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This week’s question comes from Tim, who asks:
You’ve said in the past that the activity between 4 pm and 5 pm New York time is telling. I would like to know how to interpret this activity.
I love this question for two reasons:
That may sound too good to be true, but I assure you it isn’t. My students can attest to the power of not only using a New York close chart but also learning how to read it.
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I won’t go into much detail today about various candlestick patterns as I’ve written about them previously. Instead, I’m going to outline a few ways the daily chart can improve your trading. More specifically, how you can use the last hour of the session to make informed decisions.
For more on using a New York close chart, feel free to read this post and then come right back.
What do you see when you look at the EURUSD candlestick chart below?
Some may see swing highs and lows or perhaps buyers and sellers. Others may just see a bunch of candlesticks.
While those observations aren’t necessarily wrong, I see something else.
To me, the chart above shows order flow. It tells me where market movers (banks, hedge funds, etc.) are positioned.
Before we move on, have you ever heard the saying, the devil is in the details?
If not, it means that something may seem simple at first, but the details are either complicated or hard to see and could cause problems.
Think about that for a moment. It’s the perfect description of a candlestick chart.
On the surface, the EURUSD daily chart above is simple. We have candlestick bodies, both white and black, and upper and lower wicks. That’s it!
So where are those hard to see details that could cause problems?
Those details are in the order flow. Namely, the exchange between buyers and sellers at or near a key level just before the New York close at 5 pm EST.
If you’ve ever watched a market rocket beyond a key level intraday only to spring back before the close, you know what I’m referring to.
This last hour of trade can mean the difference between a bullish signal and a bearish one.
The most common candlestick pattern that emerges from this type of activity is the pin bar. It’s what I started with in 2010, and I still use it today.
If you’ve been a reader of this site for a while, you may have seen me reference something called settlement. This is how I refer to the last hour of each session.
It’s the period between 4 pm and 5 pm EST. During this time, you’ll often see buyers and sellers jockey for position, particularly when the price is near a key level.
It’s like the last 10 minutes of a sports match. You get to see which side prevails and that alone can be indicative of what happens next.
This is why a daily pin bar at a key level can be so powerful. It tells you whether buyers or sellers are in the driver’s seat.
When I began trading way back in 2002, I started with penny stocks. Well, the truth is I had made my first trade before I was legal with my mom as the custodian of the account.
But that’s a story for another time.
In the equity markets, there is something called a level 2. It’s a subscription-based service that shows the bid and ask prices and quantities for a given asset.
While it isn’t perfect by any means, I don’t need to tell you how advantageous this can be. Even if it’s not 100% accurate or transparent, having some idea as to the location and quantity of orders can give you an edge.
We don’t have a service like that in the Forex market. Mostly because unlike the equity markets, Forex is decentralized.
But here’s the good news…
You don’t need it! If you learn to read daily candlestick patterns, there’s no need for services like the one I just mentioned.
The catch here is that you have to wait for the New York close at 5 pm EST. Only then will you be able to get a good read on whether buyers or sellers are in control.
So how do you do this?
Once you’ve drawn your key support and resistance levels (which should always be the first step), you simply wait for a price action signal to develop.
As I mentioned above, this usually comes in the form of a pin bar.
Of course, things like momentum and favorable risk to reward ratios come into play. But I’ve written about those topics before.
Right now we’re only concerned with how to interpret the settlement period on the daily time frame. And to do that, you need accurate support and resistance levels, a firm understanding of candlestick patterns and quite a bit of patience.
That’s all there is to it.
If you’re ever unsure about a particular trade setup or directional bias, the best thing you can do is wait for the market to close at 5 pm EST.
By waiting to see which side is victorious, you stand a greater chance of profiting. You may even decide the trade idea isn’t worth the risk, in which case you just saved yourself from a potential loss.
One of the primary reasons most traders don’t like to wait for the session close is the fear of missing out or FOMO, as some traders have come to call it.
But here’s the thing…
Your number one job as a trader is to protect your capital. Making money always comes second. So if you choose the riskier option of not waiting for the session close, you’re violating the number one rule.
Now, there are times where a 4-hour or perhaps even a 1-hour entry is acceptable. But we’re talking about situations where you’re unsure as to whether a trade idea is valid.
In those moments, waiting for the close at 5 pm EST is by far the best thing you can do. It will give you more confidence in the pending setup and help you protect your capital at the same time.
That sounds like a winning combination to me.
Trading from a New York close chart offers a clear view of what happened during the session. It is without question one of the most important things you can do as it will allow you to make more informed decisions when trading price action.
If you find yourself questioning the validity of a nearby key level, let the market work for you. Wait for the close at 5 pm EST to see whether buyers or sellers have won the day or if the level is even worthwhile.
In a sense, it’s like having x-ray vision while trading. By waiting for a session to close, you get to see where the big players are lurking.
And once you’re able to see where they’re positioned, trading price action becomes effortless.
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
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Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...
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