Traps Galore Are Lurking In This Market: Here’s How To Handle Them

By Mark Shawzin08/25/2017

For several weeks now I’ve been speaking about my dread of trading in the latter stages of the summer. I’m primarily concerned about increasing unpredictability creeping into the markets. Specifically, we’re in the kind of environment where chasing breakouts is clearly not the way to go as so many of them turn out to be false.

To start, here’s a daily chart of the Swiss Franc against the Japanese Yen (CHFJPY) where we have a double top bear pattern.

This pattern typically indicates a reversing market where it made a new high, came off that high, retested it and then came off it again. When we step back, it clearly resembles the letter M.

In addition to the double top bear price pattern in the Swiss franc/Japanese yen daily chart pattern, I also see another very bearish price pattern in the form of a head and shoulders.

The right shoulder is just being created now, so although we haven’t fully confirmed this price pattern, a confirmation would be a breach of the neckline at about the 112.5 area. Right now we’re about 75 pips away and any breach of that neckline would likely open up a path to the downside.

Normally I would be excited about the opportunity of shorting CHFJPY for days, weeks or months while this plays out. But I fear we could be in for quite a bit more churn and choppiness over the next four, eight or possibly 12 weeks. We had that kind of long term congestion on the left shoulder already, as I’ve highlighted on the chart.

And what’s worse, I’m very suspicious that we’ll see a false breakout where the market breaks down from the neckline and then retreats right back into the choppy area.

That’s why I’m pretty wary about chasing any of these markets right now. I’m confronted with my fear of missing out on a great trade based on something that I clearly see combined with my anticipation that we’re still stuck in a choppy market environment.

If you’re determined to trade anyway, trade with far lower risk than normal. Because I typically advise taking 0.5% risk on a trade, consider trading with half that risk at 0.25%. So if you’re trading with $1,000 that means risking just $2.50 per trade. If you insist on going higher, then 0.33% per trade ($3.33 per $1,000 account equity).

I would also set your profit targets smaller too. Typically I look at trades with a 3:1 risk to reward ratio. So if I’m taking a 50 pip risk in a market, I want to see at least a 150 pip potential return. The problem with that approach in this market environment is that it’s unlikely these markets are going to extend for 150 pips before you get a huge snap back.

So strongly consider taking just 75 or 100 pips on a trade. Go ahead and close out a third, a half or all of your position at that level. Trade with a shorter horizon on your profits and also smaller risk too.

This might feel frustrating if you’re keen on making lots of profits, but I’m telling you that the current market is not the right time for that. We need to be super-conservative when we trade, if in fact we trade at all.

Spot Gold’s Likely Trading Range

Now here’s the daily spot gold (XAUUSD) chart, which also demonstrates why I’m unwilling to chase trades in this market environment.

I recently did a test trade with XAUUSD. I’m currently long from the 1,285 and you can see that the market thrust all the way above 1,300 on Friday, and then by the end of the day it closed the other way with a key reversal at previous resistance.

That trade illustrates the difficulty of chasing trades in this environment, including chasing breakouts above resistance or support. Avoid that style of trading whenever possible right now.

However, on the positive side I think we’re likely to get increased trading activity within the trading band I’ve drawn for you on the chart. It appears we have an upper bound at 1,300 and a lower bound at 1,200.

That means we’ll be restricted to rangebound opportunities in spot gold for now. The good news is that this is a relatively wide trading band and we might see some increasing volatility in this price range.

GBPUSD Going Down From Here

This is the daily GBPUSD chart where you can see we had a clearly defined resistance area and the market broke above it recently.

However, just like every other similar opportunity in recent weeks, it turned out to be a trap and now we’ve shot back within the trading band I’ve drawn for you.

I think we’re most likely to hit the lower portion of this band soon before the price drifts sideways again for the foreseeable future.

In fact, I see a lot of the GBP pairs looking very heavy right now, I’ll take a look at another GBP pair in a moment, but again I want to point out the hazards of chasing break outs right now. Too many markets look like they’re thrusting decisively out of a range, only to come roaring back a thousand miles an hour in your face.

Now this isn’t to say that we can’t play these counter moves, but since counter moves are far less predictable this really isn’t an environment for good trading.

My whole objective as a trader is capitalizing on the larger moves in the market and there are certain environments that don’t lend themselves to these kind of opportunities.

That’s why I foresee that for the next four, six or eight weeks we may have a very contained environment where prices are just thrusting back and forth in a small range while behaving much less predictably than normal.

As I’ve suggested already, if you insist on trading then reduce your risk and your take profit expectations.

Time to Reverse My Earlier GBPNZD Call

Now I’m looking at daily GBPNZD chart. For some time I’ve been reviewing the weekly chart and anticipating that we might have a huge bullish turnaround and a reversal to higher in GBPNZD.

However, recent price action informs me this bull trend may not be as ready to go as I anticipated.

Remember that one of our primary jobs as a trader is to be completely objective. When we’re looking at something and price action doesn’t confirm our hypothesis, we have to set our egos aside and simply look at what the price is telling us.

For that reason, I now believe that the best case we can anticipate in GBPNZD is a huge trading range defined by the upper boundary around 180 and the lower boundary around 173. Right now I’m fairly confident we’re going to retest 173 price level.

That’s because the way I play these is that I look at the price action on the top and the bottom. Do you see how the price action on the top looks much heavier than the price action on the bottom?

This suggests we’re going to roll over and go lower.

You can see how every time the price made a new high it closed on the very low with a very large range that day? It happened over and over. And so now we have all these key reversals at 180, suggesting the market is very top heavy. That’s why I think we’re going to at least 173 if not lower.

You can see that holding up the support is one lone key reversal at the bottom of the range. The market made a new low and then closed on the high, but it happened only once. It’s like a one legged stool where you have one leg trying to prop up the weight of the stool until eventually it just tips over to 173.

While it might go even lower, any breach of that level is likely to be a false breakout again.

So although we have an outstanding long trade from 176.37 in GBPNZD, I suggest you exit that trade when the market reopens. If you’re aggressive you can then start looking at the short side for a good entry.

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What’s Happening in NZDCAD Right Now

Another chart that illustrates my current conundrum of seeking opportunity in an unfavorable trading environment is NZDCAD (New Zealand Dollar against the Canadian Dollar). Let’s start with a daily chart so you can see the bear patterns …

The first bear pattern is a clearly defined double top as we saw in CHFJPY earlier in this article. You have one peak, you come off the peak and then you retest it to create an M top.

You can see that since piercing the 95.5 neckline, the price has down about 350 pips so that double top is clearly in force and effect.

In addition to the double top bear price pattern, we also see a head and shoulders with the right shoulder forming lower. This indicates a more bearish price pattern with the neckline coming in right at current prices.

However, you can see there’s some support at this level already at the 9200 level.

So although we’re sitting on the neckline, which suggests that once prices crash through it then we’re headed much lower, this current trading environment is again setting the stage for a potential trap. That would be a situation where we see prices go lower through the neckline and then snap back to hand us a loss.

Is there any justification for this view at the weekly chart level? Let’s have a look …

Now I see a well articulated Adam and Eve double top. The Adam portion of the double top is a single spike whereas the Eve top is significantly wider.

And with last week’s price action we’re hovering very close to breaching this neckline. Normally I’d really want to get on board this trade. I’d want to get aggressively short here.

But this is the wrong time to do it. If you’re going to short this, then be prepared for the trade snapping back in your face at 100 miles an hour the wrong way. So keep your risk low and if you do get a small profit of 75, maybe100 pips then go ahead and close your position.

Again, this is a good example where I clearly see a pattern that indicates the next major direction in prices and my instinct would be to hop on and go short.

But we’re heading into the Labour Day weekend in the U.S. which culminates the end of summer, and until then we’re likely to see unpredictable trading that doesn’t follow through.

If you have any questions please email me: [email protected]

As always, I wish you a happy and profitable trading week. Until next time …

Mark Shawzin

Pattern Trader

P.S. Again, I’d like to remind you about my LIVE 2-Day Bootcamp coming up soon.

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Hi, I'm Mark Shawzin. After working on Wall Street as a trader for 23 years, and managing private client accounts for the past 13 years, I've put together my 21 most powerful Forex strategies.

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