The Last Kiss

All of the naked-trading strategies in this topic have three parts: The first is to identify the support and resistance zones, the second is to wait for the market to reach one of these zones, and the third is to take a trade once a catalyst prints on one of these zones.

You now understand how to find zones on the chart, and you are ready to learn about catalysts. Catalysts are powerful price patterns. These simple price patterns suggest what themarket may do once the market reaches a zone. These catalysts are only useful when they print on a zone; catalysts that are not located on a zone are simply interesting price formations—they are not high-probability trade set-ups. A very simple and extremely powerful catalyst is the last-kiss trade.

If you have been trading for some time, you have probably seen enough of the markets to know that there are two basic moods of the market, and these moods will be seen in any market in the world. There is the calm, drifting, directionless, choppy market as is evident in Figure 5.1.
FIGURE 5.1 This EUR/USD four-hour chart is in the classic consolidation phase.Notice price movement is choppy, and directionless and does not seem to go anywhere.
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At times, the market will also exhibit strong, powerful explosions characteristic of the trending market as can be seen in Figure 5.2.
FIGURE 5.2 Another EUR/USD four-hour chart, here the market is consistently moving upward in a strong trending phase.
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The market is always in one of these two moods.Continually, the market moves between these two states: the hyperactive trending market and the relaxed, drifting market (see Figure 5.3).
FIGURE 5.3 The EUR/USD four-hour chart transitioning between a directionless, drifting mood to a strong trending phase.
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Just as there are low tides and high tides, hot days and cool days, the market also projects days of laziness (choppy markets) and days of overwhelming activity (trending markets). Traders take advantage of these two moods in the market.

Most trading systems will take advantage of either the choppy market or the strong trending market. This means that most trading systems will perform exceptionally well during either the choppy market or a trending market, but never in both types of market moods.For example, if you decide to trade the trendy kangaroo tail, but instead of waiting for a strong trend, you decide to apply the trendy kangaroo tail to a directionless market, you may find that the trendy kangaroo tail does not offer the type of profit potential you are looking for in a trading system.

This is simply because the trendy kangaroo tail system is designed to take advantage of a strong trending market. Applying this system to a directionless, choppy market that isn’t interested in going anywhere will likely lead to undesirable results. This simple fact means that you must keep in mind which type of market your chosen trading system is designed to work well in, and try to restrict the application of your chosen trading system to only this type of market.

There is, however, one age-old strategy that works on the precipice of the transition from the choppy, directionless market to the strong trending market. This is the breakout strategy. This trading strategy is extremely common; there are many versions of the breakout trade.

by Alex Nekritin and Walter Peters