*Simple higher timeframe analysis with a basic 1 hour timeframe scale in position*
I have received a lot of requests via social media to do a full trade breakdown of my recent short trade on the FTSE 100 index. I imagine this is because of the media reporting on the huge drop that occurred across all global indices with the Dow Jones index falling nearly 600 points at its lowest yesterday.
It is important to note that I don’t look to time the markets perfectly and enter before huge momentum moves like this but it sure is nice to be in the moves when they are made. Let’s get right to it and look at the charts before the trade occurred and I will talk you through my analysis.
As always, you can track this trade live via the TradingView platform by clicking on the link below. I post lots of charts and analysis on there and it really is a fantastic but of software for technical traders. I highly recommend it.
Pre Trade Fundamentals:
Leading up to this trade I have been of the opinion that the FTSE 100 index and most global indices (SP500 and DJ30) are all riding high on the back of their corresponding currencies weakness. This is mainly due to the importance of the value of exports put on to each index and if the economies currency weakens then exports appear cheaper to foreign customers and sales increase, this boosts the index through the stocks of companies listed inside it.
GBP has been taking a beating since Brexit was first announced back in 2016 so the FTSE100 index has had an easy journey riding high on the back of the weak pound. As soon as a bit of progression with Brexit occurs or a sign of global economic trouble is announced then the index would witness a large correction. And that’s what occurred.
Let’s take a look at the FTSE100 daily timeframe chart first.
The higher timeframe analysis of this FTSE100 short trade revolves around my theories of how markets move. Markets rarely move in straight lines and that is why you will often see trends moving in waves. This is great because you can trade with the trend and “buy low” on the pullback of a bullish trend and the opposite for bearish trends but what if the market appears to be going sideways?
This sideways motion can be boring to watch and difficult to trade if you are primarily focused on catching a trend because the trend will constantly be reversing. This range bound market type can often be called consolidation and if it is appearing in the right market conditions then there is often a very good trade opportunity on its way if you have the patience to wait for it.
I have annotated the daily chart above with some key points that explain what I was looking at when waiting for this short trade entry. The first thing to note is that the consolidation followed a very strong bearish momentum move that took the FTSE100 index from 7720 down to nearly 7000. This shows there are heavy sellers willing to bet that the index is over valued and they are willing to get involved at the right prices.
The next point of analysis is the type of market phase that is forming. It is clearly consolidation which is great because it is a sign of price pausing and gaining interest before the next big move but it is also making a very visible rising wedge pattern. The action of price being squeezed by two trendlines gives even more confidence of a high momentum breakout. The 3rd rejection of the top TL with the 2 daily wick rejection candles forming a “tweezer tops” is a valid single that it is time to look at selling.
Top Tip: When trading wedge patterns I look for the 3rd rejection for my entry for 2 main reasons. 1) It takes 2 points to create a trendline but it takes 3 touches to confirm a trendline. The top trendline is therefore confirmed but the bottom trendline has only 2 points and is there for unconfirmed and more likely to break. 2) The Elliot wave theory works in waves of 5 and the 3rd rejection gives a greater probability that the 5th wave is about to start.
Let’s now look at the 1hr timeframe chart to look at my short position entry.
The first thing you might notice is the squeezing of price on this lower timeframe similar to that of which is occurring on the daily timeframe chart. This is why this trade entry interested me so much. I then did my normal basic trend analysis and could see that on each of the tests of the upper daily trendline, price made lower highs as if the bullish momentum was slowly dying off. This was a good sign.
I entered a short position at $7425 after the 3rd lower high and rejection of the upper trendline of the daily wedge.
As always, the stop loss was placed comfortably above the highs of the candles that were previously testing the upper trendline. A profit target order was not set at this stage because the trade is based on the daily chart and the higher timeframe analysis. Therefore I have marked on the key levels where I would look to take profit if price started to reverse.
My first zone to watch was at the bottom trendline of the wedge. If this trendline provided support then I would look to secure some profit because there would be potential for the consolidation to continue and price could just move sideways.
The next profit target was at the previous price support zone at 7220.00.
Let’s look at what happened fairly soon after entering my first short position.
Price went on to retest the upper trendline once more, as predicted and accounted for with my stop loss placement, before it then snapped with a huge bearish engulfing momentum candle. The sellers had entered the market.
This bearish momentum broke through the 1hr supporting trendline, the 1hr 50ema and made a lower low before pulling back slightly.
It was at this point that I decided to push the boundaries a little and go for the home run. I was confident that this small 2 hour pullback in price was just a small wave before the sell off continued and price was going to fall more. I will now explain why I entered a second short position so soon after my original position.
As I explained above, price broke the 1hr 50ema and trendline that was supporting price over the last few trading days. I was therefore of the opinion that there was very little to keep price up and it was going to be a near free fall down to the lower daily trendline that is shown on the chart.
I moved the stop loss order on my original position to my entry price to remove exposure and entered a second short position on the rejection of the daily pivot level and 1hr support/resistance zone. This zone is shown using the coloured box on the chart.
If you are unsure how to use intraday support and resistance zones in your trading then I highly recommend you read my previous blog post by click on the link below.
By removing my original exposure I was able to exponentially increase my potential return from this trade whilst maintaining the same amount of risk. This is very important if you like to follow strict risk management rules. Although price came very close to my original entry I was able to maintain both positions and I was confident that the bearish momentum would continue.
At this point, I now had two short positions open on the FTSE100 index with a combine total potential return of 12.7R if price reached the profit target at the 7220 support zone.
The chart above shows what happened over the next 20 hours. Bearish momentum came back in to the market and the huge 2 day sell off across all global indices began. In less than 24 hours the bottom daily trendline was broken and my profit target 1 was reached.
At this point I decided to secure some profit by closing my scale in position at 7220. This actually cost me over 5R in potential return. In hindsight I should have maintained both short positions but when you are staring down the barrel of such a vicious sell off, it is hard not to lock in some profit. I therefore closed this position for +5.38R and continued to hold my first FTSE short position.
The chart above shows the following 24 hours of trading. The sell off continued with only a few hours of consolidation/pausing before price finally reached the 7038 support zone at the bottom of the wedge structure. I closed my first short position on the large bullish candle that closed with a bounce off the support zone.
Final gross return for the original position was 12.96R before fees.
The 2nd day of trading was actually the biggest drop in a single day in 3.5 years for the FTSE 100 index. The FTSE was the worst performing index out of all global indices despite them all dropping over 1% in a single day.
I am completely aware that I was very fortunate that I entered 2 positions less than 12 hours before one of the largest Indices sell offs of this decade. I am certain that price would have reached my desired take profit levels if this sell off didn’t occur because the technical analysis was showing this but it could have taken another 3 days to get there or even another 3 weeks.
I think the key point to take away from this trade is that if you just stick to your trading strategy and rules then there is always the chance (although very small) that you may get on to the right side of a global market movement like this.
Remember… you have to be in it, to win it.