Today I was looking at the EUR/USD chart at 7 PM EST.

Well, as expected, the currency pair showed support at 1.3200 levels as that level is where a low was formed
in beginning of Oct-2011 also.

NOTE: As you may be aware, if market bounces of a particular level, that level behaves again as support/resistance if
currency pair approaches that level again!

However there is something important I noticed, that I thought I should definitely tell you about!

"The market opened with a Forex GAP"

Yes, if you look at dailyfax.com EUR/USD 1 hr chart, it will show you that
the on Friday, the currency pair closed at 1.3231.

BUT, when the market opened today at 4 PM EST, the opening price was 1.3313!

Yes, that is a GAP of about 80 pips! (1.3313-1.3231)

So, if your stop loss was for example at 1.3250 or 1.3330, your entire stop loss would have got missed and your trade would
not have closed!

That is very important point!

In a GAP, the brokers are not obligated to close a Trade. It is the responsibility of the traders!

That is the main reason why

1. You should not carry over your trades from one week to next
2. Or if you are keeping your trade open, always monitor what is
the opening price the following week!

This way you can take care of these Forex GAPs!!

Let us take a look at the 1 hr EUR/USD chart -

1. The hand driven line "A" shows the Head and Shoulder pattern. The high "2" is higher than high "1" and "3". In an ideal head and shoulder pattern the high 1 should be higher than high 3, which is happening in this scenario.

2. The Green line "B" shows the neck line.

3. The MACD as shown in Area "E" shows divergance, as in High 2 in head and shoulder is higher than High 1, but the corresponding highs in MACD are opposite (that is, MACD high corresponding to high 2 is lwer than MACD high corresponding to High 1).

So, these are all clear indications that the market may go bearish for next few days.

So, how to take advantage of this setup?

What a trader can do is wait for the market to price to break the "B" neck line. Once the neck line is broken, the expected support is at the line "D".

So, the trader can place a short trade as soon as the neckline B is broken with Profit target at line D. So this will be about 150 pips of profit. The stop loss can be placed above line "F" which indicates sort of mini resistance.

So, by risking about 50 pips, a profit of 100+ pips can be expected. Not bad..right?

If you like this post, can you do me a favour? Can you please add it to your facebook page or tweet it or digg it?

Disclaimer - The analysis is just for educational purposes
and is not a trading advice. Please place the trades by doing
analysis at your end.

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In the video I am also showing you how to spot the best setup and what precautions to take when using head and shoulder pattern

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