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Price-action-trading

How to determine if a support or resistance will holdWhen price goes to a key level, that is, a support or resistance level, it will either hold and reverse price or it will break and be violated. There are no hard and fast rules for determining if a key level will hold and reverse price but I can give you some guidelines on what to look out for that would increase the odds that a support or resistance would hold. 1. The greater the speed and extent of the previous move, the more significant the support or resistance will be. In this case, watch out for big candles leading up to the key level. Consecutive big green candles in an uptrend or consecutive big red candles in a downtrend shows that the move has speed or momentum. Also, the candles have high volatility or the ranges are large. This big move towards the key level shows that the buyers or sellers in the previous move are overextended and they might be getting exhausted, and so would be lacking enthusiasm to continue their move at that key level. 2. Examine the amount of time elapsed. By looking at when the market touched that key level in the past and the general market conditions, it could tell you whether the market is likely to regard that key level as important. The longer the price has been away from that key level, the more significant it is that the level would hold as support or resistance because other traders who trade in higher time frames would be attracted to that level. 3. Look for strong price rejection. The presence of rejection candlesticks at a key level, like pin bars and also rejection patterns like two bar reversals, three bar reversals and engulfing bar patterns is a high probability sign that the level will hold. When you see strong price rejection at a key level, you should be confident that the level would hold as support or resistance. Some reversal strategies are based on this effect.
Education
by Emekadavid
8
Rules for determining Potential Support and resistance. 1. Swing points: Previous highs and lows These points are intelligent points where one would expect support and resistance. They are high probability points because sellers and buyers made decisions on these points in the past and it is more likely that when price gets there again, due to people’s psychology being constant, they would tend to act on these points. Buyers who bought at the lows have a tendency to take profits at the highs, and vice versa for sellers to take profits at the lows. Sometimes though, price will not respect these zones and would just break through them. That is why they are pointers or intelligent places to expect support and resistance to be. 2. At round numbers: Support and resistance often form at round numbers because these serve as psychological points on which traders base their decisions. They are often referred to as psychological levels and market orders used to be formed around these numbers. It is the human tendency when talking about numbers, to gravitate towards round numbers and this is no different for the forex market. For most of these numbers, price would tend to end in two, three or four zeros like 1.3200, 109.00, 110.00, and 1.0000. 3. Trendlines and moving averages. These are dynamic levels of support and resistance. I usually use trendlines and avoid moving averages although many price action traders use moving averages. The number of times a trendline has been touched, the more reliable it will be. That is a rule in trendlines. To draw a valid trendline though, it has to touch at least two swing highs for a downtrend, or two swing lows for an uptrend. You buy or sell at these points again if price touches them another time. 4. Gaps Gaps represent emotional points on charts. They are formed when there is a substantial difference between the closing price of the previous candlestick and the opening price of the next candlestick. They are formed when there is a strong shift in sentiment about the market, and usually due to fundamental news. Gaps can occur over the weekend or intraday. Weekend gaps are more common than intraday gaps. It is noticed that the market tends to fill the gaps that were formed, and when these happens, the gaps tend to act as support and resistance levels. 5. Fibonacci levels To every action, there is a reaction. So when price moves upwards, it usually has a correction. The same goes for price move downwards. When these corrections happen, the Fibonacci retracement tool can be used to measure where this will end for the underlying trend to continue. This tool was taken from the famous Fibonacci sequence of numbers such as 1,1,2,3,5,8,13,21,34,…. If any number in the sequence is divided by its successor, what you get is a ratio, 0.618, which is called the golden ratio. The golden ratio appears widely in nature and market participants believe that this golden ratio can be used to measure how much price will make a correction or counter trend before returning to the dominant trend. The levels are defined as percentages and many price action traders believe that the 61.8% and 50% fib retracement levels are very significant, although other levels are also important.
Education
by Emekadavid
Understanding Support and ResistanceSupport and resistance are points on a chart where the probabilities favor at least a temporary halt in the prevailing trend. Support is experienced when demand concentrates around a zone as price is in a downtrend and price finds it difficult to break below that zone. This is because traders have placed a high number of buy orders at the zone, preventing prices from going lower. Resistance acts like a ceiling on prices when prices are on an uptrend. Prices find it difficult to go above that level because traders have placed a high number of sell orders at that zone making it difficult for an upward thrust beyond that zone. This USDZAR chart illustrates areas of support and resistance on a chart. Although they are plotted as lines on a chart, we should not think of them as specific price points but as zones. A support zone represents a concentration of demand, and a resistance zone represents a concentration of supply. We need to emphasize the word, concentration, because supply and demand are always in balance, but it is the relative enthusiasm of buyers compared to sellers, or vice versa, that is important because that is what determines trends. If buyers are more enthusiastic than sellers, they will bid prices higher until their purchasing demands have been satisfied. Also, if sellers are the more anxious, then they will be willing to liquidate at lower prices, and the general price level will fall. These are the three principles to follow when analyzing support and resistance zones. Principle 1: A previous swing high or low is a potential resistance or support zone. Therefore, to identify a potential support, look for previous lows. In the case of a potential resistance, look for previous highs. Principle 2: Support can reverse its role to resistance on the way up after a violation of the zone. Some elementary psychology will be used to explain this. At the previous support, some buyers went long thinking that price will rise but eventually, price violated or broke the support zone. Now, since no one wants to take a loss, they held on to their positions with the belief that price will rise up again. When price eventually rose to the previous support zone, they closed their positions so as to breakeven, thereby creating sell orders at that zone that made the zone now resistance. Principle 3: Resistance can reverse its role to support on the way down after it has been violated. Principles 2 and 3 are what traders call support and resistance flips. Take note of these principles because they are important in the price patterns we are going to trade.
Education
by Emekadavid
Which is better: Arithmetic or Logarithmic scale charts?A market chart has two axes, the x-axis and they-axis. Where the x-axis registers the date, the y-axis registers the price. The y-axis has two methods for plotting it: an arithmetic scale or logarithmic scale. Whichever you chose will have implications for your trading. Arithmetic scale: On an arithmetic scaled chart, the spacing between price levels is equal. If price rises, like from 1000.20 to 1500.20 and 1780.20 to 1980.20 for gold, the grid spacing on the chart does not change. This is a gold chart illustrating arithmetic scaled chart. Logarithmic scale: The log chart is scaled based on percent moves. A hundred percent move or change in prices will have a larger space than a fifty percent move or change in prices because the spacing reflects differences in percentages. The same gold chart illustrating a logarithmic scale. The differences in both scales are not readily noticeable when charts are plotted on short periods of time because price fluctuations are relatively subdued. However, you begin to notice considerable differences with large price fluctuations. Because my trading is in the short term, I use the arithmetic scale. But position traders who deal on the longer term would consider using both arithmetic and logarithmic charts for their trading. That way they see both the price level moves as well as how that scales in percentage terms.
FOREXCOM:XAUUSDEducation
by Emekadavid
Identifying Trends through swing points - the 2-step approach.Using swing points i.e swing highs and swing lows, to identify trends is one of the most basic techniques of technical analysis. This is also the building block for identifying price patterns and part of having high probability setups. Swing points are the maximum or minimum points on a trend or range. A swing high identifies the rising price extreme while a swing low denotes the minimum price extreme. The concept is simple. A rising trend consists of a series of higher highs and higher lows. A falling trend consists of a series of lower highs and lower lows. The following two charts show a rising trend and falling trend using this concept. First, USDJPY chart showing an uptrend or rising trend. Next, EURGBP chart showing a downtrend using this concept. In a rising trend or uptrend, when the higher highs and lows are interrupted, we know that a trend reversal has been signaled. For a falling trend or downtrend, when the lower highs and lows are interrupted, we know that a trend reversal is about to take place. But often, people find problems with really identifying a trend reversal. For example, it is widely taught that to identify a trend reversal in an uptrend, price has to intersect the last swing low. I used to follow that approach until I ran into problems. The same goes for a downtrend where it is taught that price has to intersect the last swing high for a downtrend to confirm a trend reversal. Using this approach, one could believe that a trend has reversed on some cases while in actual fact the reversal has not been confirmed but just a half reversal. Now, I use the two step approach to confirm trend reversal. For uptrends: Step 1. Price should first of all make a lower high. Step 2. Then when price breaks the last swing low before the lower high, a trend reversal has been confirmed. Otherwise, price will get to a consolidation or trend continuation. This GBPJPY daily chart illustrates it. For downtrends: Step 1: Look for price to make a higher low. Step 2: Then when price breaks the last swing high before the higher low, you have confirmed a trend reversal. Otherwise, price will go into a consolidation or a trend continuation. Note: How significant a trend reversal is can be determined by the duration and magnitude of the rallies and corrections for uptrends, or selloffs and corrections for downtrends.
Education
by Emekadavid
This time, Gold won't bounce from that supportI think gold is going to make another try for the 1680.94 support. It has touched it four times already: 20th april, 21st april, 1st may, and 6th may. I wrote an idea about the break of the support on the 6th of May just before it touched it but the bulls came up with some resistance to the move of the sellers and price just bounced from the support. Price is descending again but this time with a bearish engulfing bar that appeared yesterday. This is it. Gold is going down and it is going down big time.
OANDA:XAUUSDShort
by Emekadavid
Coming week, USDJPY in a heavily congested resistancePrice has tried to break through the 106.62 resistance at the close of trading this week for USDJPY but I think that move is exhausted. On the daily, price is tracing out a downtrend and I believe that is how it will be for the coming week. Just hopeful. On the 4 hour chart shown above, price has confirmed a trend reversal, but the downtrend preceding it took only 5 days, so I foresee a shorter time for this trend reversal if it succeeds. Maybe after a day or two, price will revert to the downtrend on the daily. Just watching this pair. Not decided yet on what decision to take. The 106.62 resistance is a heavily congested area of recent. I don’t see long trades succeeding. Not yet. But as for shorts, well, only time will tell.
by Emekadavid
Coming week, Aussie expected to go stronger against dollarA day before NFP, on Thursday, the aussie continued to strengthen against the dollar. On the daily, it showed upside volatility and broke through the 0.6459 resistance. A bullish engulfing bar was noticed which indicated that prices would rise further. With the US unemployment rate now at 14.7% and negative GDP growth of 31.22% expected for the second quarter, the aussie would continue to strengthen against the dollar in the coming days. I am looking for long opportunities here.
Long
by Emekadavid
Price patterns in relation to intraday chartsIntraday data is based on time frames from the 4 hours and below. For these time frames, the short-term trend in the daily charts will be seen as the long-term trend in the intraday time frames. For those who are keen to trade intraday time frames, they need to know that patterns on these time frames or charts have three principal differences from their long-term counterparts. 1. Their effect is of much shorter duration. 2. Price trends in these time frames or charts are much more influenced by instant reaction to news events than is their longer-term counterparts. Therefore, decisions are not well thought-out when trading these extremely short-term charts but they develop as emotional, knee-jerk reactions. 3. Intraday price action can be easily manipulated. Therefore, their price data are much more erratic and generally less reliable than those that appear in longer-term time frames. These are the reasons why I have choose not to trade the intraday charts. When I first started out in trading, I tried out the intraday charts, especially the 5 minutes and 15 minutes time frames, but the emotional cost of reacting to every split-second movement of price data was high for me. That does not mean you cannot do it. You just need to understand the costs involved in trading intraday charts. The chart below, of EURUSD, is an illustrative 5 minutes chart of how volatility could suddenly change on the whim of emotions due to news. This is based on the 169th Non-Farm payroll (NFP) data which were released for the USA on 8th May, 2020.
Education
by Emekadavid
Interaction of trendsIt is interesting to study trends and how they interact because the price level of any security is influenced simultaneously by different trends. Hence, why we need to note some application of trend classifications as it applies to trend interactions. 1. When we see any specific price pattern, our first question should be: Which type of trend is being reversed? If it is a short-term trend that is being reversed, then we would not be expecting much price movement when compared to an intermediate or primary trend being reversed. 2. Since intermediate and primary trends dominate price action, traders who deal with short-term trends should pay attention to these trends. They can help them in making good trading decisions. 3. When a trade is positioned in a countercyclical position to the main trend, trading losses usually happen. I do not say that trading with countercyclical positions to the main trend do not succeed, but they have a higher probability of resulting in failures. I trade countercyclical positions sometimes, but I am careful. I usually want to see the patterns having high volatility or being well pronounced. Below is an EURGBP chart showing a two bar reversal that did not move much because it was countercyclical to the main trend which was a downtrend.
Education
by Emekadavid
Classification of trendsIn an earlier note, we defined a trend as a period in which price moves in an irregular but persistent direction. It could also be a time measurement of the direction in price levels. The three common classifications of trends are: primary, intermediate and short-term trends. Primary trends: This trend revolves around the business cycle which lasts for 3.6 years from one bottom to the next bottom or from one top to the next top. Bull and bear trends respectively last for 1 to 2 years, though the magnitude and duration may be significantly different at various times. Reversal price patterns in primary trends usually take longer than three months to complete. You can find primary trends on the higher time frames like the monthly time frame. This is a EURUSD chart on the monthly time frame of a bull trend illustrating how long a primary trend on the bull side or bear side can last. Intermediate trends: When primary uptrends and downtrends are interrupted by countercyclical corrections along the way, they give rise to intermediate trends. These last from 6 weeks to 9 months, and could last even longer, or could even be shorter than 6 weeks in some occasions. Reversal price patterns in intermediate trends could take from 3 to 6 weeks to form and its duration depends on the duration and magnitude of the intermediate trend preceding it. Intermediate trends are usually found on the weekly time frame. Short-term trends: These trends are countercyclical corrections in intermediate trends, and sometimes they align with the intermediate trend. They typically last 3 to 4 weeks and could sometimes be shorter or longer. They are usually influenced by random news events and could be difficult to identify. Price patterns in short-term trends can take 1 to 2 weeks to develop. These trends can be spotted on the weekly, daily, and 4 hours time frames. Below is a EURUSD chart showing countercyclical trends on the daily when compared to the intermediate trend, the weekly, which was in a downtrend. Next we will discuss how understanding trends and their categories has consequences on understanding how price patterns will probably turn out.
Education
by Emekadavid
Time frames in trading price patternsBecause human psychology is more or less constant, that means the principles of technical analysis can be applied to any time frame be it 5 minutes to daily or monthly time frames. The only difference between time frames is that the battle between buyers and sellers is much larger and pronounced on the higher time frames than on the intraday time frames. Therefore, in generalizing, trend reversal signals are more significant on the longer time frames. When trading price patterns, any time frame can be used. What matters most is the character of the pattern. This is a pin bar that was profitable on the 15 min time frame of AUDNZD. I prefer to take trades on the longer time frames like the daily, 12 hours, 8 hours, 6 hours, and 4 hours time frames. I noticed that they contain less noise from the market and suits my temperament. You can choose yours. Notice how smooth this inside bar is on the 4 hours time frame of GBPJPY chart. Compare the same signal on the 5 min chart. You can see that on the 5 min chart you have to deal with a whole lot more bars and you have to spend lots of time on the screen when you can get the same pips spending lesser time on the 4 hours timeframe. That doesn't mean lesser time frames are inferior. Each person has to choose what suits his personality and is convenient.
Education
by Emekadavid