BTCUSD: Great Setup, Not So Great Location.

BTCUSD Update: A higher low formation appeared off of the 7823 low and price took out the 8185 high during the previous candle, but we did not issue a trade signal. Why? This price action is occurring within a resistance zone which increases the risk for initiating long swing trades significantly.

It took me quite a few years to figure out that not all signals are created equal. Context offers a way to gauge the likelihood of the expected outcome and this has nothing to do with complicated formulas. It is all about having a way to organize market information and compare unfolding ideas to best practices, or specific criteria to justify risk. Our criteria is very well defined and this is what acts as a signal filter. Higher risk trade ideas, even though they produce profitable trades at times, are not consistent enough in the long run. Consistency over the long run is a defining factor when it comes to professional speculation.

Best practices dictate that buying into a resistance is generally a bad idea and that is exactly where this buy trigger has appeared. I wrote about this specifically when I updated the BTC analysis on S.C. yesterday. The 8091 to 8543 resistance zone is the .618 area relative to the recent bearish structure. Buying in this zone carries more risk on this particular time frame when it comes to evaluating a potential swing trade long.

The more attractive location for this setup is the 7553 level (.382 of recent bullish swing) because of it's proportion to the current price structure and because it is where the recently established bullish trend line is located. This support level is a much better place for a buy signal to appear in terms of reward/risk and expected outcome. The problem is the market may or may NOT retest this level.

Waiting for a setup to occur at this level or having the patience to not react if the market continues higher from the current level is what separates the rational traders from the herd. The herd reacts to anything because it is driven by greed. The rational trader wants to make money too, but waits until conditions are most favorable and is willing to forfeit market moves that promote bad habits and reduce consistency over the long run. Just like a fisherman anchors his boat in a "good spot" and waits for the fish to find him, he does not chase after the fish.

In summary, this market is showing an attractive structure that implies further strength, but what is not immediately apparent is the risk. There is no particular advantage in a situation like this and the outcome is more random. As price action traders, we do not want random because it does not lead to consistency in the long run. So even if this trade setup produces a favorable outcome, we know that if you take this same trade 100 times, the majority of the time you will lose. If this bullish setup does not get through the resistance zone, it will more than likely drift lower into the support level that is more in line with our swing trade plan. At S.C., we prefer quality over quantity and have no problem watching higher risk setups move without us. Referring back to the fishing analogy, you cannot control the fish, but you can control the action you take to increase the chances of catching one and trading works the same way. This is one of those situations.

Questions and comments welcome (We post more technical versions of these details on S.C. first. Make sure to check updates there).