was at 0.715 down at the POC area. The OBV breaks its own horizontal trend line pretty much at the same time as price breaches through 0.125 resistance (dotted lines on chart above). This to me indicates that with the price move there is confirmed volume, so will likely be able to be sustained and move on further.
Now with all these confluencing factors and with the power of hindsight, like I said earlier, this really looks like a no brainier of a trade. But safe to say I didn’t take it! Why, probably because I didn’t notice it, probably because I was trying to play the shorts side when price was bouncing off 0.725, and because it’s harder to identify the set up when it’s actually happening.
Hindsight makes it easier to identify these confluences and set ups. As in any trading video when someone scrolls back through their charts to find a particular set up they are talking about and want to demonstrate, it is easier to find them because they have already happened and you can see it within the overall picture.
The second set up I wanted to cover occurred in the EUR, and like the Aussie was a break to the upside that looked so predictable now the move has happened.
The EURUSD had been in a kind of shallow consolidating downtrend from the explosive move on the 3rd December 2015. The market was ebbing and flowing up and then down for a good two months before we saw a break in a particular direction. And in the process of this consolidation a market structure pattern was emerging, in the form of a symmetry triangle.
Now looking back at it, we can clearly see the breakout to the upside after price tightened up in the last week or so before the break, moving in between the symmetry triangle’s trend lines. But moving down to the 4hr chart we can begin to see the clues that the move will occur / be sustained once it’s broken out.
The first thing that you will notice that when the breakout occurred (on the 3rd Feb, 4-6pm) you can see there was a power candle of around 100 pips that printed when price finally managed to break to the upside. The LFX Order Flow Trader indicator is bullish and had been for the past 2 days or so, similarly the LFX Psych Momentum was bullish and had been for a while. Reviewing the OBV direction it had moved up from price lows of 1.0806 and breached its own horizontal trend line at the same time price broke through 1.094 horizontal resistance; again confirming that there is some volume to the move. Looking at where the POC was, at the time when the breakout occurred, the POC for that week would have been at 1.0912 before price moved higher towards the end of the week where a significant amount of volume occurred. But looking at the previous week we can see that price closed above it’s POC, with price even heading back down the following week to test that level of support (1.0832). This is indicating to me that there are buyers at these levels and with such a strong break out above, the move had potential for further upside.
If you had got in on the power candlestick breakout, the move went up another 300 pips! Again depending on stop loss placement and where you entered, this could have been a profitable trade to take.
Obviously there are times when similar circumstances appear and it doesn’t work out, and I have just selected two examples that really stood out to me which could have been profitable trades if taken. But this is why you should do back testing of a strategy to see if it will be profitable in the long run.
But hindsight generally is a good thing in trading, we can learn a great deal as to why certain moves worked and some don’t, we can look left on the chart from current price to see what it did in the past at certain levels to provide us with clues. To quote Jason Stapleton from ‘TradeEmpowered’ that I recently discovered in one of his videos, “Look left, structure leaves clues”, which just kind of made so much sense to me. So looking in hindsight of what price action did previously can be used for current set ups as well as learning from historical moves for developing strategies.
That was a little longer than anticipated, but hope you enjoyed the long read.
I’ll leave you with a little clip from South Park, Captain Hindsight, showing how things seem really obvious.…in hindsight.
Click Here (video quality not great, but point comes across)