This article is written with the intent to explain basic supply and demand economics and how retail forex traders could benefit from this knowledge. Most retail forex traders are not finance geek and have limited knowledge about market dynamics and how forex market operates. Early Trading Years I entered the world of forex trading about four years ago and I came from a Management background. When I started trading, I did not have any clue whatsoever about forex market. I used to visit different trading forums and financial news websites in search of a profitable system, where I saw different explanation of price movements. Some financial news website would say that the reason US Dollar fell against Euro because it reached a 50% fibonacci retracement, whereas another forum would state that the price fell because it hit 100 day moving average, other financial experts would argue that prices fell cause it touched a descending trend line and a bunch of experts would say that price fell cause it reached a resistance level. As a novice trader, I used to scratch my head because all these different explanations were too much for me to grasp and it was hard to keep up with it. As a result, I used to fill my charts with tons of indicators, where it was sometimes hard to even see price candles. I knew that there has to be some logical explanation for all these price movements. So I decided to dig deep and do some research and find the one idea that above all is what drives the market and is displayed on our charts. It did not took me long to realize that all these price movements, I see on currency charts are result of supply and demand imbalance. If price is moving up it means there are more willing buyers for that currency at that point in time and if it is moving down it means there are more willing sellers for that particular currency. Price is simply moving from one zone to another zone to fill these orders. The information I am presenting in this article about Supply & Demand is learned and attained from numerous sources and I will try my level best to explain it in the simplest of form. Some folks might disagree with my point of view, but I always believe that two people might see similar thing and have completely different point of view. So let's get started: Definition Q. What is the definition of Supply ? A. Supply is the quantity of an item available for buyers at a certain price. Q. What is the definition of demand ? A. Demand is the quantity of an item which is wanted by buyers at a certain price. Q. What is imbalance of Supply & Demand? A. (I) If the available Supply of an item exceeds the demand for it then prices tend to fall. (II) If demand for a certain item exceeds the available supply then prices tend to rise. Q. What is Price equilibrium ? A. The market price at which the supply of an item equals the quantity demanded. From above definitions, we now understand what is supply, demand, imbalance of supply & demand and price equilibrium. Now let's go into further details with some examples.
From is go into
above definitions, we now understand what supply, demand, imbalance of supply & demand and price equilibrium. Now let's further details with some examples.
Example - Supply Exceeds Demand From the above explanation, we now know that supply and demand are fundamental driver of price. Now lets look it into simple context to better understand how supply exceeds demand. Let's assume its winter season and a customer goes to an electronics retail store to buy something. As he enters a store he sees a sign board offering 50% discount on air conditioners, but he hardly see anybody interested in buying it, despite the low price. What could be the reason for it. The simple and logical reason is since its winter, and the weather is cold, this item is not wanted by buyers cause it's of no use to them right now, however since the store is aware that there is lack of demand for this item, they are offering discounted price to entice buyers. This is classic example of supply exceeding demand viz. there is less demand for air conditioner in winter season, but more supply available, as such item was offered at a discounted price.
Example - Demand Exceeds Supply Now lets look at similar scenario to understand how demand exceeds supply. It's winter season and a customer goes to an electronic retail store to buy a Heater, but it was out of stock, so he goes to another store hoping he would get it there, but unfortunately they are also out of stock. Thereafter, he goes to third store and finally he sees heaters available, at that store, but the problem is there are lot of customers already standing in line to buy it. Moreover, there is no discount offered on heater, in fact the price is much higher than normal, but lot of customers are still buying it. This is classic example of demand exceeding supply viz. there is more demand for heater being a winter season, but available supply is limited. Since many stores are out of stock, this particular store which have heaters raised the price due to excessive demand.
Example - Price Equilibrium
Now here is another scenario to understand Price equilibrium. It's winter season and a customer went to an electronic retail store to buy a Heater, there he sees enough heaters available at the store and some people are buying it. The store is not offering any discount nor the price is higher than normal. Since there was enough quantity available for this item and limited number of customers are buying it, the customer decides to check another store to see, if he can get a better price. He knows that this item will not be out of stock for the time being, so he visits another store and notice the same scenario as store one. This is classic example of price equilibrium viz. a supply of heater by retail store & demand by customers are equal, as such price is not at discount nor it is higher than normal.
How to identify Supply & Demand Levels on Forex Chart Now that we have better understanding of price equilibrium and imbalance of Supply & Demand. We will go a step further and see how we can benefit from this knowledge in forex market. As in any market the purpose of trader / speculator / investor is to buy an item or instrument at discount (wholesale price) and sell at retail price, the forex market is no different. We as retail traders are unable to see actual buy/sell orders in forex market, but we can apply our knowledge of supply & demand to identify our next level of interest, where we believe smart money (large players / institutional traders, real market movers) are most likely to place their orders. Our main area of interest would be, where price made a substantial move from a particular zone and where actual imbalance of supply and demand between buyers and sellers occurred. It could be a series of candles or one candle, but it should clearly show a decision point where either buyers or sellers took charge. Once a zone is identified, our job is to wait until price approaches that zone again. We could either place a limit order or watch price action to enter trade at that zone. As with any system or strategy we cannot be 100% sure that price will again respect that zone, but there is a higher probability than not that price would react at that zone, considering the way price left that level the first time, suggest that buyers/sellers consider it as an important zone. Let's look at attached chart example, which is self explanatory:
Price Structure There are four common structures that are used to identify supply & demand levels on forex charts: 1) Drop- Base- Rally 2) Rally-Base-Drop 3) Rally-Base-Rally 4) Drop-Base-Drop ____________________________________________________________________________
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_____________________________________________________________________________ I firmly believe that once a trader understands supply & demand dynamics and trade with patience, discipline and proper risk management, he/she could achieve success in trading. Here are some of my favorite Quotes from successful traders: •
Don't think about what the market's going to do, you have absolutely no control over that. Think about what you're going to do if it gets there.
•
All we can do at best is look for historical reasons and apply this to a level or price area for possible future moves. Trading is neither science or art, it is a reflection of what value humans place on a particular financial instrument at a given point in time.
•
If you must play, decide upon three things at the start: the rules of the game, the stakes, and quitting time
The Holy Grail of Trading [2/2] Risk Management / Part 2 - by Ken Part 1 of this article can be found here - > In the following practical demonstration of Risk Management, I have scrolled EUR/USD chart back to Oct 2010 as the starting point of this exercise. Chart contains only Chaos Semafor indicator for showing 3 levels highs and lows. Purely for information not for our entry and exit decisions. Time to get on with our 10 exercise trades.
Trade 1: We have one fresh supply zone and one demand zone. The fresh word here refers to zones are not been visited by price yet. Then we have some mid supply zones which we will ignore unless we see some decent opportunity. Now we wait and see what price does. NB. I use an alert indicator which plays a sound when price is approaching wherever I place the alerter's horizontal line. I don't have to sit and watch the price on any particular chart. Please see end of this article for the indicators mentioned/used in this exercise.
See how price sliced through the first mid-weak zone. We cannot see any decent PA here to prompt us to sell, especially considering demand at bottom was established with an engulfing candle. So we ignore it. If upper supply works and price turns down towards demand then so be it. We'll wait for the next opportunity. Do not worry about missed opportunities. Markets present no ends of entry opportunities on a daily basis.
As expected all weak zones are taken out. After price touched the main supply zone we have been watching, it produced a juicy bear engulfing candle. Now we are looking for an entry opportunity that fits in with our Risk Profile. It comes first and second candle after the engulfing one. Since we are all excited and cannot wait we enter as soon as price hits our stop range. Now we have to wait and see without doing anything stupid in the meantime. Please note that this entry doesn't fit conventional supply and demand trading. Textbook entry would have been when price traveled further up within supply zone so that we can have our 40 pips stop just outside [above the upper border] the supply zone. However, after price hitting supply zone then seeing such a nice engulfing bear bar we decided it's worth taking the risk and entered at first possible opportunity.
The price hit our first target. Decision time. Do we close or let it run? Obviously, we don't take a long time here to think about closing or not. We should already have a pretty good idea by now what we'd be doing when price hit the TG1. We already know that best possible signal we hope to see on charts is a nice engulfing candle on right place. Meaning in and around strong zones. We have a nice engulfing and a decent PA. In this occasion we decide to move our stop break-even +, define TG2 and let it run.
Since price sliced through our TG2, we decide to move our stop to TG2 and let it run. Looking for the price to hit the bottom demand or at least come bit more close to it.
We were proven to be right on this occasion. With patience and without unreasonable fear we have managed to maximize our gain by sensible trailing. We put our third and final target just off the demand zone to ensure quick exit. Often price can mess around before hitting the actual zone. Some may ask why that bull engulfing candle pattern on the way down didn't work. Look at where it formed? Do you see any decent zone around there? Besides, we put off from our entry radar levels between the supply and demand zones we decided to trade. Please note that not all price movement as straightforward as the above one. That's why it's very important that when we catch a nice opportunity we don't waste it with premature exits. Trade 1 is closed with 290 pips gain.
Trade 2: In accordance to our Risk Profile and dirt simple trading plan we take the buy in the demand zone. Our stop works out to be just outside of the demand zone which is ideal.
Now, there are various approaches on entries in and around supply and demand zones. Some enter when price hits the zone, some wait and see if the the candle makes it into zone, closes inside the zone, or goes through therefore invalidate the zone. There are others who wait to see if price is going to be contained in the zone by watching PA to give them some clues. Each approach has it's own advantages and disadvantages. Waiting for PA confirmation may take some time and it'll most likely will happen outside the zone thus increasing stop pips count. Of course it's still not guaranteed it'll work. On the other hand taking the trade when price hits the zone will reduce our stop pips count but we do not have any indication or clue if it'll be contained within the zone or not. In my case I do not subscribe to any particular one. I use all of them depending on the zone and how price travels, the speed price hits the zone. The above is a good example of for the first approach.
We have a fresh fairly strong looking zone which is established with an engulfing bull candle and hitting the zone with fairly big H1 candle.
As you can see price hit our TG1 nicely. Instead of closing we expanded our TG to about from 80 pips to 120 pips and moved our stop to break-even + 19 pips. Our TG2 is almost hit but not quite. Since we moved BE to plus 19 pips we can afford to wait and see. All looking good so far. We locked our trade. We are fairly safe. We won't be taking any loss on this trade unless something unexpected happens or we leave this trade like this over the weekend and market gaps down to well below our entry price.
TG2 also hit with a nice big bull candle. Instead of closing we decided to trail. Moved TG further up and moved our stop to break-even + 122 pips. We could have moved our TG further up but notice the left boxed dirty price action zone. We don't want to get involved in any dirty price action. It's best to take what we have [once hit the dirty zone] and run. If TG3 hit we'd be achieving over 4:1 reward ratio. No point getting greedy. If it slices through the dirty zone so be it. We'll wait for the next opportunity. As this trade is fairly secured, we may go ahead and look for another trading opportunity on another instrument.
TG3 is hit comfortably and Trade 2 closed with 170 pips gain. There is a nice bear engulfing candle in dirty zone which established a new supply zone. Why didn't we take a sell order around there. Well we already decided we'll only trade clean and strong zones. What about that current bull engulfing candle then. Are we not going to trade it? Yes we would consider this buy after a good engulfing bull bar around previous spike. Additionally, price has been bounced from fresh demand and not reached any serious supply yet. However, we cannot take this buy trade as stop would be bigger than our Risk Profile allows us. We need to wait for the next candle and see if it's going to come to within our 40 pips range.
Trade 3:
Unfortunately, price didn't come down enough to allow us enter with a maximum 40 pips stop as defined in our Risk profile in fresh demand zone. However, we took a sell order in fresh supply zone without waiting candle finish or PA config. All was good other than amount of time price took to reach supply zone. As you can see it hit our stop and this Trade 3 closed with 40 pips loss.
Trade 4:
A new zone established at new high with an bear engulfing candle. If the risk is small, newly established zone looks attractive, looks a worth try. We will have to wait and see what kind of risk level it'll offer on the next candle.
We have our entry with bit lower than our maximum stop of 40 pips
Instead of closing we decided to trail as the candle following the one hit the target worked out nicely. So, we moved the stop to TG1. Locked our 80 pips gain and moved the TG further down.
Again instead of closing we decided to trail. Selling pressure looks quite promising. Already sliced through a minor ranging zone and gunned into bigger one. Decided to go for the full monty by moving target all the way down. However, this doesn't mean we will not keep trailing at reasonable distance.
Target hit on weaker demand zone. Trade 4 closed with 405 pips gain. Are we going to buy here? Not as yet. It's a weak demand zone and we don't see any convincing PA as yet. So, we wait and see.
Now we have our bull engulfing candle. Only downside is it's on a weak zone. We can not take the entry as yet. Price is well out of our stop range.
Trade 5:
Even though PA and levels have some warning signs for buyers we went ahead and bought it. Managed to reduce stop size to 27 pips.
Stop is hit. Trade 5 is closed with 27 pips loss. Lower main zone hit. We have to remember it's no longer fresh zone. This is the second visit. We cannot enter a buy. It's outside of or stop range.
Since the lower demand was not fresh we decided to wait and see the finish of the big bear candle. Eventually, it took out lower demand. Established new supply zone and selling pressure is still on.
Trade 6:
Even though it's a minor supply we take the sell trade almost within the zone. We could have sold bit higher and therefore reduce our stop amount but we wanted a bit of PA confirmation. A weak but some indication that sell is still on. We had better indication as to where price may be heading on the near left. Note those big engulfing bear candles within/around the supply zone. Some call it previous demand zone turned into supply zone. That's a bit too techie for me. The fact is that sellers are in charge as we can see on the chart. All the remaining buyers from the origin of the demand zone already used their buying power and remaining ones are wasted at subsequent visit. Additionally worth noting that we see on the charts new lower highs and two demand zones are taken out without much difficulty. Especially the lower main one taken out with such a zeal that we need to take notice of heavy selling pressure. What this means is that selling the peaks may be better option than buying in minor demand zones.
When TG1 is hit, we moved our stop BE+9 and TG2 to 118 pips. We let it run; trusting our analysis about heavy selling. We could have taken well over 120 pips with further trailing but let it run and it's almost hitting our stop.
On this occasion we got back previous low, but sometimes price takes the stop by a couple of pips or so. For those who cannot handle frustration when such thing happens best to trail more closely or close the position when TG1 is reached. Trade 6 closed with 209 pips gain
Trade 7:
Why we took this long entry when we were convinced there are heavy sellers and were saying best to sell peaks. Price created a form of gap and hit the rejection point. This knowledge may be out of the beginner's domain. So, lets just say we see heavy selling up to a certain point then rejection. Since it fits to our stop range we want to try this newly established zone.
Just short of our TG1. It looks turning against us. We don't want the winning trade to turn into a looser so we moved stop to BE+10
Since we have a nice bull candle it would be shame to close here rather than trailing. So we move the stop to TG1 and TG expanded to TG2 for 160 pips.
TG2 is hit and decided to close due to price structure on the left. Trade 7 closed with 160 pips gain.
Trade 8:
Since we already have a supply zone just above, we have decided to go with the newly established supply zone just below the existing one. Note: Conventional supply and demand trading method advises us to wait for the price to visit the established zone before entering the trade. The reason for this is that establishing zone usually takes more than a couple of candle. However, in this exercise we have been taking trades just after a zone created. We go in early if we see attractive PA when establishing a zone. And of course we always keep left of the chart under constant observation. We look at left and trade the right.
Trade is developing nicely. TG1 is hit. Instead of close we have moved stop to BE+29 pips and expanded the target all the way down to near demand. Now we are targeting just over 250 pips. It would be real nice if we get it. That would be over 1:6 reward ratio.
What the heck.. Since price moving nicely in our direction we have the opportunity to move stop to our TG2 and let it run. Heavy selling pressure. We know overall market direction is south [down]. The downside is if it turns from here we'd be loosing a buy entry in demand zone.
Demand is taken out with ease. We have locked 1:7 reward ratio by moving our stop bit further down. Now we can sit and relax. Let the price do it's thing. See what else it may offer. At this point it doesn't matter a bit if it turns and hit our stop. If it doesn't then we may be onto something bigger here. However, we will still trail it at a reasonable distance.
Run is still on. We have no rush to exit. We just have to keep our greed in check here and let the price do it's thing. After all we don't catch such moves every day.
Traders with enough screen time will know that once price hits an important psychological level it's bound to react. We are trading EUR/USD and it hit sub 1.30. Lets assume we are new and not familiar with such stuff. So we leave our trailing as it's at 652 pips.
As expected bounced from new territories of 1.29. Our stop is hit. Trade 8 is closed with 652 pips gain.
Trade 9:
We have missed the lower demand while waiting for our previous trade. Decided to enter a long on upper demand. Couldn't take previous hits as it was not in range of our stop. As you can see our initial TG is already hit. Not closing it. Moving stop to BE+ and expanding the TG.
We will start trailing here as we don't want to give back most of our gains.
Since it took out previous highs we keep trailing it. Already secured about 282 pips. Let see if market is willing to give us more.
Closed here manually after seeing rejection and especially engulfing bear candle. Trade 9 closed with 307 pips gain.
Trade 10:
We couldn't take the sell order as it was just outside our stop range by 1 or 2 pips. We just cannot say what's 1 or 2 pips. We could take that sell. Look how it worked fine. Yes, but we cannot compromise on our Risk profile. Once it's defined we must keep it's rules to the pips, until we decide to work out a new one. We just cannot work out a new Risk Profile to fit in our current trade. So best is too keep it if it's working until it doesn't over a period of time. Discipline must be there at all times. We enter a buy order in newly established demand zone with smaller stop than our maximum.
Initial TG is hit. Again instead of close we started to trail by moving stop BE+35 and expanding the TG.
Unfortunately, on this occasion price didn't go in our direction. It hit our stop. Trade 10 is closed with 35 pips gain. MACD Introduction So, we've looked at what the MACD is, where all it's components are derived from and what trading signals it produces. Now we're looking at how to trade with the MACD. Traders use the MACD indicator in a number of ways to realise a trading opening. • The MACD Divergence • The MACD Histogram Crossover and Divergence • The Signal/Trigger Line Crossover • The MACD zero line crossover In our last section on The MACD, the indicator is best used in trending markets and shouldn’t really be used in range bound markets – not even to predict a new trend. The MACD
indicator allows us to determine how strong a trend really is (or if we’re in a range). If the MACD is hovering and flat around the zero line then this identifies a range bound market and if the MACD is trending strongly through or from zero (up or down) then there will be a strong trend trend. We can see this in the below McDonalds Chart.
Using MACD to Identify Trends So the MACD and it's histogram should be used for trading in trending markets. Once we have established a primary trend (Dow Theory Tenet 1) there are a number of ways we can trade with the MACD on the continuation or this trend from it's retracement (Secondary Trend). Trading the MACD Divergence The MACD Divergence is either loved or hated by traders and often gives us false signals. The Divergence between the market price and the MACD is signalling weakness in trend. When the MACD is moving in the opposite direction to the market price this is a signal that the markets momentum MAY reverse at some point. Be aware though, that there are plenty of situations where trend hasn't reversed on MACD divergences. In the below chart we have examples of positive and negative divergence. Positive divergence is seen when the MACD is increasing (making higher peaks and higher troughs), while less than zero, against a downtrend in price (lower peaks and lower troughs) – This is a Bullish Divergence (although the market is still in a bearish primary trend, we anticipate a bullish retracement or reversal). A negative divergence occurs when The MACD trends down, while above zero, against an up trend in price – A Bearish Divergence. These Divergences occurs because the current price momentum still outpace it’s, growing opposite momentum. This opposite momentum may take some time to be strong enough to win the day. You can see in this case the Momentum did change while the MACD was in positive and negative divergence, indicated by the yellow line.
MACD Divergence The MACD divergence is an indicator which really needs to be used in conjunction with other indicators. The MACD divergence tells us trend may reverse at some point due to a shift in momentum. Other indicators needed will include volume. Volume is important here because as momentum wanes volume should decrease, indicating a lack of conviction in the current trend. This divergence (along with histogram resistance) is particularly useful if the divergence shows a secondary trend (retracement) possible reversal. This may indicate the primary trend is about to begin again, which is a signal for trend traders to enter the market. Instead of an indicator that is going to trigger trading signals, MACD Divergence is really an early warning system. Many traders will wait for the trend to confirm its reversal before entering the market - using the MACD divergence as a filter, only entering MACD/signal line crossover signals after a divergence. As we can see in the above chart the green circles represent possible entry points where the MACD crosses the signal line. Trend traders may give the 1st circled entry point a miss, as it's against the primary trend and hopefully just a retracement to the downward trend resistance line. The 2nd entry point would interest a trend trader though, as it's signalling a trend and momentum continuation. Many divergences will last for a long time, so patience is needed. Trading the MACD Histogram As well as setting up trading strategies around the MACD divergence and its signal, traders may also set up trading strategies around the MACD Histogram. Remember, the MACD histogram is a derivative of the MACD and it's 9 day MA signal - measuring the distance between the two, therefore changes in momentum. There are two ways of using MACD histogram to trade - The zero crossover and the divergence. The crossover will produce actual trading signals, where momentum and trend has changed, while the divergence is more subtle. The histogram divergence is almost a filter, or early warning system. It allows traders to see slight changes in momentum (even though price trend looks the same to the naked eye), which may lead to a full blown trend reversal in the future. Traders may filter out all MACD/signal line triggers that aren't associated with a divergence.
Trading the MACD Histogram Zero Crossover The Histogram zero line crossover occurs when the MACD equals the MACD 9-day moving average (it's signal). It's exactly the same as trading the MACD/signal line crossover as discussed later in this section, just graphically different. So, we won't spend much time on it here. Trading signals are triggered when the the histogram crosses it's zero line. When the histogram crosses above the zero line buy signals are triggered and when the histogram crosses below the zero line, sells signals are generated. I've shown this in the chart below. As shown these signals occur when the MACD and it's signal cross. Once again, the MACD histogram should only be used in a trend following strategy.
Trading The MACD Histogram Crossover Trading The Histogram Divergence The histogram divergence is used to anticipate a MACD-Signal crossover - an early warning system if you like, when trading with the trend. It can be used effectively as a filter to all those MACD/signal line crossovers, filtering out crossovers that don’t have a divergence associated with it. There are 2 types of histogram divergence - The Peak-Trough and Slant divergences. In both cases a full-bodied divergence generating over a few weeks is a better indicator than a shallow divergence developing over a few days – so go long and large, not short and shallow. We have two examples of the Peak-Trough Histogram Divergence – one Positive and one negative. A negative (or bearish) divergence forms when the histogram makes consecutive lower peaks and the MACD and price form consecutive higher peaks – price momentum is weakening in a similar way to the MACD divergence above. This can be seen in "The MACD Histogram PeakTrough Negative Divergence" Chart . We have a histogram negative divergence indicating a possible price reversal to the bearish side. This price reversal is confirmed when the MACD crosses below the signal, which could be a trade entry point to short the USD against Japanese Yen (green circle). As with the MACD divergence the Histogram divergence indicates many false trade signals; so it’s used as part of an overall trading strategy where other trading tools are also utilised.
The MACD Histogram Peak-Trough Negative Divergence A Positive histogram Divergence forms when the MACD and price form lower troughs and the histogram forms higher troughs – price momentum is turning away from the downside, to a bullish trend. This can be seen on the above chart “MACD Histogram Positive Divergence” where the lower well-defined troughs on the MACD are highlighted in Red and the Higher well-defined troughs in the histogram are highlighted in green. Notice MACD moved to a lower low in late May, but the histogram formed a higher low. It follows, if traders are using this divergence as an early warning signal before committing, a good entry level maybe Jun 6th or Jun 13th when the MACD crosses above the signal/trigger. Remember, this is a trend following indicator.
The MACD Peak-Trough Positive Divergence The Slant divergence acts the same way as the peak-trough histogram divergence, but is minus the peaks and troughs. The Histogram in both the positive (bullish) and negative (bearish) divergences will slope towards the zero line indicating that price momentum is weakening and the price of the security is maybe about to turn. (Remember the histogram measures the distance between MACD and it’s 9-day moving average signal line. Momentum weakens as these lines converge). In the below chart we've zoomed into a section of an IBM weekly chart following a primary up trend. Within this primary up trend we can see two retracements. Two positive histogram slant divergences have been highlighted, where the histogram diverges with the price and the MACD itself, indicating a momentum change. If traders are using the histogram divergence as an early warning to possible momentum change then they will act on the buy signals where the MACD crosses the signal line (or where the histogram crosses zero). These buy triggers are highlighted with green circles. These two bullish divergences bring IBM out of retracement back on to the primary trend.
You can also see two negative divergences, one a peak-trough divergence (May-Jul 99) and one a possible slant divergence (Dec 98). Trend traders will use these negative divergences to highlight where the primary trend maybe about to retrace and sell on the MACD-signal crossover. Remember, other indicators should be used as part of your trading strategy. The MACD Signal/Trigger Crossover We touched upon the trading possibilities of the MACD price crossover in the section – “The Moving Average Convergence Divergence – MACD”. The signal crossover is the most common MACD signal - when the MACD crosses above the 9-day EMA (Exponential Moving Average) trigger line a buy (or exit the short) signal is created and when the MACD crosses below the signal line a sell/short signal is created. This is a great signal confirmation in itself, or just after a divergence and is generally traded with other indicators to get a clearer picture of where momentum is going. Again, this is better used in trending markets. Below, we have an S&P 500 hourly chart in a primary up trend. We can see how traders utilise this indicator in a trading environment. On the 22nd the MACD (Blue line) crosses below the 9-day EMA trigger line. This indicates that traders should sell a long position. Indeed, momentum shifted to the downside until the MACD crossed above our trigger (white line) on the 27th. This crossover on the 27th is a buy signal where momentum reversed again to continue the primary trend. In effect the area between this sell signal and buy signal is a primary trend retracement. The signal to exit this long position comes on the 5th when the blue MACD crosses under the white signal. Trend traders may sell here and await the retracement to follow it's course. On the 7th we can see a criss-cross buy/sell signal. Anyone entering a buy here would have been burned, as price continued to fall and a quick strong sell signal developed. In fact we can see a negative divergence here, indicating a turn in momentum to the downside. This turn to the down side may have been a retracement or full blown trend reversal. Other indicators need to be utilised to indicate whether the
retracement is to continue,or not... Use volume, Fibonacci retracements and see where support and resistance are before trading.
MACD Signal Line Crossover In the above example I've indicated that traders will sell on the retracements and buy on the continuation of the primary trend. This may not be the case for all traders. As part of a trading strategy, a long-term trader may be happy to keep his long position going into a retracement. He/she may have a long position that only gets sold when long term trend lines are broken, or when previous support areas are lost. By the end of this course, hopefully you'll be aware of many trading strategies and pick the one best for your needs. If you find yourself in a situation where you see a buy signal crossover (MACD crosses above 9day signal) above the zero line. or a sell signal crossover below the zero line, this indicates momentum is continuing and these signals are still valid. Just be aware of any divergence that you see, indicating the possible change in momentum in the future. The MACD Zero Line Crossover As the name suggests the MACD zero line crossover highlights buy/short positions that may be profitable to a trader. When the MACD crosses the zero line it indicates that momentum has already reversed. Traders will employ other indicators into their trading strategy to try to determine whether it’s still a good trade to enter into. To determine a strong trading signal The MACD will pass the zero line in a strong manner at a decent angle. This will also coincide with a strong histogram indicating good price momentum continuation. If the MACD crosses zero flatly or just above the zero line this indicates a range, which isn’t good to trade with The MACD. In the Chart Below This strong signal is highlighted on the left where the MACD is also moving away from the 9-day trigger line. This strong MACD and rising histogram (the difference between MACD and trigger) shows good rising price momentum – a good buy signal. In this situation the trade sell signal occurs when the MACD crosses under the signal. As the MACD heads towards zero a “MACD zero line crossover” trade should be anticipated, but only if it crosses in a strong manner. We can see that when the MACD crosses back across zero and the histogram is strong – a good short signal. We can exit the trade at the next MACD/signal crossover.
In the below example out trading profits are indicated by the green and red trend lines. If we had traded the MACD signal/trigger crossover our profits would have been greater between the two trades (indicated by the grey trend lines). However, using the MACD zero line crossover is an extra confirmation that momentum has turned and strong, as well as triggering less false signals. In effect the zero line crossover is another way of looking at the double moving average crossover, as when the MACD crosses zero, the 2 moving averages cross each other.
MACD zero line crossover Changing The MACD Parameters The standard setting for MACD is the difference between the 12 and 26-period EMAs. Chartists looking for more sensitivity may try a shorter short-term moving average and a longer long-term moving average. MACD(5,35,5) is more sensitive than MACD(12,26,9) and might be better suited for weekly charts. Chartists looking for less sensitivity may consider lengthening the moving averages. A less sensitive MACD will still oscillate above/below zero, but the centerline crossovers and signal line crossovers will be less frequent. To Sum Up The MACD and MACD Histogram are great for spotting trend, identifying changes in trend & price momentum and establishing trading trigger entry & exit points. Many trend following trading strategies will have MACD at their heart. The MACD can't tell us if prices are overbought or oversold though and as the MACD is a derivative of price it's difficult to compare Momentum against different stocks, or against historical prices of the same market. But it's unique in bringing together trend and momentum. To compare other markets and historical prices we can use the Percentage Price Oscillator (PPO). This is MACD's cousin and we'll talk about this next.
We can set the indicators price action sensitivity. The sensitivity of the indicator to price action determines how quickly the trader enters the move and how accurate these trading signals are. If the indicator is set to low sensitivity then you generate less false signals, but you may see the move too late, or not see it at all. With high sensitivity you are more likely to catch the move into the trade, but you may generate false trading signals. For instance a swing trader (trading with a horizon of 4 to 5 days) may set the MACD to 3, 10, 16 once they've drill down to an hourly chart from a daily chart. Reducing the parameters of the moving averages will increase the sensitivity and highlight more signals - good and bad. Good charting software will allow the parameters to be changed. Technical analysis is not an exact science and although these indicators can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.
Introduction Fibonacci (Full name: Leonardo Pisano) was a 13th Century Italian mathematician who developed a sequence of mathematical numbers, which described how life is bound by the same mathematical principles. We can use his findings to interpret (in mathematical and charting terms) how the individual ceases to act alone, but acts as a collective, making group decisions. We'll find out how Fibonacci's (shortened to Fib's) mathematical relationship between his sequences of numbers and crowd mentality plays a critically important role in charting, as well as in nature itself. A more in depth look at Fibonacci numbers can be found on Wikipedia etc… but for now, we as traders only need to know the basics. Fibonacci’s numbers are: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each number is simply the sum of the 2 proceeding numbers. It’s remarkable characteristic is the ratio between the numbers - Each number is approximately 1.618 times greater than the proceeding number. This ratio strengthens as we climb higher in numbers. In mathematical learning this is sometimes called retracement studies. The key Fib ratios are: • 61.8% (the golden Rule) - Divide 1 number by it’s following number. I.e. 13/21 = 0.619 • 38.2% - divide 1 number by the number 2 places up. I.e. 55/144 = 0.3819 • 23.6% - divide 1 number by the number 3 places up. I.e. 21/89 = 0.23596 The ratio of 61.8 is known as the “Golden Ratio”. It’s found in all walks of life and forms the building blocks in the laws of nature. The golden ratio can be seen throughout the mathematical construction of nature – From architecture, sunflowers, snail’s shells & spiral galaxies. For example the ratio of female bees to male bees in a hive is 1.618 and the difference between the distance from your fingertips to your shoulder and your fingertips to your elbow has the Golden Ratio. This Golden Ratio is also found in finance. Fibonacci in Technical Analysis The 1st thing to note is, when using "The Fibonacci Retracement" we are working on the basis that a trend will continue and the reversals are corrective in nature. In other words the retracement's are
temporary pull-backs and up-turns within a larger trend. The section on "retracement or reversal – a checklist" will help to identify whether the trend is correcting or reversing. Most Charting Software will have the Fibonacci Tool that can be utilised by chartists. The Fib retracement is created by taking 2 extreme points (usually a peak and trough) on a chart. The extreme points of the Fib are divided vertically by Fib’s ratios – 23.6%, 38.2% and 61.8%. A 50% retracement is also added, because it is an important psychological number. This 50% level was derived from Dow theory and the assertion that a 50% retracement is psychologically on the mind of the collective. These ratios between peak and trough are then drawn horizontally on the chart and are used as stated in the above paragraph to highlight potential trend retracement support and resistance areas. These areas are useful for trade entry and exit.
WFM - Fibonacci Retracement The above Whole Foods chart shows how Fib is drawn and used. The Fib is drawn between the trough of a trend (price $34) and it's peak at $66.56. The charting software automatically draws on the ratios at 23.6, 38.2, 50, 61.8 and 100 (Sometimes a 78.1 will also be drawn). See how, as we’ve circled, these ratios offer reversal, support and resistance opportunities. You’ll see that 100 on our Fib scale (right hand side on the chart) signals the start of the drawn line, this is because it will take a 100% price reversal to get back to this price level of $34. Fibonacci Assumptions and Rules These ratios don’t always hold, but do offer good technical indication for the trader especially when used with other indicators and price action. Since ALL traders are aware of Fibs and use them WIDELY the ratio levels tend to become self-prophesising, especially is you draw the Fib between obvious peaks and troughs. Fib lines can be drawn from candle body to candle body, or from shadow (or wick) highs and shadow lows, but it’s best not to mix bodies and shadows. They can also be drawn from any peak, trough in any timeframe and be perfectly valid in tech analysis. However, Fibs work better over the longer term. The shorter the timeframe then the less reliable the data can be as volatility skews support and resistance levels. It’s like any survey – the more data the better the result. Fibs can be used in any chart time-frame, but just bear in mind that it’s better to use multi-time frame analysis focusing on a daily chart over a longer period prior to focusing down.
Always use other tech analysis in conjunction with Fibs. Candlesticks, Price action, volume, chart patterns & indicators are always worth confirming 1st. Trading Fibonacci - A Leading Indicator for Entry Fibonacci is sometimes thought of as leading indicator particularly if used in a trend. As we have discussed price doesn’t always go up in a trend, as a trend has periods of consolidation. Traders will use Fibonacci Retracement to predict the price downturn/up turn in a period of trend consolidation and then look for entry points if the trend is to continue. The Fib levels of 23.6, 38.2, 50, 61.8 are Alert Zones that traders can anticipate trades from – hence a leading indicator. Keep in mind that these fib levels are not hard reversal, support and resistance levels; but are zones for potential tech analysis. In our example of EUR/USD below in mid April a strong up trend reached a long consolidation point until late August where the trend continued with higher lows and higher highs. This bottoming of the consolidation occurred on the 50% Fib retracement line where the currency pairing bottomed a couple of times before taking off. I’ve circled the 50% Fibs that traders Many looking to enter at. You’ll also see a 38.2% retracement where bull traders entered, but this rally was very short lived. As a leading indicator The Fib is allowing traders to forecast where a reversal MAY take place and MAY indicate trading opportunities when used with price action and technical analysis. A trend is deemed stronger if the consolidation hits the 38.2% retracement then rebounds to continue the trend.
EUR/USD - Fibonacci as a Leading Indicator Fibonacci Trading Confirmation Combining Fib retracement with other tech analysis is a must. In our EUR/USD chart above we have a stochastic oscillator. Notice how an oversold 20 crossover line, a stochastic / 5 period MA cross over and 50% retracement align on the 24th/25th Aug. There’s also a spinning top indicating a possible reversal (See Price action Module 5). Before trading, traders like to get confirmation. Confirmation in the way of: • A double confirmation of Fib support levels • Candlestick patterns (see price action module 5)
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Increased volume on trend continuation Moving averages support & resistance levels met Trend Lines Met Previous Resistance becomes support and vice-versa (below chart)
Looking back at previous support and resistance levels is a good idea to get confirmation that the Fib retracement is holding. These historical levels can be previous Fib extension levels, or other levels set by moving averages, significant round numbers, etc... In the chart below, look how a previous resistance level now become support and this coincides with a 50% retracement. This level is highlighted with a blue line. This 50% Fib Retrace, is not only support from a previous resistance level, it also holds 3 times. This is good trading confirmation.
USD/CHF - Fibonacci Extension now becomes Support Trading Fibonacci - Setting Profit Targets with the Extension Fibonacci can be used to calculate profit-taking levels. We’ll use the same Fibonacci set-up as above on the EUR/USD and highlight the whole profit set-up in a new chart of EUR/USD below. The Fib is kept in the same place, so we have an up trend between June and Aug with a retracement to the end of Aug. To calculate profit targets we can use Fibonacci Extensions. The most common of which are 0.382 and 0.618. We use The ABCD Fibonacci pattern to establish our trading strategy. The start point of our Fib is labelled A, while the end of the Fib is labelled B – That’s the easy bit. Now it gets a wee bit harder as we need to establish our trade entry point. If we have established we’re in a trend and we’ve recognized the down turn is a consolidation period prior to the trend continuing then we need to find our entry point (The section Retracement or Reversal – a Checklist, in this module should help here). In or example, using Fib retracement, the EUR/USD retraces back to 50% on 24th Aug with a stochastic oversold signal. We could have entered here, or we could have entered on the 31st Aug or 10th Sep. At both these later dates the 50% retracement has been confirmed, indicating support. In our example entry was 31st of Aug as a double bounce on support is good confirmation that support will hold (volumes can help here where buying pressure will increase on support – not shown. SMA will also help confirmation). This Long (BUY) entry point is our C
point. Be aware of support and resistance levels and trading channels, as your profit targets could be affected be these.
EUR/USD - Fibonacci Extension to Set Profit Targets Our profit target needs to be set now. This is where Fib Extensions come into play. Some software applies these automatically, but others you will need to edit yourself. Usually you can edit the properties of Fibonacci to achieve this. You’ll see on our example I’ve had to edit the Fib with a -38.2, -50 and –61.8 to get the extensions – these are our 0.382, 0.50 and 0.618 extensions. You can calculate the Fib extension yourself by the following formula where A = the 100% retracement and B is the 0% retracement. Up tend: D = B + {(B-A) x Fib Extension}
Downtrend: D = B – {(A-B) x Fib Extension}
Important: Some traders will calculate from A meaning our 0.618 extension becomes 1.618 – just be aware of this when looking at other resources. In our EUR/USD example our profit target at D occur on 14th Oct. If our entry point is 50% retracement, our target should be 50% extension (or 1.5 in some software). The same applies for 38.2% and 61.8% etc… We could have reduced our expectations here and taken profit at the 38.2 extension, which would have also been profitable. It’s almost like a self-fulfilling event, as most technical traders will be looking at the same stand out Fibonacci to profit. The 50% extension was hit on the button, prior to profit taking. Notice how the FX pairing hits the 61.8% extension exactly prior to a reverse - This has now become an important resistance level as can be seen to the far right of our chart. Example Fibonacci Trade Fibonacci Simple Trend Trade (Using above EUR/USD chart) • Draw Fib and get Fib retracement confirmation (see above) • Confirmation set at point (C) • Profit Target (D) is 50% (or 1.50) extension line
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Stop/Loss placed either at next Fib level below entry point (in this case 61.8%). This allows the trade to breathe, but may be a little to much for some. It all depends on your risk threshold. A longer term trader may place the stop way back at the 100% retracement, while a day trader may place the stop under the last candle bottom Risk/Reward. If target is D (1.41), entry (C) is 1.26 and you lace a stop at 1.245 (under 61.8%) your risk reward is profit (D)-(C) = 0.15 / potential loss (C)-Stop = 0.015 = 10:1. Set trailing stop under trend line, moving averages of below the last candle low.
Fibonacci Extensions - Future Support and Resistance As indicated in the above paragraph, Fibonacci extensions can form important support and resistance levels for future price action. As seen in the above EUR/USD currency pairing chart the November high at extension level 61.8% now becomes resistance for future price moves in January 2011. Support and resistance levels can be seen along the length of the extension as we go ever higher. For instance the 1.382% (or 2.138%), 161.8% (or 261.8%), etc.. may also become an important support/resistance level in the future too. To Sum Up The value of Fibonacci's numbers is clear to see in nature as well as in finance and should be an important part of your trading strategy. As we've seen Fibonacci is a trading tool used by many Chartists to anticipate trade entry points as well as setting profit targets and stop/loss positions. However, it's not an all-in-one trading solution and should always be utilised with other technical analysis. There's a strong relationship between Fibonacci, human nature and crowd mentality. One theory that we'll go on to talk about is The Elliot Wave, which used Fibonacci as it's basis. This theory and the psychology of trading need to be looked at at this point. Some points to note are: o Fibonacci ratio retracements don’t always happen, but play around with Fibs to satisfy yourself of it’s worth to your own trading strategy. o Be aware of support and resistance levels and trading channels, as your profit targets will be affected be these too. o It’s best to trade in the direction of the trend. o Use Multi-timeframe analysis, other chart patterns, price action and other tech analysis for confirmation of trend, entry and exit. Peak and Trough Analysis Peak and Trough Analysis is a useful tool to identify when a security is trending or is in a period of consolidation. Spotting trend is important for trend traders as many trend traders will only trade when there's a definite trend to be seen. Trading in a trend tends to let your profits run and is usually more predictable than range trading. However many traders do trade in ranges and we'll study this and other types of trading in future sections. Peak and trough analysis is also useful to gain points of entry to the trade, especially if combined with other technical indicators. Again, we'll delve deeper into technical indicators in future sections. As we've seen in our section on Dow Theory price action never goes up or down in a uniform manner, it zigzag's. This zigzag motions forms the peaks and troughs in charts. In an up trend each new peak is higher than the previously observed peak and each new trough is higher than the last observed trough. In a down trend each new peak is lower than the previously observed peak and
each new trough is also lower than the last observed trough. This is what defines a trend - higher highs (peaks) and higher lows (troughs) for the up trend and lower highs and lower lows for the down trend. Some charting software will highlights peaks and troughs for traders (%-zigzag indicator), but spotting them yourself is possible. To do so, one must bring up your chart focusing on primary trend and simply highlight all the significant highs and lows. After a while you'll get used to spotting them... This should indicate whether you're in a long term trend, or not. Your primary trend is determined by your trading horizon, i.e. if you are a day trend trader (in and out of a trade within a day or thereabouts) you may want to focus on a primary trend of a few months. A trend traders will then usually only trade in the direction of the long term trend. In our Forex example of the USD/JPY cross-pairing, a down trend looked like it had started in May 2010 and finished in Nov 2010, but by highlighting the main peaks and troughs with arrows we can see the circled red arrows indicated there weren't lower lows until June 2010. The down trend actually started in June 2010 with consecutive lower highs and lower lows. Trend trading would have been difficult prior to June 2010, as technically the price may still have been in a range.
Peak and Trough Analysis Combining Peak and Trough Analysis with other trend spotting technical indicators like moving averages is ALWAYS wise in forming trading strategies. It's also wise to make sure the timeframe isn't too short, so remember to use Multi-Timeframe Analysis to figure out the markets general direction. Be aware that if the trend journeys into a consolidation range, it can do so for quite some time. In general a range can last between 33% and 66% of the length of the trend, but not in all cases. Don't be fooled thinking that the trend will reverse after this consolidation period either. The trend can continue on it's merry way after this consolidation. We'll go on to talk about consolidation chart patterns in later sections. Other Methods of Spotting Trend Some define trend as a deviation from a range as indicated by Bollinger bands. For others, a trend
occurs when prices are contained by an upward or downward sloping 20-period Moving Average. Others will utilise The Average Directional Index (ADX) to identify trend. All of these indicators can be found under Module 3 in our course. Trend Traders Regardless of how one defines trend, the goal of trend trading is the same - join the move early and hold the position until the trend reverses. The basic mindset of trend trader is "I am right or I am out?" The implied bet all trend traders make is that price will continue in its present direction. If it doesn't there is little reason to hold onto the trade. Therefore, trend traders typically trade with tight stops and often make many probative forays into the market in order to make the right entry. By nature, trend trading generates far more losing trades than winning trades and requires rigorous risk control. The usual rule of thumb is that trend traders should never risk more than 2% of their capital on any given trade. Module 7 has more on Managing Money Introduction Many of the most successful traders will only trade when there's a trend present and some like to catch the new trend early on the reversal. Whatever the trading style, all traders need to know the difference between a trend retracement and a full-blown trend reversal. We've gone through some of the indicators, chart patterns and talked support and resistance already, but knowing retracement versus reversal is a must. Whether you're looking to use Fibonacci, Moving Averages or Trend Lines as part of a trend following strategy, or looking for the reversal, then it’s worthwhile identifying whether the change in a trend is a correction or a complete turnaround. Traders thus face the following dilemma: • If they're in a position relying on the trend continuing, do they hold onto their position? This could lead to losses if the retracement turns out to be a longer term reversal. • They could close their position and re-enter if the price starts moving with the overall trend again. Of course there could be a missed trade opportunity if price sharply moves on. Money is also wasted on spreads if you decide to re-enter. • They could close the position permanently. This could result in a loss (if price went against you) or a huge profit (if you closed at a top or bottom) depending on the structure of your trade and what happens after. Because reversals can happen at any time, choosing the best option isn't always easy. This is why using trailing stops can be a great risk management technique when trading with the trend (See the Module on Risk Management) . You can employ it to protect your profits and make sure that you will always walk away with some pips in the event that a long-term reversal happens. In our Moving Averages and Parabolic SAR section (amongst others) we've explained some trading examples utilising the trailing stop. Retracement or Reversal - The Difference In a retracement or correction the long-term trend is still intact, so if you gambled on a full-blown reversal it could have been a costly trade. It’s important to know the difference between the two, as this will influence our decisions to hold, sell or buy the security with a view to picking it up later on.
A retracement is defined as a temporary price movement against the established trend. Another way to look at it is an area of price movement that moves against the trend but returns to continue the trend. Reversals are defined as a change in the overall trend of price. When an uptrend switches to a downtrend, a reversal occurs. When a downtrend switches to an uptrend, a reversal also occurs. Retracement or Reversal - A Check list There are key differences between the reversal and retracement as highlighted in the following check list. Retracement or Reversal Check list
Retracement / Correction
Reversal
Volume
Small Selling Volume
Large Selling Volume
Money Flow
Buying Interest during decline is Buying interest is small still present and selling interest in a down trend and selling up trend is still present
in a
interest is small in up trend. Both force price to reverse
Chart Patterns
Continuation Patterns (Wedges, Triangles, Flag & Pennant)
Reversal Patterns (Head & Shoulders, Double Top)
Time Frame
They are short lived
These are Longer Term movements
Fundamentals
No Change
Change or Speculation of change
Candlesticks
Lots of Indecision Candles with long shadows and small bodies
Reversal Candles lick engulfing, soldiers etc…
This list is by no means fool proof, but give a trader a base for understanding the corrective nature of a market. Just remember to be aware of the time frame you're dealing in. A weekly chart looking out 5 years may see a retracement, but that very same retracement may be a reversal on a daily chart - Remember time-frame analysis. Identifying Retracement There are a few ways to identify retracements other than the checklist above. These are: 1. Fibonacci Retracements 2. Pivot Points 3. Trend Lines 4. Candlestick Patterns 1.Fibonacci Retracement A popular way to identify retracements is to use Fibs. For the most part, price retracements hang around the 38.2%, 50.0% and 61.8% Fib level before continuing the overall trend. If price goes
beyond these levels, it May signal that a reversal is happening. As you may have figured out by now, technical analysis isn't an exact science, which means nothing certain... For an in depth look at Fibonacci Retracement see our section earlier in the Module. 2.Pivot Points Another way to see if price is staging a reversal is to use pivot points (intra-day only). In an uptrend, traders will look at the pivot or lower support points (S1, S2, S3) and wait for them to hold or break. If broken, a reversal could be in the making! In a downtrend, traders will look at the pivot & higher resistance points (R1, R2, R3) and wait for it to hold or break.
Pivot Points - Reversal or Retracement 3.Trend Lines The last method is to use trend lines. When a major trend line is broken, a reversal may be in effect. We've already looked at how to draw trend lines, how support and resistance can affect trend and how moving averages can act as trend lines, so if you're unsure then please revisit the relevant section. 4. Candlestick Patterns By using trend lines in conjunction with candlestick chart patterns discussed in Module 5, a trader may be able to get a high probability of a reversal. To Sum Up You now have the tools to try to differentiate between a retracement and a reversal. Using the "Check List" and the "Identifying Retracement" section will give you a fighting chance. While these methods can identify the difference between retracements and reversals, they aren't the only way. At the end of the day, nothing can substitute for practice and experience. With enough trading time, you can find a method that suits your trading personality in identifying retracements and reversals.
Reversals can happen at any time. Retracements can turn into reversals without warning. This makes using trailing stops very important. With trailing stops, you can effectively prevent yourself from exiting a position too early during a retracement and exit a reversal in a pinch. The Bullish Engulfing Pattern
Trading with Engulfing Patterns - by Richard Krivo What qualifies as an engulfing candle is fairly simple: as long as the body of a candle engulfs the previous candle in terms of the body and wicks, it would be considered an engulfing candle (Sometimes you may find trader's don't count the wicks). As such, it can indicate that a move in the opposite direction of the candle that was “engulfed”may take place. In other words, if a bullish candle is engulfed by bearish candle, the higher probability direction to trade the pair will be to short it. If a bearish candle is engulfed by a bullish candle, the higher probability direction to trade the pair will be to buy it. Remember, just because a trader sees an engulfing candle does not mean that a move in the opposite direction is assured. As far as being certain goes, a trader can be certain that a candle is an engulfing candle, but we can never be certain of what may transpire on the chart going forward. Keep in mind, as is the case when interpreting candlesticks, a trader cannot make a decision regarding what a candle might turn out to be until that candle is closed. So, always wait for a candle to close before making a trading decision based on whether it's engulfing or not. A simple trading strategy is to take a trade when the engulfing candlestick is in the direction of the main trend. In other words, in a correctional take profits retracement we would look for bullish engulfing candles and in a short bullish correction we would look for bearish engulfing candles. Should the trade be taken, the stop can be placed below the bullish engulfing candle in an uptrend and above the bearish engulfing candle in a down trend. See more on stop/losses in our Module 7 Lastly, as usual, nothing in trading is a certainty and not all engulfing candlestick patterns will lead to a reversal. Testing a system with proper risk management is essential prior to trading Really only useful if found in a downtrend. We can see the pattern on the left above where the hollow candle body completely engulfs the filled candle body. This pattern doesn’t indicate indecision, but that buyers are back in the market - The short bear candle is running out of steam and being engulfed by a strong long bull candle. The longer the white (hollow) candle against the black (filled) candle the greater the chance of reversal and if there is increased volume we’ll also increase our chances of a reversal. The black candle shouldn’t really be a doji as it’s fairly easy to engulf. If the shadow is engulfed, then this is better, but not necessary and finally the shadows on both candles should be small or non-existent. Again, further confirmation is needed for reversal. This pattern can also confirm a continuation of trend and continued buying pressure. If seen passing through a resistance level then this may confirm a break of resistance. This pattern is valid as long as the body is engulfed. The Bearish Engulfing Pattern Only useful in an up trend and is the exact opposite to the bullish engulfing pattern – it is the 2nd diagram on the left above. The same rules apply here as they did above and we should always look
for other confirmation in the form of further price action to the downside (like the three black crows, below) and increased downside volume. The Piercing and Dark Cloud Cover Patterns These two blends work in the same ways as the previous two. The Piercing pattern is a bullish pattern where the hollow 2nd candle drives up from below the previous filled candle to above half way of the previous filled candle. Both candles should be fairly large bodied with small shadows. If the white candle doesn’t finish above the black candles middle then this isn’t considered bullish. This is the third diagram above. Again, confirmation is required for reversal. Dark Cloud Cover is the mirror image of The Piercing Pattern. Three White Soldiers and Three Black Crows Reversal Solid Confirmation is found if reversed momentum is followed up with strong corroboration – the most famous of these are the three white soldiers and the three black crows. The 3 white soldiers equal 1 long white (hollow) candle and the 3 black crows equal a long black/red (filled) candle. Both these blends can be seen in reversal patterns and are used to confirm that the reversal has taken place. These two formations will be more prevalent after a long trend that is going through a reversal. Ideally the 3 candles should start within the last candle and close near the high (in the case of the 3 white soldiers) or the low (in the case of the three black crows). In the 3 white soldiers chart below the soldiers are the reversal and in the 3 black crows chart the black crows confirm a spinning top candlestick showing indecision.
Three White Soldiers & three Black Crows Reversal The Use of Other Technical Analysis is Beneficial Candlesticks provide an excellent means to identify short-term reversals, but should not be used alone. Other aspects of technical analysis can and should be incorporated to increase reversal robustness. For instance support and resistance, Fibonacci retracement and overbought and oversold oscillators can play an important part in any price action trading strategy. Look how support coincides with a bullish engulfing candlestick pattern and how The Stochastic crosses the bullish 50 line below helping to confirm the reversal.
Example of Price Action Combined with other Technical Analysis How to Trade Candlestick Reversal Patterns As we've discussed in all of our Candlestick Reversal Patterns, traders must wait for confirmation prior to trading. This means that they're supposed to wait until the following day's close to see if the stock reverses. This is the trade entry point. Combining candlestick confirmation with other technical analysis, i.e, oscillators, moving averages etc...to gain further confirmation may also be prudent as we've seen above. However If a stock pulls back to an area of demand (support) and there's a candlestick pattern telling us that buyers are taking control of the stock, then that is all the confirmation some traders need. The choice is yours and all depends on your threshold for risk. Let's look at an example trade using the engulfing candlestick pattern. This is a simple day trading system for example only, using the AUD/USD forex pair, so you may want to research other price action/indicator systems. You also need to back tested all trading systems yourself, to make sure your comfortable with the risks. But I hope you can see how this system can transfer to other candlestick patterns and time-frames?
Example Bullish Engulfing/Moving Average Trading System Our set up - a 1 hour chart with a 50-period simple moving average Our system rules - If price is above 50 SMA we're in an up trend so we buy. In an up trend we're on the look-out for bullish engulfing candlesticks. In a down trend (price below 50 SMA) we look for a bearish engulfing pattern and we sell. Entry - 1 pip above the high of the bullish engulfing or 1 pip below the bearish engulfing on the next candle Risk Management - Stop/Loss placed 1 pip below the bullish engulfing in an up trend, or 1 pip above the bearish engulfing in a down trend Take Profit - We're looking for a reward to risk ratio of 1:1. So, Price is above 50 SMA, so we need to be looking to go long. I've highlighted the bullish engulfing candle in the yellow oval on our 1 hour chart. We enter long 1 pip above the bullish engulfing candle on the next candle at 1.0530 (3am, 16th Mar) and place a stop/loss at 1.0508. If our Target take profits ratio is 1:1 then our target price is 1.0552 (i.e the equivalent distance from entry to our risk - 1:1). We reach this at 1pm on the 16th - 10 hours later. Well, I hope you get the just of how to trade candlestick patterns and begin to see how you can develop your own system? Of course many trades will go against you! Remember this is a simple system. Yours may incorporate different reward to risk factors and support and resistance etc... See the Trading Flowchart for more ideas. But you may want to keep it simple - Simple systems do make money. Visit some blogs and sites to view some other systems. Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on
completion of this course. Introduction Gaps in charts are empty spaces between one trading period and another. They usually form because some information (exceptional earning report, profit warnings, mergers etc…) has come to light. Basically the opening price of the 2nd period moves substantially away from the 1st period’s closing price in post and pre-trading. It’s often said that “gaps will always fill”, meaning the price will move to cover the gap sooner rather than later. This doesn’t always happen, or may take some time to happen. These fills are quite common and occur because of the following. • Exuberance: The initial spike may have been overly optimistic or pessimistic, therefore inviting a correction. • Technical Resistance: When a price moves up or down sharply, it doesn't leave behind any support or resistance • Price Pattern: Price patterns are used to classify gaps, and can tell you if a gap will be filled or not. We explore these gap types below. Exhaustion gaps are typically the most likely to be filled because they signal the end of a price trend, while continuation and breakaway gaps are significantly less likely to be filled, since they are used to confirm the direction of the current trend. Gap Types There are 4 gap types as highlighted in the following chart. Chartists will look at trend, volume and location of the gap when forming their trading decisions. The bullet points below the charts highlight the important aspects of the period gaps.
Here are the key things you will want to remember when trading gaps: • Once a stock has started to fill the gap, it will rarely stop, because there is often no immediate support or resistance. • Exhaustion gaps and continuation gaps predict the price moving in two different directions be sure that you correctly classify the gap you are going to play. • Make sure to wait for the price to start to break before taking a position. • Be sure to watch the volume. High volume should be present in breakaway gaps, while low volume should occur in exhaustion gaps. The Island Reversal The above Gap types can be found in specific Gap Reversal Patterns. One of the most well known gap formations is the Island Reversal. This reversal pattern is formed by a gap followed by flat trading period, then confirmed by another gap in the opposite direction. This can be found in an up trend or down trend and can be seen in the below chart.
The Island Reversal Pattern The above Island Reversal is formed after an up trend. An exhaustion gap appears, followed by a consolidation, then a breakaway gap down. The quality of the reversal signal and the strength of the subsequent reversal are more robust if it comes at the end of a long trend. Notice volume too. There’s large volume going into the exhaustion gap and large volume going into the breakaway gap. Trading Gaps - A Day Traders Perspective "Fading" occurs when gaps are filled within the same trading day. For example, a company reports good earning, and price gaps up on daily open (meaning it opened significantly higher than its previous close). As the day progresses, traders realise that some not so good news is hidden within the depths of the report, so they start selling. Eventually, the price hits yesterday's close, and the gap is filled. Many day traders use this strategy during earnings season or at other times when irrational exuberance is at a high. More on Trading Gaps - Some Popular Systems There are many ways to take advantage of these gaps, with a few more popular systems highlighted below: • Some traders will buy when technical's favour a gap on the next trading day. For example, they'll buy a stock after-hours when a positive earnings report is released, hoping for a gap up on the following trading day. • Traders might also buy or sell into highly liquid or illiquid positions at the beginning of a price movement, hoping for a good fill and a continued trend. For example, they may buy a currency when it is gaping up very quickly on low liquidity and there is no significant resistance overhead. • Some traders will fade gaps in the opposite direction once a high or low point has been determined. For example, if a stock gaps up on some speculative report, experienced traders may fade the gap by shorting the stock. • Lastly, traders might buy when the price level reaches the prior support after the gap has been filled.
To Sum Up Remember, gaps are risky (due to low liquidity and high volatility). Those who study the underlying factors behind a gap and correctly identify its type, can often trade with a high probability of success. However, there is always a risk that a trade can go bad. Make sure you gain further confirmation through technical analysis prior to trading, i.e studying volume. If you see high-volume resistance preventing a gap from being filled, then double check the premise of your trade and consider not trading it if you are not completely certain that it is correct. Introduction We’ve looked at some reversal patterns involving a series of candlesticks. Some like doji and long shadow candlesticks need prior and preceding confirmation to confirm the reversal and some like the engulfing pattern, three white soldiers and Harami are patterns in there own right. All of these patterns, doji and long legged candlesticks are also significant support and resistance level markers. Candlesticks Confirming Resistance The same buying and selling pressures apply here as they did in our sections “Candlesticks – The Basics” and “Candlesticks and the Reversal”. The engulfing, Harami, three black crows, dark cloud cover, evening star, shooting star, doji, long-legged, Marubozu and long filled candles can all mark resistance levels. I've included a couple of charts below to show some of these candlesticks and patterns forming good resistance. As we can see there are Bearish Engulfing, Bearish Harami, Shooting Stars, Doji, Spinning Tops, Inverted Hammer and various long-shadow candlesticks all helping to confirm resistance. It’s worthwhile familiarising yourself with these patterns in our glossary. Notice in our first chart that a bearish engulfing can also be a shooting star.
Candlesticks and Candle Patterns Confirming Resistance (1)
Candlesticks and Candle Patterns Confirming Resistance (2) Candlesticks Confirming Support The bullish engulfing, bullish piercing, Harami, hammer, inverted hammer, morning star, doji, long-legged, Marubozu and long white candles can all mark support levels. I’ve highlighted some of these in the charts below. Notice in the second chart that the middle section of the chart bounces along support. We have many doji and small bodied candles here signifying a neutral stance and indecision. Confirming support can be seen in trends as well as in ranging markets
Candlesticks and Candle Patterns Confirming Support (1)
Candlesticks and Candle Patterns Confirming Support (2) To Sum Up
I hope you can see why the above support and resistance confirmations can be useful. In any trading strategy it's important to understand these levels as they can act as important psychological barriers to price action and offer good entry, stop/loss and exit positions. Why not go over the importance of support and resistance again? Introduction In the 1980’s John Bollinger developed his bollinger band theory around moving averages. Bollinger Bands allow us to determine volatility in the market as well as measuring how high/low prices are relative to their historical price action. Bollinger bands comprise of an upper, lower and centre band. The centre line in the band is a simple moving average (SMA) usually set at 20 periods and the upper/lower bands represent chart points that are 2 standard deviations away from the average. Price should normally fall within the upper and lower bands. When the bands widen, volatility increases and when they narrow volatility decreases. Trend reversals usually take place close to the upper and lower bands and the centre line will sometimes act as support and resistance (Rem: It’s a 20-day SMA). Many traders use these bollinger bands to determine overbought and oversold levels; especially in range bound markets that are said to take place 80% of the time. Price tends to rebound between the upper and lower bands like a drunk bouncing along two alley walls. Bollinger bands don’t produce signals in themselves, but can act as confirmation that reversal is taking place. As we’ll discover below in “Trading overbought and oversold” very often price will “walk” the band, especially in trending markets. Traders use Bollinger bands in a few ways: • Identify overbought and oversold • Bollinger Band Contraction • Bollinger Band “Bands” • Combining Bollinger bands and time frame analysis Trading Overbought and Oversold Levels Traders use Bollinger bands to identify overbought and oversold levels. When the price of the market touches the upper or lower band the market may be oversold or overbought. If the price crosses the outer Bollinger then this represents significant overbought and oversold. These “tags” and bollinger band crosses are not signals, merely gauges. Prices tend to hug the outer Bollinger for long periods of time, especially in a trend, so other indicators must be used when using them in trading strategies – This is especially true with Bollinger bands over other indicators. Trading oversold and overbought levels with Bollinger bands is a good strategy in range bound markets, while using other indicators and chat patterns as confirmation (e.g. may be a head and shoulders touching the bollinger). To illustrate this we’ve drawn a chart of S&P 500 that has a range on the right from Mar 2011 and an upward trend on the left. You can see that in the range bound market we have multiple touches of the outer bands and in the up trend the price hugs the upper band for much of the time. Combining the bollinger with another indicator like the RSI helps us with our trading strategy – utilising RSI overbought and oversold signals, RSI trend ID, RSI Divergence/Convergence, Centre Line crossover or RSI failure swings. 1st Range Trade In the chart below we have many overbought and oversold levels. Many of them in conjunction with Bollinger would have been profitable. We have an RSI Divergence at (1), which we can look to for possible reversal. Our short/sell signal occurs when the diverged RSI crosses back over the
70-signal line on the 4th May and our exit signal could be when the price hits the opposite bollinger on the 17th May. In range bound markets traders may anticipate that the price will move from one outer band to the other. 2nd Range Trade Combing the Bollinger's upper touch with a simple RSI overbought signal at (2) could have been a short trade position. As the RSI crosses 70 it signals a sell/short trade. Our profit target was the lower Bollinger band, but we can't see if it was reached. However, other profit targets can be set. For instance, a trailing stop order could have worked here (trailing price down, until price turns), or our target could have been the oversold RSI 30-level. There are many money management strategies employed by traders, we'll talk about these in future modules. A Stop/Loss order here would have also been extremely useful, as they limit our losses. When dealing with bollinger bands stop/losses you may want to look at “Bollinger Band “Bands”” below.
S%P 500 - Bollinger Band Overbought and Oversold Of course there are many trading signals that can be utilised. After the RSI overbought signals above traders may wait until a 20-day SMA has been crossed before confirming a trade, or a 50-line RSI cross may be needed for confirmation. It's up to you to decide how much confirmation you need prior to trading. More confirmation means less false signals, but also means less profits if the trade goes your way. Notice the strong trend on the left hand side of the S&P chart above. In a strong trend the price generally fluctuates between the 20-day SMA and an outer band, so a cross of this 20-day SMA may represent a price reversal. This looks to have happened on the 22nd Feb above. A shock has broken 20-period SMA, breaking the trend. Trading The Bollinger Band Contraction, or “Squeeze” Generally, after periods of low volatility in the market the market tends to rally significantly. As we’ve learned in chart patterns, when the bulls and bears cancel each other out volume and interest
begins to wane. When a break does come, it comes significantly. A contracting bollinger band “the squeeze”, represents low volatility and high volatility widens the bands.
LIME - Bollinger Band Volatility with Bandwidth Indicator In the above chart we have a contraction in the bollinger band up to 7 Jan 11 then a bullish break, from 4.25 resistance, meaning the buyers have won in this situation. We can see the contraction more easily by adding the Bollinger Bandwidth indicator to the bottom of the chart setting it up to 20 periods and 2 SD like the bollinger. To determine the direction of break we need to employ other indicators, like RSI, Stochastics and volume indicators – where we may be looking for divergences. However, this is a challenging play to make… Bollinger Band "Bands" Bollinger bands “bands” were created to form buy and sell signals within the bollinger band indicator. Basically the bollinger band “band” measures 2 bollinger bands – The first with a 2 standard deviation (as normal) and the second with a 1 SD, which sits within the 2SD Bollinger band. I’ve illustrated this on the below EUR/USD chart. Basically the chart shows EUR/USD in an up trend until May 11, then in a range - notice the hugging in the up trend. To amend the bollinger band “band” you must edit it in your charting software, by changing the standard deviation to 1 – this creates the inner band. By doing this we’ve created buy & sell and neutral zone.
EUR/USD - Bollinger Band "Bands" The Bollinger Band “Bands” can be utilised by traders who trade the trend and those who range trade. Trend traders who can enter on oversold oscillator signals like RSI, Williams %R etc can use the buy/sell zone to establish exit points. An up trend trader's exit point could be as the price crosses back below the 20-period SMA centre line, or when price crosses from the buy/sell zone into the 1 SD Bollinger band. The red circles in the above chart highlight some exit positions. You’ll see that there are many of these exit points in a trend, so traders need to use other indicators to form their exit strategy. Bollinger Band “Bands” can be used in range trading too. In our EUR/USD chart we’ve highlighted two possible short entry positions with a green circle on the 5th May, confirmed with an oversold RSI 70 crossover (also circled). A cross from the buy/sell zone through the 1 SD Bollinger signals a buy or short trade - in this case a short. This is perhaps not the best example, as initially the trade is against the trend and ideally traders need to confirm the trend has ended (i.e support broken). However, it does show a trade at work. An exit for this trade can be played as in the above paragraph - exiting as the price crosses from the bottom buy/sell zone back across to the neutral zone. I've yellow circled this range exit position. Bollinger bands can be utilised to form stop/loss decisions. You can either have your stop loss placed just outside the Bollinger band as per position 1 on our chart, or by measuring the bollinger 1st Standard Deviation band height and measuring the same distance up from the top of the 2 SD band (position 2 on our chart above). This prevents us from getting stopped out on market noise. This may be too risky for some though and it all depends on your own trading strategy. We’ll talk about stop/loss and money management in Module 7. Combining Bollinger Bands and Adjusting Them Bollinger recommended making small incremental adjustments to Standard deviation multiplier if you are looking at different timeframes and sensitivities. If we are looking more long term we may use a 50-day SMA bollinger with standard deviation of 2.1; or short term 10-day SMA with 1.9
SD. He also advocates using Bollinger bands over differing time frames, finding correlation and trading on these correlation signals. Introduction The Relative Strength Index (RSI) created by Welles Wilder in 1978 measures momentum in a financial instrument indicating overbought positions on the upside and oversold positions on the downside. The RSI measures this by comparing the size of its recent gains to the size of its recent losses as is shown in the formula below. This results in an index number between zero and 100 with centre line at 50. This indicator is then usually placed in a box just below the price chart and is calculated automatically in any good charting software or online package. A number above or below the 70 or 30 respectively is considered overbought or oversold, indicating a possible momentum change. RSI in best used in Range Bound Markets, but we'll also see how it can be used in trending markets. RSI = 100 minus 100 / (1+RS) Where RS = Average Gain / Average loss In charting software you may be confronted with a couple of RSI options, eg Wilder RSI. Select the RSI option and generally the default value is set at 14 for longer period time frames (daily chart and above). Even though Wilder invented “RSI” the “Wilder RSI” is different as it's smoothing which is a different exponential average. Both can be used and serve the same purpose, but here we’ll talk about RSI. We won’t go into the RSI calculation in any great detail except to say that The RSI is based on closing prices and the RS (Relative Strength) part of the calculation is measured over the last 14 periods and is smoothed by exponential equations. Some traders will adjust the period as part of their trading strategy – eg if they’re looking at longer or shorter timeframes. Lowering the period will increase sensitivity and increasing it will decrease sensitivity - 10 day RSI will reach overweight positions more easily than 20-day RSI. To add more complexity some stocks will reach 30 and 70 more easily than others. E.g. a tech stock may be more volatile than a Utility. To reduce the amount of false overbought and oversold signals, some traders will increase the oversold and overbought parameters to 20 and 80. In fact some day traders will use 20, 80 and use a 2 period RSI to form signals and Swing Traders (Capturing gains in securities within a 1 to 5 day window) may look at an RSI 5 to form their signals. We’ll stick to 14 for now until we become accustomed to the RSI. How it Works and Trading The RSI within a Range As with many oscillators the RSI works best in a range. This chart happens to be a horizontal range, but RSI also works well in trending channel creating consolidation points before the trend continues again. In strong trending markets the RSI tends to fluctuate at higher levels, like 40 to 90. We discuss The RSI indicator in trending markets in the below section. As we’ve mentioned when the RSI is below 30 or above 70 the market is oversold or overbought and traders are going to look for a price reversal at some point. In our below chart we’ve plotted the RSI against a daily chart of The Nasdaq. The period we’re looking at is from Mar 2011 to Jul 2011 and you can see we’re trading in a horizontal range with good support and resistance levels. To the far left (1) we have an overbought indicator where The RSI almost hit 90, then a bearish retracement. I've highlighted several overbought and oversold positions, most signal a retracement within the channel, but some were false signals, like (2) circled in June. Despite this oversold indicator the index continued it’s bearish trend until it hit support at 2600, when it turned – reversal and retracement can be a process taking a few signals to happen.
I hope you can see how a trader can use the RSI in a ranging market? Our example is a large 300 point range, so buying at the bottom of the range and selling at the top of the range looks very profitable when buying on these oversold signals and selling on overbought signals. When looking for overbought and oversold stocks traders should first see how the overall market is doing. I.e. if FTSE is thought to be overbought then drill down into individual stocks with high RSI readings to trade.
Nasdaq - RSI overbought and oversold signals RSI Range Trade (simple strategy): • General Parameters set at RSI (14) on a daily chart • Buy trigger - Enter the trade long (buy) when RSI crosses above 30 • Sell Trigger - Sell when RSI crosses above 70 • Short Trigger - Enter the trade short when RSI crosses below 70 • Sell the Short Trigger - Sell when RSI crosses below 30 • Our stop/loss is placed just below support or resistance highlighted by trend lines • Risk Reward Ratio: Generally traders look for 2:1 or 3:1. We'll look at risk reward in later modules As always other indicators (like moving averages), volume and economic news will help with our trading strategy. If using an RSI some traders find it useful to make their trading decisions along with other indicators like the moving average crossover. A 10-day and 25-day MA crossover may be useful when using the RSI (14). I.e. when the 10-day MA crosses below the 25-day MA and the RSI indicates overbought this may be a good short signal. Trading The RSI in a Trend The RSI tends to work in a very predictable way in a strong bull or bear market. In a strong up trend the RSI tends to fluctuate between 40 and 90 with the 40 to 50 RSI “zone” acting as
support. These ranges are based on the RSI 14 and will change depending on the RSI period, the strength of the trend and the securities volatility. In our below chart of The S&P 500 we are showing an upward trending market with consolidation periods along support. You’ll notice that the RSI surges above 70 on 5 occasions and holds it’s 40 to 50-zone quite consistently. However it did hit 34.46 in Nov 09. Nevertheless the 40-50 support level held for 5 ½ months. This support zone provides “lower risk” entry points to the market when it’s in a strong up trend. Notice how the RSI dips below the support zone and through 30, once the market breaks support.
S&P 500 - How the RSI works in an Up Trend RSI Trend Trade - always go with trend (simple strategy): • General Parameters set at RSI (14) on a daily chart • Up trend Buy trigger - Enter the trade long (buy) when RSI crosses above 40 or 50 • Up trend Sell Trigger - Sell when RSI crosses above 80 or 90
Down trend Short Trigger - Enter the trade short when RSI crosses below 50 to 60 Down trend Sell the Short Trigger - Sell when RSI crosses below 10 and 20 OR, don't sell and keep long/short position until an RSI divergence precedes the above sell triggers. Set a trailing stop 2% behind the trade to lock in profits. We'll talk trailing stops in later modules Our stop/loss is placed just below support highlighted by trend lines Risk Reward Ratio: Generally traders look for 2:1 or 3:1. We'll look at risk reward in later modules
In a down trend RSI tends to fluctuate between 10 and 60 with resistance levels between 50 and 60. Again, these ranges will change depending on timeframe, RSI period and the strength of the downtrend. I’ve charted the USD/CHF below showing the resistance level providing entry-level points of which there are 4 plus two touching 50. To Trade this down trend traders will always follow the trend. Instead of entering at the 30 or 70 signal as they would in a range, the entry point will be as the RSI dips below 60 or 50. This really depends on how strong the trend is and what your trading strategy will be. It also depends on your RSI settings, i.e. an RSI 5 will be more sensitive than an RSI 20, so the entry trigger will be higher. In the below case I've highlighted short positions as the market dips below 50.
USD/CHF - How the RSI works in a Down Trend RSI Indicator Divergence & Convergence The RSI divergence & convergence has similar trading properties to The MACD divergence & convergence, i.e. if theRSI is trending in the opposite direction to the price then this is an indication that there may be a price momentum reversal imminent. It's a trend reversal early warning system. A Convergence is in many cases the forerunner to a bullish price momentum reversal, while a divergence is thought to be the forerunner to a bearish price momentum reversal. These moves tend to be more robust when they cross the overbought and sold line. Below in our RSI divergence chart of S&P 500 we have shown an example of a bearish divergence, where the price mechanism shows higher highs and RSI records lower peaks. These lower peaks in the RSI hints that weakening momentum in the upward price push is unfolding and that price may reverse. We can see this unfold below. As this divergence is an early warning (leading indicator) a good entry point will be the next 70 line crossover after the divergence Highlighted below.
S&P 500 - RSI Negative (bearish) Divergence RSI divergence indicators work best in ranging markets and can be traded as the "RSI Range Trade" in the "How it Works and Trading The RSI within a Range" section. However they can be used in trending markets. Remember, always trade with the trend, so in an up trend many RSI divergences will signal a retracement (secondary trend), where traders can sell long positions (if this is part of their strategy). However, a full blown reversal may result after a divergence starting a new trend. Trade it as per "RSI Trend Trade" in the section "Trading The RSI in a Trend". Be careful though. The divergence doesn't always show a retracement or reversal. In a strong up trend the price momentum may still go up. A bullish convergence happens when the RSI forms higher troughs while the price forms lower troughs.Again, this convergence is more robust when crossing the oversold indicator at 30. This convergence suggests that downward price momentum is waning and a change in trend to the upside is possible. Other indicators such as volume decreases, moving average convergence and support and resistance levels will also be useful in determining momentum shifts. Trading the RSI - Short-term Scenario Day traders (Intra-day traders) and Swing traders (1 to 5 day horizon) can amend the RSI from 14 down to 2, 3, 4, 5 etc... When looking at RSI (2) overbought and oversold positions may only stay for up to an hour or a day, so it’s really only used for these short-term trades of 1 to 5 days. Since shorter period RSI’s are more volatile than longer period RSI's the overbought and oversold parameters must be changed away from 30 and 70. For instance they may be moved to 5-10 for oversold and 90-95 for overbought. Each market and situation will have to tweak these parameters and some historical profiling will help set them as part of a trading strategy. Below is how a Swing Trader may use the RSI • Analyse the longer trend using Moving averages, Peak trough analysis, support and resistance etc... • General rule - Trade with the trend
• • • • • • • • •
Drill into the market with a 15 minute chart Use scanning packages to see where RSI is crossing signals Set at RSI (5) on the chart. Remember the RSI 5 is more sensitive than RSI 14 Buy trigger - Enter the trade long (buy) when RSI crosses above 30 or 40 Sell Trigger - Sell when RSI crosses above 70 or 80. Or buy, sell vice-versa if in a down trend If there's major resistance prior to this trigger, then sell A stop/loss is placed just below support or resistance highlighted by trend lines. This could be no more than a 2% loss. Risk Reward Ratio: Generally traders look for 2:1 or 3:1. We'll look at risk reward in later modules
This sequence will be a part of their over all trading set-up and strategy. To Sum Up The RSI is a standard component on any basic technical chart. The relative strength indicator focuses on the momentum underlying the security and is a great secondary measure to be used by traders. It is important to note that the RSI is often not used as the sole generation of buy-andsell signals but used in conjunction with other indicators and chart patterns. As we've seen, we can set the indicators price action sensitivity. The sensitivity of the indicator determines how quickly the trader enters the move and how accurate these trading signals are. If the indicator is set to low sensitivity then you generate less false signals, but you may see the move too late, or not see it at all. With high sensitivity you are more likely to catch the move into the trade, but you may generate false trading signals. For instance a swing trader (trading with a horizon of 4 to 5 days) may set the RSI to 3or 5 once they've drill down to an hourly chart from a daily chart. Good charting software will allow the parameters to be changed. osted on May 28, 2009 at 19:42 in Trading Desk by Ryan O'KeefeComments Off
USD/CHF has been testing $1.080 all week and printing an inverted megaphone pattern on the four hour chart. Today’s daily candle printed what could almost be considered a bearish engulfing range but it’s not text book. I realize the candle patterns are usually used to time reversals in an uptrend but it can also have merit as a trend continuation indicator also. I’m wondering if $1.080 is going to give way tomorrow morning with the Swiss KOF data followed by the U.S. GDP numbers on the docket. I went looking on a longer term chart to see what might be holding up USD/CHF at $1.080 and this is what I found.
I have an idea how to play this but I need to wait a bit longer before I make any moves. Stay tuned and best of luck. Ryan Swing and a Miss Posted on May 28, 2009 at 7:45 in Trading Desk by Ryan O'Keefe4 Comments » Looking back on my USD/JPY thoughts I underestimated the strength Dollar would enjoy. It seems the risk appetite eased enough to send this pair much higher than I thought it would overnight. I was stopped out on my small sell position but that is fine. Sometimes you swing and you miss, it’s the nature of the business. Back later tonight with my regular long term analysis. I hope your having a great trading week! Japan Sees Continued Improvement Posted on May 27, 2009 at 20:46 in Trading Desk by Ryan O'Keefe1 Comment »
Dollar sentiment seems to be improving tonight against the Yen with a rally up to $96. The Dollar is challenging the lower boundaries of 19th’s Doji. Retail sales data out of Japan tonight post a better than expected -2.9% loss versus the anticipated -3.2% loss.$96.09 marks a 38.2% pull back from the down trend which broke the head and shoulders pattern on this pair. Looking at the daily and weekly time frames I still think $96 is a decent pivot back to the downside on this pair. I’m testing the waters with a small short at $95.90. I suspect if I’m wrong I’ll get stopped out by the end of New York tomorrow, guess we will see. Regardless of potential support at $94 the plan for now is still the same, targeting $92.70 or lower. Stay tuned… IMPORTANT NOTICE: These comments are for information purposes only. My opinions or other information contained in this post do not constitute investment advice. It should not be understood as a direct recommendation to buy or sell any currency contract or other investment vehicle. Forex trading involves substantial risk of loss and is not suitable for all investors. Missed it by an Inch… Posted on May 27, 2009 at 7:54 in Trading Desk by Ryan O'Keefe2 Comments » Having missed my short orders by just a few pips overnight I’ve decided to pull the orders off the desk. USD/JPY has support on the Daily chart around $94 / $93.50 which I failed to notice last night. I’m thinking this pair may be headed a tad higher after all, perhaps the sell is closer to $96. Either way since I’m not 60 pips in the money this morning I’ve decided to sit this out for now. Stay tuned… Selling Pivot for USD/JPY? Posted on May 26, 2009 at 18:48 in Trading Desk by Ryan O'KeefeComments Off
Howdy folks! So equities rally, Dollar gets beat up and USD/JPY is boring to watch as usual but it looks like the short idea I talked about yesterday may be getting closer. Tonight I’m watching the support pivot at $95.60 which gave way last week. This has been a decisive area of support on the daily chart over the last few months and now we are going to test it from below.
Now comparing that to what I see on the four hour chart, I like the idea of selling around $95.60. Ideally I can join the daily chart head and shoulder breakout at a bargain price on it’s way to a lower support level.
I’m planning a short at $95.60 but if things go horribly wrong I’ll be stopped out around $96.60. See the daily chart below for my longer term target on this trade. I’d like to see the pair fall back to support and a 61.8% pull back around $92.70. Risk to reward is just shy of 1:3.
Stay tuned….
IMPORTANT NOTICE: These comments are for information purposes only. My opinions or other information contained in this post do not constitute investment advice. It should not be understood as a direct recommendation to buy or sell any currency contract or other investment vehicle. Forex trading involves substantial risk of loss and is not suitable for all investors. Memorial Day Break Posted on May 25, 2009 at 13:47 in Trading Desk by Ryan O'KeefeComments Off Howdy Folks! It’s a beautiful day on the lake today! Clear skies, 70 degrees and a holiday weekend in the Seattle area, you can’t ask for much better! I hope your having a great day in your corner of the globe! The holiday weekend in the United States has obviously dried up the market activity so today I’m just doing some week ahead planning on the majors. USD/EUR Fiber’s assault against the Dollar was unforgiving last week as Euro posted five straight days of gains. From a technical view the pair has moved into a weekly zone of rather messy supply and demand levels and it will be interesting to see if the rally can continue unabated this week. CCI on weekly and daily time frames are oversold but that doesn’t mean the trend is done. For now I’m sticking with the trend and planing to buy on a pullback if the right opportunity comes around this week. I think $1.42 is in the Fiber’s sights but I’d like to see a pull back and join up with some bargain hunters.
USD/JPY Dollar sold off quite smartly following the pullback day we talked about last week. There is a lot of fundamental data on tap for Japan this week including jobless data, retail sales, consumer prices and their trade balance. If the numbers continue to suggest continued stabilization and the potential for expected growth the Yen could continue it’s assault against the Dollar. It also appears talk of
intervention was a false fear last week as well. As usual, I’m interested in selling with bargain hunters around the $95.60 level if the right opportunity comes along this week.
That’s enough shop talk for today, it is time to have some fun on the lake! USD/JPY Finishes a Pull Back Posted on May 19, 2009 at 18:47 in Trading Desk by Ryan O'KeefeComments Off Dollar / Yen appears to have completed a pull back move on the consolidation that broke out last week. Today’s demand level ended up between $96.50 and $96.69 which may offer a nice level to short through a test of yesterday’s high. A short would have to be protected above $96.80 as the pattern breaks down with a close back inside the triangle. $96.00 seems to be holding as a pivot level for now.
Dollar Selling Continues Against the Yen Posted on May 15, 2009 at 10:50 in Trading Desk by Ryan O'Keefe2 Comments » So yesterday’s guess Dollar / Yen would continue to fall was correct. The sell off unfortunately happened early leaving my orders in the dust. I was looking for a test of Wednesday’s demand level high before a fall, oh well.
That’s all for this week, I’ll be back on Sunday looking for some gap opportunities to trade! Best of luck, Ryan
USD/JPY Breaks Loose, Looking to Sell Posted on May 14, 2009 at 17:37 in Trading Desk by Ryan O'KeefeComments Off Dollar / Yen finally broke through daily chart consolidation with some gusto yesterday which brings into play previous support between $96 and $96.50. If these previous support zones provide resistance the pair may give us some selling opportunities into our new found daily chart down trend.
Using some simple Fibonacci it appears the next support targets with price action confirmation could be $94.27 (50%) followed by $92.50 (61.8%). Best of luck, Ryan How Far Will USD/CAD Pull Back? Posted on May 11, 2009 at 17:39 in Trading Desk by Ryan O'KeefeComments Off Just a few posts ago I wondered whether or not USD/CAD would make it down to $1.15 and low and behold, the pair turned right around on the $1.15 mark. “Is USD/CAD Headed For $1.15?” Now I’m pondering how far the pair may pull back before this daily chart trend continues. Thinking out loud for a moment I’m going to keep my eye on the $1.20 handle which is right above a 61.8% pull back and corresponds with broken support back on 4/30. I think it’d be slick to get a bearish reversal day somewhere in that zone.
What do you think about this pair? Trading Sunday Gaps After Friday’s huge Dollar fire sale I went looking for some gap trade opportunities Sunday night. Trading gaps on Sunday can be a great strategy for folks who work a day job. They seem to appear frequently now with the market’s added volitilty, that may not last but it is fun for now. This wasn’t the cleanest trade I’ve ever done but I managed to book a few points off USD/CHF.
If you haven’t seen Sam Seiden’s presentation on gap trading I’d recommend taking a look, he has some great points. Strong Retail Sales Data For AUD Posted on May 5, 2009 at 21:37 in Trading Desk by Ryan O'KeefeComments Off About an hour ago the Australian Retail Sales data posted a 2.2% increase versus an expected .5% increase and the result was a sell off smack into a demand level at $0.7335. I haven’t dived into the report detail yet but the number itself is very promising. Trade balance data was better than expected as well. If you want my opinion I think the initial sell off appears to be technical rather than a reaction to the data because round number $0.7400 was drilled just prior to the sell off. I suspect some protective stops on any shorts left over from today were tripped above the “00″ level. AUD/USD has nearly recouped the losses as I write this. Overall AUD/USD had a decent pull back day within the uptrend yesterday and I’m personally looking for the marked demand level from a couple days ago to hold up with more than just a touch before I join the trend again.
Best of luck, Ryan IMPORTANT NOTICE: These comments are for information purposes only. My opinions or other information contained in this post do not constitute investment advice. It should not be understood as a direct recommendation to buy or sell any currency contract or other investment vehicle. Forex trading involves substantial risk of loss and is not suitable for all investors. Rally Day Within Up Trends, Looking For Pullbacks… Posted on May 4, 2009 at 20:34 in Trading Desk by Ryan O'KeefeComments Off Howdy Folks, Today was a rally day among most of the daily chart up trends I’ve been watching. From reading this blog you know I prefer to buy into dips during an up trend. Since most of the pairs I watch made new highs within their up trends, I’m looking for a decent dip day. There was one exception, USD/JPY had been on a decent rally for the last few daily bars but today it posted a sell off and lower close. I really looked for an interesting demand level to buy on but I just can’t find anything satisfying about buying USD/JPY until it gets lower. Even then the rally may just be a pull back within a larger decline so I reserve the right to be wishy-washy until a clearer signal appears. GBP/USD posted about a 50 point bump above $1.50 today. The question is will $1.50 hold straight away headed into London or will this pair need a deeper pull back before the buyers return? Looking over GBP/USD price action I see a couple of areas which may be interesting to watch over the next trading day. I like the $.14861 level better than the $1.4960 level but as I mentioned in the
beginning of the post yesterday was an up day in an up trend and I’d prefer a deeper pull back, perhaps down to $1.4800.
GBP/USD is up against some resistance as well so watch out around $1.5068 which was the high mark before last month’s 600 plus point sell off. AUD/USD Nears Channel Boundaries
We are awaiting the Royal Bank of Australia to release their Interest Rate decision in about two and a half hours from the time I’m writing this. The RBA is expected to leave rates unchanged at 3.00%. This pair has traded inside a channel we have monitored since I started writing this blog! It will be interesting to see if the pair is moved lower into demand levels before it can move higher after the rate statement. I personally don’t think the upper boundaries of the channel will stymie the pair but you never know. A break higher may put $.7600 and $.7800 into play, a reversal and we look to move back to the lower boundaries of the channel over the medium term.
Finding Fibonacci in various markets
Nikkei versus Dow The Nikkei is a widely traded index of major Japanese shares. It is considered the Dow Jones Industrial Index of Japan. You would think that since the world’s major economies are globalised and inter-connected that the world’s stock markets would move more or less in synch. After all, a slowdown in the USA and Europe should result in a similar move in Japan and China as these countries are export-driven. But compare the Nikkei with the Dow on these daily charts going back to the pre-credit crunch days:
(Click on the chart for a larger version)
(Click on the chart for a larger version) Following the 2007-2009 collapse, the Nikkei managed to rally to the exact 38% Fibonacci level (blue bar) – and had declined ever since. That was a great place to short the Nikkei. In the Dow, we saw a similar collapse, but the Dow rallied to a deeper 62% Fibonacci retrace before hitting resistance. That was also a great place for a short trade. But here, the Dow has rallied, unlike the Nikkei. Maybe markets are not so inter-connected after all. Let’s take a look at recent action in the Nikkei:
(Click on the chart for a larger version) The decline off the April peak is a clear five-wave affair – complete with a positive momentum divergence at the wave 5 low. That is pure textbook and indicates the main trend is down. But when you see this pattern, you know a rally lies ahead and it becomes a good idea to cover shorts. The first rally carried to the Fibonacci 38% retrace (blue arrow) and after a series of overlapping waves (indicating a likely pause in the bear market), the market made two stabs at the Fibonacci 50% level (blue bars) and is currently challenging recent market lows. The rallies to the 50% level were ideal places to enter short trades, of course. I find that the shallow 38% retraces normally indicate a prompt resumption in the downtrend, while the 50% and deeper retraces normally indicate more work before the bear market can get back on track.
EUR versus USD The euro has been in a bear market for some time, but with a recent large correction.
(Click on the chart for a larger version) Following Monday’s 1.28 low – a new low for the move - the market this week has rallied in a clear A-B-C form (indicating a correction), and the market made it back to the Fibonacci 62% retrace with a slight overshoot (purple bar). These ‘pigtails’ are quite common and usually mark the end of the move. Again, a short trade at the 62% area was indicated. And finally…
GBP versus USD This market has been swinging wildly recently with no clear direction, and here is the action over the past few days:
(Click on the chart for a larger version)
From Friday’s high, the decline occurred in five waves: with a nice positive momentum divergence at wave 5; then a rally to the 36% Fibonacci level; then a dip; and then a run up to the 50% level. This last run completed a nice A-B-C (purple lines) corrective pattern. The odds favour a declining market, which would be confirmed by a move below Monday’s low – and in fact as I write, this move has just occurred in the past minute! In these posts, what I write can very quickly become out of date! You are here: Home / Foundations of Price Action Trading / Identifying SD Zones – Decisions and Multi TF Analysis
Identifying SD Zones – Decisions and Multi TF Analysis September 2, 2012 By lovejoy80 1 Comment So far we have learnt: • • • • • • •
The concept of supply and demand and how it is the driver of price movements. The four different types of supply and demand zones. What is meant by support, resistance and the familiarities and differences to supply and demand. How to find supply and demand zones within an SR zone. How being able to identify SD zones and key decision levels, can have a significant positive impact when trading at SR zones (in determining entries and stops). How an untested fresh SD zone has a high chance of rejection price on the first return. The more times an SD zone is tested the weaker it becomes as with each rejection price is ‘consuming’ supply / demand.
The final step in order to understand the basics of price action is to be able to mark up supply and demand zones on a chart and determine where price should react within the zone. The video below discusses examples of marking up supply and demand zones on the higher timeframes and then zooming in to determine where price is ‘likely’ to react i.e. where the supply / demand (big money orders) are situated. Identifying Demand and Supply Zones by thethetradersguild
Summary A brief summary of the key points to note from the video are: • • • •
To identify SD zones on a chart we look for the types of zones outlined in this post. We should use a top down analysis – start from higher TF’s working our way down. What I commonly do is identify a H1,H4, Daily TF SD zone and zoom down each TF to identify the key decision levels within the zone. These decision levels consist of a) clear areas that had to be broken in forming the SD zone b) source of the initial move c) clear untested supply / demand – remember we can tell supply and demand by looking for signs of rejection from a specific level.
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The above can be used to poinpoint with high accuracy where the large orders (professional money) is situated – remember price action trading is all about identifying the large institutional orders and following them.
The last example in my video was off a trade taken recently on GNZD based on a daily TF SR – the chart below highlights where my entry and SL were placed (5min TF). The second chart explains the reasoning behind my entry and SL levels (1min TF).
This trade demonstrates how we can pinpoint with high accuracy where price should meet supply and demand and how we can use this to pinpoint entries and tight SL’s when trading a rejection from an SR. Compare this to conventional teachings which may tell you: • •
That touch trading is aggressive and it’s better to wait for confirmation in the form of a bar or price pattern on a higher TF. Entries on touch trades are based on finding the average price between wick extremes within the SR (yes people do actually teach this rubbish!).
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SL’s should be placed under significant swing high / lows below the SR or the SL should be placed below the breakout bar low – both of which of course having nothing to do with where price should react and why.
This of course leads to low trade frequency (always waiting for a pattern to form before taking a trade from an SR), missed entries (because of an entry technique not based on supply and demand) and wide stops leading to poor risk/reward. It’s not hard to see why people struggle to good consistent returns trading through conventional price action teachings!
Tired of Being Too Early or Late?
Rick Wright Instructor So you’ve analyzed the charts and have decided that your currency pair is trading at the right location for a possible reversal – a clear level of supply or demand. The questions in the back of most traders’ minds are, "Will this level hold? Am I too early?" This is where multiple time frame analysis can help a trader decide WHEN to trade. The way I look at the charts is: My larger time frame tells me WHERE to enter, and my smaller time frame tells me WHEN to enter. A very common problem with new traders is buying or selling too late, or waiting for too much confirmation. By the time the moving average has turned, for example, and the trader buys, the move has already started and your stop loss may be dozens of pips further out than it had to be! The opposite side of buying or selling too late is trading too early. Very often traders will try to pick bottoms or tops, yet the price continues and stops them out. A relatively simple way to fix both problems is multiple time frame analysis.
Figure 1 On this 4 hour EURUSD chart, the blue arrow indicates the lowest risk, highest reward entry on the long side. However, many newer traders will be unwilling to take that long trade as the market has been trending down for the past several days. The fear in this trader’s mind is keeping him from buying, because of the simple fact that the trend may continue down and hit his stop loss. Waiting to buy on a close above the upward trending moving average will get him in, but not until 1.3875. The experienced trader is looking to the left on the chart and defining his demand zone (which was also a supply zone previously!) from the two dramatic moves to the upside from the 1.3761 level. This trader will get in, but approximately 100 pips cheaper! Now the question remains: How can I get a better entry yet still have confidence that I’m not too early?
Figure 2 Using our multiple time frame analysis, we can see on the 15 minute chart that the price action came down into our demand zone TWICE within the four hour candle. This even shows us a double bottom pattern, a very common reversal pattern. So now, waiting for the blue arrow, the trader has a higher degree of probability in their long trade. Still not enough confidence? How about the doji candle with the longer tail, giving a potential bullish reversal? I hope that three reasons to go long at the blue arrow are enough for you! If not, then try throwing in a moving average on this smaller time frame. Waiting for the trend to start will give you more winning trades – albeit with larger stops and smaller winners. If you waited for the close above the moving average on this chart, you would still be getting in around the 1.3790 level – 30 pips higher than the best entry, but about 85 pips better than if you only watched the 4 hour chart! In class, we call this "timing our entry." Buying in high quality demand zones and selling in high quality supply zones has been covered numerous times in previous Lessons from the Pros newsletters. The only potential pitfall in this technique is getting in too early. However, with lots of screen time, you will begin to trust the levels you have identified. Using the smaller time frame chart to confirm your entry within your longer time frame supply and demand zones will lead to a higher percentage of winners, and give you more confidence in trusting your levels. One simple way to watch these charts is to set up two time frames for the currency pair(s) you will be trading.
Figure 3 If you are looking at only one chart and switching back and forth between your long-term and shortterm time frame charts, you will certainly miss a trade once in a while. So I do recommend having two charts of the same pair next to each other on your screen. Provided your trading computer has the necessary screen space, why not have these two charts for every pair you trade up at the same time? Trading from a laptop would make this a bit difficult to see the price action, but if you have a larger monitor or three, this would be a very efficient technique. Longer term position traders will often use daily and one hour charts, swing traders may use 4 hour and 15 minutes, and shorter term may even be using 1 hour and 5 minute charts. Always keep in mind that larger time frame supply and demand zones are more important than smaller time frames, and this technique should help. Feb 24, 2012: 8:12 AM CST
Though it’s been mentioned frequently on the news, the recent crude oil price breakthrough has been impressive on the charts as well. Let’s take a look at the current structure of Crude Oil and pay special attention to the breakout from consolidation/resistance, as well as the current “Open Air” pocket to watch. Here’s the Daily Chart Structure:
I wanted to highlight the main points of the chart, including two trades that developed for aggressive traders. First, Oil struggled against the $103 overhead resistance level and formed a clear sideways trading range (Rectangle Price Pattern) between $95.00 and $102.50 as labeled above. This allowed an opportunity to play a “Support Bounce” (including the 200d SMA) from $95.00 as February began. The initial target for a “Range Play off Support” is always the top of the range or resistance – in this case near $102.50. When price broke firmly above the $102.50 line and began trading even higher than that this week – particularly on the break and close bar on February 17th – it triggered a Breakout trade.
That breakout trade is still in motion, though there’s no clean/easy entry after the initial breakout (per breakout trading logic). Here’s the Pure Price Chart to highlight the current “Open Air Pocket:”
The $102.50/$103.00 area was important as it provided prior areas of resistance from mid-2011 to present – particularly from May/June. The firm breakout and continuation move higher this week officially enters the “Pocket” of Open Air between $105 and $115 – there’s no obvious price resistance between those zones given the sharp drop in May. While price may not continue straight up/directly higher without some sort of retracement, price may ultimately continue its higher movement towards the prior reversal high at $115. This is the logic of “Open Air” – looking backwards on a chart to see any obvious price targets or levels. An absence of these barriers suggests continued movement through the “Air Pocket.” For those wishing to look inside the Daily Chart, here is the Hourly Chart Structure:
I wanted to make a quick note from an educational standpoint, particularly with regard to higher timeframes. Note the $95 confluence support area on the Daily Chart and now view the structure as it appeared at the beginning of February. The Hourly Chart showed a downtrend developing multiple positive momentum divergences into the Daily Chart’s confluence support at $95.00. This helped confirm the bigger picture “Retracement” or “Range Bounce” play mentioned above. Eventually, price broke through the falling Hourly trendline and developed a “Kick-Off” surge in Momentum – an early chart signal of potential trend reversal. This provides a good example of one of my favorite ‘complex’ trades: Higher Timeframe Support + Lower Timeframe Positive Divergences/Kick-Off Signal Eventually, the Breakout Trade developed from this week’s breakthrough beyond $104.00 and $105.00, placing us in the current “Open Air” Zone.
For now, let’s watch price in the context of the Daily Chart’s support level near $103 (if you’re bullish, you don’t want to see price return back under $103 anytime soon) and the current impulse/trend move making its way through “Open Air” perhaps all the way back to $115.00 as a potential target.
Charting the Breakdown and Key Level in the CRB Index Oct 4, 2011: 1:25 PM CST
Commodities – along with equities – have fallen sharply since their respective May 2011 market peaks. Let’s take a look at the breakdown in the CRB (Commodity) Index and note the critical confluence reference support level upon which the index sits currently.
First, let’s start with the May peak of 370. I showed previously that there was a “Three Push” price pattern accompanied by a corresponding negative momentum divergence, which was a major caution sign for the index. Price then broke both the 20 and 50 day rising EMAs, resulting in a new price and momentum low (a “Kick-off” Early Reversal Signal).
Price stagnated between 330 and 350 for the next few months, though price structure took on a bearish pattern which confirmed an official trend reversal on the break under 320 in August. The August breakdown also triggered a close under the rising 200 day SMA, often a “Line in the Sand” marker between bull and bear markets (at least in simplest terms). In late September, Commodities in general collapsed towards the current 300 target after triggering a “Bear Flag” or breakdown reversal set-up into 340 (the underside of the 200d SMA reference level). For reference, this is a good example of how a chart-based Trend Reversal develops and is confirmed by non-correlated indicators (“Three Push” price pattern, negative momentum divergences, EMA breakdowns along with bearish cross-overs, new momentum low “Kick-off” signal, break under 200d SMA, etc). I’ll be discussing Trend Reversals in much more detail during two upcoming presentations: “Designed by Traders: Trading Trend Reversals“ October 12, 3:30 CST How to Spot and Trade Trend Days –(when to expect them, how to adapt your tactics/trades to them) – at the upcoming Las Vegas Traders Expo in November. At present, the index trades at the same level as when the Federal Reserve initiated its “InflationCreation” program known as QE2 (Quantitative Easing). That’s important to know as we turn now to the weekly chart to see why the 300 level is a very important index reference level:
While you can spot other lessons in the chart above (the interesting correlation between QE1 and QE2 on the CRB Index, negative divergences and reversals into January 2010 and May 2011), let’s focus our attention simply on the two Fibonacci Retracement grids overlapping at the 300 level. The RED Fibonacci Grid is the “Bear Market” retracement up, starting with the 2009 low and moving back to the 2008 peak. The GREEN Fibonacci Grid is the “Bull Market” retracement down, starting with the 2011 high and moving back to the 2009 low. You can also see that the 2011 high into 370 (and the negative daily divergences) developed into the 61.8% Fibonacci Retracement of the Bear Market – very interesting. What’s most important right now is the double-confluence just above 300: The 38.2% “Bull Market” retracement at 306 and also ironically the 38.2% “Bear Market” retracement at 304. To throw another classic indicator into the mix, the flat 200 week SMA resides at 306.50. As you can see above, price is nipping under this higher timeframe confluence area which isn’t a good sign for buyers.
In the meantime, watch the reference support from the November 2010 “QE2″ low near 295 along with the weekly confluence above 300. Just like in stocks, a failure to hold their critical current support reference levels (see prior posts on the levels to watch in all stock market indexes), a breakdown here suggests lower prices will be seen in both stocks and commodities, so keep all these important levels in mind as you trade this (and next) week. Corey Rosenbloom, CMT Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade Corey’s new book The Complete Trading Course (Wiley Finance) is now available! Continue Reading… 3 Comments and 4 Reactions • • • • • • • •
Lesson from an Intraday Creeper Trend Reversal on Divergences Sep 29, 2011: 10:55 AM CST
Previously, I explained what a “Creeper Trend” is, how it develops, and – if you’re willing to feel uncomfortable – how to trade it (it’s not your typical trade set-up). I wanted to follow-up that lesson with a great example of a “Creeper Trend” formation (trade entry), Trend Reversal (with excellent positive momentum divergence example), and re-formation of a Creeper Trend in the OPPOSITE direction. While this is your standard “Trend Reversal” example, I wanted to take it a step further and explain it in terms of “Feedback Loops” and “Creeper Trends” which are important but often misunderstood concepts. Let’s start with the 5-min “bigger picture” structure of Crude Oil at the end of September 2011:
For simplicity, we’ll focus on two main lessons: 1. The Creeper Trend Move (see “Lessons on Creeper Trend” for detailed explanation) 2. The Reversal of the Creeper Trend on Clear (Lengthy) Positive Momentum Divergences The goal is to empower you to spot (and understand) a Creeper Trend in real time and then trade in the direction of the Creeper trend UNTIL a clear reversal signal develops (and what that signal is). Starting at the top left of the chart, price formed negative momentum divergences, broke under a rising trendline along with the 20 and 50 EMAs, and then formed a “support shelf” above $83.00 per barrel. Our conversation begins when price triggers a “Sell Short” signal at 11:00am CST with the break under the $83.00 support shelf. What resulted was a bar-over-bar Positive Feedback Loop that evolved into an infamous “Creeper/Oozing” Trend that didn’t really give traders good entries, exits, or risk-management parameters. That’s what a Creeper Trend does – it confuses many traders and leaves them sidelined, never quite getting that perfect retracement entry.
Let’s focus our attention on the overnight reversal off of lengthy (persistent) Positive Momentum Divergences (3/10 Oscillator) at the $80.00 per barrel level. In a Trending Move – including intraday Creeper Trends – we look mainly to EMAs (exponential moving averages) to provide structure and trade entries on retracements. We also look to these EMAs – I prefer the 20 and 50 periods – for reversal signals when price BREAKS THROUGH these averages. We confirm the move by assessing the picture from Momentum – namely we want to see lengthy positive divergences AHEAD of a breakthrough. We also want to see if the oscillator thrusts to a new relative high which accompanies the EMA (or trendline) breakthrough. If so, this is a hidden signal of strength – hidden because traders who are not assessing momentum do not see the “burst” or “kick-off” signal in the oscillator. A Momentum Kick-off occurs when an oscillator thrusts to a new relative high (preferably off divergences) when price is clearly NOT making a new relative high. Traders should not remain short after a kick-off signal that accompanies a price breakthrough of a trendline or EMA structure – in fact, this is an aggressive BUY signal to play the potential Trend Reversal in Development. Traders place stops under the swing low when entering on the Trendline/EMA breakthrough – in this case at $80.50. An opposing or bullish Feedback Loop (“Creeper Trend”) developed to the upside, resulting in a similar bar-over-bar creeper/oozing price action until price developed a sideways support shelf around 6:00am. Unlike the prior session, price actually HELD this support shelf, resulting in a breakout “Bull Flag” buy signal… but that’s another story for another day. For additional reference, here are the 1-min charts that step-us inside both the down-move and the up-move:
Crude Oil’s Reversal Signal and subsequent bullish “Creeper Trend” development:
Lower timeframe charts provide a clearer picture of what we’re seeing on higher frames, allowing us to “step-inside” the price action seen on a higher frame. The important thing to learn from this reference post is the development/ignition of a Creeper Trend, the Reversal Signal via positive divergences, and the official Trend Reversal that created – surprise – another Creeper Trend situation. Take time to learn the lessons from clean examples like these so you’ll be better prepared to recognize then trade these situations when they develop in real time in the future (across all markets and timeframes). I’ll be discussing similar situations/examples as these in my upcoming webinar presentation: “Designed by Traders: Trading Trend Reversals“ October 12, 3:30 CST Additionally, I’ll be speaking specifically on Trend Days – how to spot them in real time, how to trade them, when to expect them, how to adapt your tactics/trades to them – at the upcoming Las Vegas Traders Expo in November. Corey Rosenbloom, CMT Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade
Corey’s new book The Complete Trading Course (Wiley Finance) is now available! Continue Reading… 1 Comment and 5 Reactions • • • • • • • •
Charting the Multi-Timeframe Make or Break Support at Dow 12000 Aug 1, 2011: 2:59 PM CST
Well, here we are at the well-known Make or Break chart support at Dow 12,000. This is what I mean when I say refer to critical chart reference levels to make objective sense of all the good and bad – often confusing – economic/political headlines affecting the market at the moment. It’s really as simple as “The market is holding critical support so that’s objectively bullish, or it’s firmly breaking strongly under critical support which is objectively bearish.” If you’re finding yourself confused as to which way is up or down in the US Equity Markets, take a moment to look at the following reference charts:
If you prefer the S&P 500, check out my prior reference post on the S&P 500: “Making Sense of the Current SP500 Market Range” “SP500 Critical Support on Weekly Trendline Confluence” I’m a fan of keeping charts (technical analysis) as simple as possible and here it is: Either the market supports and holds bullishly at 12,000, returning higher as it did recently in 2011 or it doesn’t, which opens up the door to expect 11,500 or even lower for a full trend reversal. What we’re seeing presently in 2011 is very similar to that of mid-2010 where 10,000 became the major market “Make or Break” Bull/Bear Line in the Sand. It’s not magic and price didn’t respect 10,000 perfectly, as seen with the 2010 low of 9,600 in June. We could still see a similar “nip” or trap here at the 12,000 level so don’t expect 100% perfection of chart magic. Key levels reflect true battle points between Buyers and Sellers (Supply and Demand). A key level that breaks thus forces action from those trapped by failed expectations. Subsequent moves create “Feedback Loops” that send the market moving off the inflection point in a sustained move. Traders look to take advantage of these low-risk points. Let’s step inside the Daily Chart to see another reason why 12,000 is so important on the chart:
Similar to 1,280 on the S&P 500, the 200 day Simple Moving Average rests almost exactly at 12,000 which joins both the short-term trendline from the March 2011 low and the intermediate trendline as seen on the weekly chart. Buyers have placed simple stop-losses under 12,000 and 11,900 (June low) which will be triggered should sellers push the index under 12,000 then 11,900. That’s something a trader can expect. A breakdown under 11,900 returns the market to 11,600 where it will be a major battle of buyers and sellers. Should buyers/bulls lose the Supply/Demand battle at 11,600, then this could be deemed as an intermediate term sell-signal which would suggest (or confirm) a trend reversal down on the higher timeframe. Key levels like this aren’t magic – however, they often trigger self-fulfilling prophecies that result in perpetual moves called “Feedback Loops” where traders can take advantage (or limit losses if caught on the wrong side of a feedback loop). Speaking of Traders, aggressive short-term traders can easily take advantage of a price movement into a major/key price level:
Let’s assume you are an intraday or swing trader looking to buy into the expected support at Dow 12,000 (whether using futures or the DIA ETF or corresponding stock or ETF). As the Dow tested the critical 12,000 level from 10:30 to 11:30am (CST), we observed reversal candles that were accompanied by both a positive momentum and TICK (market internal) divergence. The combination of reversal signals and positive divergences off a critical make-or-break support level suggested odds favored an upward reversal in price. If the upward reversal thesis failed, then that’s ok because this situation allowed for a tight stop under the 12,000 level (11,990, 11,980, and so on depending on your risk tolerance). Keep in mind that price has a tendency to nip a few points under a critical level before reversing – we call this a “Finger,” “Trap,” or “Rinse/Wash” Situation. It happens.
Aggressive traders like to buy INTO a support level while conservative traders like to buy AFTER support held and price then breaks a falling trendline or moving average. Price broke above 12,050 at noon, then broke above 12,075 at 1:45pm. It can be a little less stressful to buy on a breakout than buying into support, at least if you want greater odds that a support level is holding. At 12:30pm, the TICK (internal) gave a “Kick-off” Reversal signal which further confirmed that the odds shifted to favor a positive/bullish reversal. As of this writing, price rallied higher from 12,000 to the 12,125 level. Anyway – that’s a discussion of a short-term intraday set-up, the kind of which I describe each day in the Idealized Trades reports (with more detail, explanation, and trade logic for reference). The main idea is this: There’s a lot of economic and political news affecting the market at the moment – more than usual. At times of increased noise and volatility, it’s important to pull the perspective back and look at the big picture to focus on critical price levels in key markets. For now, 12,000 is the critical reference level to watch in the Dow Jones, just as the 1,280 and 1,260 level is critical to watch in the S&P 500. Use these levels as references to guide your game-plan and trading decisions accordingly – otherwise you may feel very bullish one day and then tremendously bearish the next. Ground yourself with objective price reference levels and observe how price is behaving at these levels. Corey Rosenbloom, CMT Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade Corey’s new book The Complete Trading Course (Wiley Finance) is now available! Continue Reading… 1 Comment and 5 Reactions • • • • • • • •
A Quick Intraday Peek Inside the SP500 at the 1300 Level
Jul 18, 2011: 12:43 PM CST
To follow-up with my prior morning post on the “Monday Morning Stock Index Update at Midpoint Value Areas,” I thought it would be helpful to show the current structure of the 1-min chart during lunchtime. In other words, we’re all watching the “Make or Break” 1,300 region, but what is the market saying? Let’s take a peek:
We’re seeing the plain SP500 Price Chart with the 3/10 Oscillator and the NYSE TICK (Internal). What’s the message? Going down in to the 1,300 level, the key indicators formed lengthy Positive Divergences into the 1,300 pivot (actually on a slight ‘nip’ or potential ‘trap’ under it).
Just now, we received a bullish “Kick-off” Signal in TICK (after the 11:00am signal from momentum). That’s a good sign if you’re a bull who is expecting a bounce off this level, and a caution sign if you’re a bear who is expecting a big break. As of lunchtime on Monday, we have NOT received an official breakdown sell signal. That may change into the close, but for now, the ball is on the bulls’ court and it’s their short-term game to lose. In other words, if there were new momentum and TICK lows as the market fell intraday to 1,300, we would simply expect a firm breakdown – buyers could not stop the tide of selling. However, what we’re seeing at this moment (which admittedly may change) is hidden strength from the buyers/bulls and a willingness to defend the 1,300 level at the moment. Look for further confirmation intraday buy signals on a break of prior swing highs from the morning – 1,302 then 1,304 come to mind. Otherwise, continue watching your intraday charts to see inside this critical tug-of-war between buyers and sellers at 1,300 and be ready to trade accordingly. If the bulls give up the advantages here (from the divergences and support), it would likely trigger a feedback loop of selling pressure (bears shorting and bulls selling to stop-losses) on a firm breakdown under 1,300 and “failure test” of 1,300’s critical/obvious market support. Corey Rosenbloom, CMT Afraid to Trade.com
Momentum Kickoff from Dual Timeframe Support Example in Harley HOG Jul 4, 2011: 11:23 AM CST
A reader recently asked me if we had a “Kick-off” Signal in Harley Davidson (HOG) and indeed we did – with powerful follow-through as anticipated. The entire event gives us a great lesson in the Kick-off Reversal Signal, with the special emphasis on two-timeframe confluence support (on a retracement) where the Kick-off Reversal Signal formed on the intraday frame. Let’s take it step-by-step and learn from this excellent reference. First, let’s build down from the higher frames – The Weekly Structure:
Without getting too detailed, we note the “Structure” (the sequence of swing highs and lows) reveals HOG to be in a persistent, long-term uptrend, triggered officially from August 2009. Through most of 2011, the stock pulled back (retraced) to the critical confluence support level of $35.00 per share. It was both the rising 50w EMA and the prior price swing high from April 2010. To keep it simple, we’ll just refer to this as a “Make or Break” support level in the context of a multi-month retracement/pullback to support. Now, we see the Daily Chart for more detail:
Again, keeping it simple, this “bearish” period on the daily chart (from April to June) was just a stable/simple pullback on the Weekly Frame. The $35.00 level was our Weekly Reference price, and we can see a confluence with the rising 200 day SMA along with a prior tiny price high from December 2010. Now we see multi-timeframe (Weekly and Daily) expected support at $35.00 per share. This example is a good follow-up to my recent “Kick-off Reversal Signal” webinar from Trader Kingdom (archive). Towards the end, I described a situation where a higher timeframe retracemet to support occurs and then explained how a trader should then drop to lower timeframes (intraday) to see developing structure and whether or not a “Kick-off” reversal signal forms there. This situation in Harley Davidson is a great “follow-along” accompaniment to the presentation.
The chart above is “cheating” as we can see the favorable resolution of the retracement, but to understand how this would have played out in real-time, envision yourself seeing this at the beginning of June as price retraces into the $35.00 per share level. There is a lengthy positive momentum divergence into this dual-timeframe support level as price retraces to test $35.00. Now, let’s drop-down to the hourly (intraday) chart to assess what the structure revealed – including the Kick-off Reversal Signal:
For fun, I labeled two “Downside Kick-off” signals in early April just for additional reference. For our purposes here, we have price pushing down into the $35.00 confluence support level as visual positive momentum divergences form in the 3/10 Oscillator. Then, on June 6th, Harley simultaneously breaks a short-term falling trendline AND forms a Kickoff Early Reversal Signal.
To refresh, the “Kick-off” Signal triggers when price is moving down into positive divergences and then a price swing up results in a new momentum high (new oscillator high) in the indicator while price is NOT making a corresponding new high. This is based off the teachings of Richard Wyckoff as a “Hidden” Sign of Strength via Momentum that price does not yet reveal. The trade generally is to buy the first retracement swing AFTER a Kick-off Signal forms, or wait to buy the actual price breakthrough above the “Kick-off” Price High (in this case, $38.00 per share). Immediately following the Kick-off Signal on June 6th, price swung down officially into the dualtimeframe key “Make or Break” support level at $35.00 per share and then Re-broke above the falling trendline on June 14th above $36.00 (an aggressive buy signal). Shortly after, price then officially broke above the “Kick-off” price high at $38.00, triggering a late but safe entry. Due to the higher timeframe confluence support, the stop-loss for the bullish reversal play rested under $35.00 ($34.50 perhaps to give some ‘wiggle room’). From there, price continued its strong impulse higher and moved quickly back to the $42.00 per share swing high, allowing for a quick swing trade that was confirmed with multiple timeframes and a Kick-off. To recap – We had a primary uptrend and a simple pullback/retracement to the dual-timeframe price confluence expected support at $35.00 per share. While most traders find this to be enough information to put on a swing trade, other traders can “step inside” the developing structure to assess what’s developing on the intraday frame for clarity and better execution. In this case, we had a positive momentum divergence into a Kick-off Early Reversal Signal and then a confirmation via a breakthrough of a falling trendline and then a break above the “Kickoff” swing high at $38.00 (late entry). You don’t have to go to this level of detail when planning/executing a trade, but for those who want to do so, this recent example in Harley Davidson gives a great lesson in dual-timeframe confluence support and integration of the intraday chart for a clearer perception of the opportunity, entry, stoploss price, and real-time trigger(s) as the trade develops and confirms. Corey Rosenbloom, CMT Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade Corey’s new book The Complete Trading Course (Wiley Finance) is now available! Continue Reading… 1 Comment and 7 Reactions
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Join Corey for a Webinar Wednesday June 29 on the Momentum Kickoff – Early Trend Reversal Signal Jun 29, 2011: 12:04 PM CST
I wanted to invite you to attend a Webinar (Wednesday, June 29th at 3:30pm CST)as part of the Trader Kingdom “Technical Trading 101″ educational series where I will be discussing an important set-up/trade signal that often signals an early trend reversal. Entitled: “The Momentum Kick-off – Identify and Trade Trend Reversals Ahead of the Crowd,” I will be discussing how to identify this signal, the logic behind it, and how to trade properly (position) when this signal triggers intraday.
We’ll start be defining “Momentum” and how it has a tendency to lead turns in price, particularly in terms of a “kick-off” or sudden impulse in momentum (as seen in oscillators and market internals – specifically the TICK) at specific times in the intraday structure. We’ll then move to defining how to recognize, enter, manage (place stops), and exit positions that develop as a result of this concept. While I will focus the majority of the presentation on the intraday frame (using examples from multiple futures markets), this concept can be applied as well on the higher frames (to swing traders) and of course to stocks along with ETFs as well.
Here’s part of the official description of the event: “The initial “Momentum Kick-off” signal is one of the clearest and most powerful early signals of trend reversal, especially when it is preceded by clean momentum divergences.” “Drawing from examples in multiple markets and multiple timeframes, Corey will broaden your awareness of this time-tested concept that is based off the original work of Richard Wyckoff. He will put the original principle in context of today’s markets and indicators that complement the reversal signal.” This is a free webinar event and the presentation will be archived and available to those who registered if you are unable to attend the webinar live. Thank you to Trader Kingdom, ICE Futures, and ZenFire for sponsoring this webinar opportunity and I hope to see you there! Corey Rosenbloom, CMT Continue Reading… 5 Comments and 7 Reactions • • • • • • • •
A Quick Lesson on How to Identify Price Structure in Trends Jun 20, 2011: 12:06 PM CST
Do you know how to quantify price structure? It’s not a difficult concept at all, yet many traders miss the benefit of taking a moment to assess objective price structure in the context of a developing trend. Doing so allows you to assess objectively the next likely swing, and thus the most probable trading strategy to take. Let’s take a brief moment to review the basics of identifying price structure on multiple timeframes. Let’s start with a long-term weekly chart of the Philadelphia Housing Index:
We’ve heard it 100 times, but let’s refresh basic definitions of Trends: An UPTREND is defined as a series of higher swing highs and higher swing lows. A DOWNTREND is similarly defined as a series of lower swing highs and lower swing lows. To reverse a structural uptrend, price structure must make BOTH a lower low and a lower high. The point at which price makes both a lower low, then a lower high, then breaks under the newly established swing low is known as the “Trend Reversal Price” and is the most objective point at which to call (or label) an official trend reversal. Looking above at the Housing Index, we have a weekly structural uptrend from 2003 into 2006 as marked with a sequence of higher highs and lows. However, Price forms a lower high in early 2006 and then turns down to break under a long-term rising uptrend as shown. A break in a trendline strangely enough does NOT officially reverse a trend in terms of price structure. Shortly after, price continues its power swing to the downside and officially breaks and closes under the two recently formed swing highs during June 2006 at the 230 index level.
I circled this spot as the Trend Reversal Price – henceforth, the weekly trend was officially labeled as down. From there, the weekly structure continued to record lower swing highs and lower swing lows as the downtrend continued. The structure finally changed in mid-2009 when we began to note minor new swing highs and lows, thus reversing the intermediate trend to the upside in late 2009. From the May 2010 peak, a power swing to the downside recently took out the previously established swing low from late 2009 as a warning sign of potential future trend reversal back to the downside – but that’s beyond the scope of this educational post. Take a look at how I labeled each successive swing in terms of higher highs and higher lows, both on the primary (larger) trend landscape and in the smaller or intermediate landscape (particularly during 2007). You can identify long-term structural trends on the weekly chart, but if you’re a shorter term trader than that, you can use the same logic on smaller timeframe charts, including all intraday landscapes. Let’s see a recent hourly structural trend progression in Gold:
Moving right the point, we see the hourly (intraday) structure forming a sequence of higher swing highs and higher swing lows from March to May 2011. Even on the hourly chart, you can see smaller swings that build up the larger hourly swings in gold. These create trading opportunities for traders on the lower frames, with the simplest strategies being buying (putting on new positions) during pullbacks in lower timeframe structure in the context of higher timeframe structure. Alternately, traders can play breakout strategies on intraday breakthroughs of a prior higher timeframe swing high – notice the continuity (burst) that tends to occur when price in a structural uptrend breaks to a new chart high (examples – April 6th above $1,440; April 15 above $1,480; and April 27th above $1,520). Structure can also be helpful even on the smallest timeframes to guide decision-making (trades) as structure develops. The IPO for Linked-In (LNKD received a great deal of attention (bullishly), but if traders took a moment to look at developing structure in the days after the initial hype, they would have seen a deterioration in structure and a reversal to an official intraday downtrend.
Here’s the IPO and structural trend reversal on the 10-min frame:
The hype was intense on the IPO date and shortly after, but as we moved into June, intraday structure officially reversed to the downside, allowing for short-sales on each retracement up or for breakdown trades on each breakthrough of a prior swing low (such as $756 on June 9 and $70 on June 16). You can even see minor swings (which you can label easier on the 5-min and 1-min chart) that comprise these ‘larger’ swings on the 10-min chart. Intraday traders can do well by assessing structure as it develops. It merely takes a moment to quantify objective price (trend) structure, and it’s often best to do so quickly on a clean chart of price only – no indicators are necessary. Once you assess the current (developing) structure, you can plan your trading strategies more effectively, keeping in mind price levels that would serve as an early warning for potential trend reversal, and of course the official price that would confirm a trend reversal.
I will be presenting a webinar with Trader Kingdom on June 29th after market close to show how to identify potential trend reversals AHEAD of the official price reversal point: “The Momentum Kick-off: How to Identify Trend Reversals Ahead of the Crowd.” I’ll start by discussing price structure and then explain how to get a head-start on a potential trend reversal using a special insight from momentum. Corey Rosenbloom, CMT Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade Corey’s new book The Complete Trading Course (Wiley Finance) is now available! Continue Reading… 2 Comments and 3 Reactions • • • • • • • •
Look at these ETF Charts SLV ZSL Before Calling a Top in Silver Apr 21, 2011: 10:40 AM CST
Are you trying to call a top in silver? You’re not alone – I’ve been picking up on a lot of chatter in the blog (and email) world about traders and analysts trying to call that proverbial “top” in Silver “any day now.” Before you can’t fight the temptation any longer, at least take a look at these four charts – Two Daily and Two Weekly – of major Silver ETFs SLV (bullish) and ZSL (ultra-bearish). Let’s start with SLV Weekly for our reference:
In this post, I’ll specifically be focusing on a few key chart points: 1. Bernanke’s “Jackson Hole” Speech that introduced us to QE2 on August 27, 2010 2. The “Weekly Pullback” to the 20 EMA in January 2011 3. Volume and Momentum Insights I need not remind you that Bernanke’s QE2 speech (“We will do anything to prevent a second recession”) helped kick-off the inflationary commodity rally we’re seeing now – but that’s completely another story. Second, the “Weekly Pullback” in January was an interesting topic, as the daily chart (as you’ll see) had plenty of warning signs of a potential “top” and “reversal” that was shortable … but wound up being nothing more than a clean and easy pullback (retracement) to the rising 20 week EMA – an intermediate term BUY signal.
In terms of momentum and volume, we’re seeing CONFIRMATIONS from both instead of negative divergences on both the weekly and daily frame – that is a sign of likely price continuation. Now let’s flip down to the daily chart:
Again, we can see the “Blast-off” in price at the end of August which coincided with Mr. Bernanke’s QE2 announcement (which would begin officially in November, though markets tend to move ahead/in advance of actual events). The MAIN IDEA with the daily chart is what happened in the run-up to January 2011. Generally, if you’re going to call a top, it’s best to wait for confirming signals of potential trend reversal.
These include lengthy negative divergences in both volume and momentum (which were present as shown) and then triggers from price in the form of breakdowns under rising price trendlines (handdrawn) or moving averages (such as the 20 or 50 day EMAs as shown above). So, if you’re going to call tops, it’s best to wait for triggers that form AFTER divergences or some other non-confirmation are present. Even with all that bearish wind at traders backs, SLV (silver) did not reverse, but instead just pulled back to the rising 20 week EMA (higher timeframe support) and launched up from there. This is a key point in Multiple Timeframe Analysis – wherein the daily (or short-term) chart can signal a clean reversal… which turns out to be nothing more than a standard pullback on the Weekly (higher) frame. Anyway, with Silver shaking off that potential reversal signal in January, the next BUY signal came on the breakout to new highs in February above $30 per share (roughly $3.00 per ounce). I’ve posted many times that the two leading trading strategies in strongly up-trending markets are retracements to rising EMAs/Trendlines or price Breakouts to new chart highs. What we’re seeing now is the remainder of the current rally which – again – is confirmed with bullish surges in volume and momentum – these are things you do not use as bearish short-sell catalysts. A main point from the current chart is that, while there is not a corresponding buy signal (as in, no breakouts above pre-existing resistance and of course no pullback to support), there is – as of this moment – NOT a bearish short-sell signal (given that price is rising and overextended… but overextension alone is not a reason to short). Now, let’s flip the tables and move away from the Bullish SLV chart to the Ultra-Short ETF – ZSL:
Before getting too deep into the chart, keep in mind ProShares announced a 10 to 1 Reverse Split for ZSL on April 14th, 2010. The long-term fate of leveraged inverse ETFs almost always means a trajectory headed to $0 per share … which is why they will have to CONTINUE reverse-splitting most leveraged inverse ETFs every few years (particularly if there are strong rallies in the underlying market) … but that too is another story. I’m really showing this chart for comparison purposes, and as a reminder that double or triple leveraged inverse ETFs are for very short-term (perhaps only intraday) trading purposes – you should not invest long-term in leveraged inverse ETFs. The main point of this chart is the literal surge in volume in 2011 – which one would assume is a rush of risky/aggressive traders seeking to profit from a potential top in silver. So far, that has been a losing bet, as seen from the daily chart:
Again, I’m just going to focus on a few things. First, when Bernanke announced the initial QE2 plans in August 2010, ZSL sold for $140 per share. Today, it’s at $15 per share. That’s a 90% decline and – mark my words – ZSL will NEVER see $140 per share again (without a reverse split). Let’s assume silver fell from $40 per ounce to $20 per ounce – a 50% decline. One would thus assume the ZSL – a double-leveraged inverse fund – would increase 100% which is an enviable gain. $15 per share times two (increased 100%) is $30 per share. Oops. While your position dollar value did double, $30 per share is no where near $100 per share seen in September. Price will not make it back there. Anyway – again this topic is a huge issue for another conversation, but it underscores the importance of reading an ETF’s prospectus (and doing your research) carefully before purchasing an ETF. Moving on – the surge in volume from March to present either indicates that more people are now aware of the ZSL fund… or that more people are finding shares just too irresistable to snatch up a
position that will rally a large percentage gain (but NOT large share price gain – certainly NOT back to $140 per share or even $100 per share) in the event Silver does top soon. Now going back to the main point – our weekly pullback phase in January (when it looked like Silver had topped on the daily chart) led to a ZSL move from $40 to $50 per ounce (a 25% gain) but now price is 70% lower ($50 to $15) and still declining. To make a long story short, any type of trend reversal strategy is inherently more risky than playing for trend following strategies – given the foundation of technical analysis is built on the notion of trend continuity. Martin Pring (Technical Analysis Explained) defines Technical Analysis as: “The Art of identifying a trend at its earliest stages and riding that trend [trading in the direction of the trend] until the weight of the evidence proves that the trend has reversed.” To me, “weight of the evidence” takes into account a variety of factors including sentiment, momentum, volume, trendlines, moving averages, reversal candles, exhaustion gaps, and many more concepts/indicators. Right now, we’re seeing “price overextended” (a vague term) and high bullish sentiment. That’s not the weight of the evidence. We’re NOT seeing divergences, trendline breakdowns, EMA breakdowns, etc. It would be much safer to short silver if we started to see some of those… but even then we DID see those in January 2011 that was nothing more than a weekly chart pullback ahead of the recent rally from $30 to $45. One of technicians’ favorite saying is the well-known: “A market can remain irrational longer than you (your account) can remain solvent” along with “Trends tend to go higher (or lower) than almost anyone thinks they can go.” So until we start seeing some material chart evidence of a reversal according to the “weight of the evidence” model, it’s probably a good idea to resist the urge to be a hero and call a top in this powerful metal until we see some objective sort of sign of reversal other than “it’s really expensive and overextended.” Unless you’re required to trade Silver, there’s probably better reward/risk opportunities elsewhere. Corey Rosenbloom, CMT Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade Corey’s new book The Complete Trading Course (Wiley Finance) is now available! Continue Reading… 41 Comments and 13 Reactions • •
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Lesson in Divergences Plus Trendline Breaks in Dollar March 31 Mar 31, 2011: 5:50 PM CST
It seems all traders seek to answer the same question: “When is this market likely to reverse?” Newer traders tend to love “reversal” style strategies, wanting to enter as close as possible to a trend reversal in order to have the tightest stop and biggest target possible. While no strategy can call a top or bottom all the time, one of the best ones I’ve found is to look for multi-swing divergences followed by a trendline break as a high probability, low-risk trigger for entry into a potential major shift in a market trend. Let’s take a quick look at this concept as played out in the US Dollar Index (really it could be anything) through March:
Click for full-size image. As you probably know, I am a huge fan of trading divergences and have posted dozens if not hundreds of times on the topic of trading divergences in multiple markets. Here is a quick sampling of some of the recent educational posts: “A Lesson in Trading Dual Divergences on Two Timeframes in Dollar UUP” “A Lesson in Playing Intraday SPY Reversals with Dual Divergences” “When Divergences Really Matter: SP500 at 1,300″ “Lessons from Crude Oil Divergences and Head and Shoulders” “Divergences and Breakout Lessons in Goldman Sachs in 2010″ “A Quick Lesson in Intraday Divergences in SPY December 16 2010″ “Lessons from Crude Oil in Dual Divergences, Kick-offs, and Breakouts” Take a moment to look over some of those for background reading. The main idea with the Divergence plus Trendline Break situation is that the Divergence (in momentum using the 3/10 Oscillator) is your first warning signal of potential trend reversal – and the more “swings” build up a divergence (when price continues to push higher while the oscillator continues to slip lower on each swing) – then the greater the odds of a reversal. You can’t necessarily trade BECAUSE there are divergences – you need a TRIGGER. The best trigger/signal comes from price breaking through an opposing trendline that connects the rising (or falling) trend. So if you observe a multiple swing divergence then see price breakthrough a corresponding trendline, THEN that is a much safer signal that odds are strongly likely to lead to a reversal in the timeframe trend. Of course, nothing guarantees a reversal so you’ll need to place your stop beyond the absolute swing high or low in the event the market trend pushes on beyond what you think it can – this higher risk is inherent (cannot be removed) from aggressive-style reversal trading strategies.
In the chart above, we have three such trend reversals in structure (series of price highs and lows) in the Dollar Index: A) March 11th gave us a multi-swing negative momentum divergence that was followed with a signal via a trendline break at the $76.80 level. In this case, price fell sharply from the high and broke an otherwise ‘lazy’ trendline that couldn’t keep up with the recent swing high – leaving this trade to be a later entry than perhaps was comfortable. It did produce a trend reversal as expected though.
B) This was a big one, and given the bearishness on the US Dollar index, it may have been a difficult trade to take but it was effective. The Trend Structure continued pressing lower (lower lows and lower highs) though the momentum oscillator continued building a positive divergence situation which eventually gave-way on a breakthrough of the falling (tighter) trendline on March 22nd at the $74.50 area – allowing for a tighter stop under $75.30. Price continued its pulse higher and then recently slammed into a triple top formation – with its own divergences – at the $76.40 level… leading to the recent trendline breakdown and opportunity. C) The triple-top served as a clean resistance area which had its own negative momentum divergence and trendline breakdown on March 30th which sent the index moving lower into the present session. Without going into exhaustive detail, I wanted to highlight this lesson/concept – discussed in far more detail in Chapter 2 on “Momentum’s Leading Edge” in the new Complete Trading Course book. The Dollar Index served well in describing this concept of Divergence plus Trendline Break equals likely structural change – and the inherent trading opportunities that come from changes or reversals in market structure.
Triple Timeframing the Breakout in Copper JJC Feb 1, 2011: 10:28 AM CST
Many investors and traders look to copper prices to gauge the strength or weakness of the economy, as copper is an industrial metal used in all sorts of construction projects. If that sentiment holds true, then copper just sent a big “economic recovery” message this morning, as it has been doing over the last few months. Let’s “triple timeframe” Copper prices and then finish by looking at the current tradeable JJC Copper ETF:
This is one of those things where, until you see it, it’s hard to imagine. Copper has already exceeded its 2008 peak (stocks peaked in October 2007), meaning Copper is not just at new recovery highs, but at all-new highs, having exceeded the price at the start of the Bear Market Recession. The NASDAQ 100 has also accomplished this feat (though it’s not above its 2000 high) and the broader NASDAQ index is nipping at exceeding its 2007 peak. That’s really the main idea of the monthly chart – Copper is beyond its 2008 pre-bear market peak, and momentum is confirming the recent push up. The weekly chart shows a similar positive strength:
The $400 level in copper was key resistance, as it was both a “round number” and was the peak of the market ahead of the 2008 recession/bear market. There were three weeks of downward prices that ended at the rising 20 week EMA at $375 and copper broke powerfully through the $400 level, officially changing the game to the bulls – and copper broke this morning to a new high above $450 which served as nominal price resistance. As long as copper remains above $450, it’s a strong bullish vote of confidence in the economy… and the inflation ‘created’ by the QE2 liquidity policies of the Federal Reserve. As a note, the momentum oscillator registered a new swing high just ahead of the breakout which contributes to the bullish chart picture. Finally, let’s drop to the daily frame to see lessons in trading power-moves like this:
StockCharts uses End-of-Day data for their indexes, so that’s why I’ll show a chart of JJC (ETF) shortly. Main idea: After bottoming in June, Copper showed signs of strength, breaking its daily EMAs, forming a “Kick-off” strength sign, then supporting in August on the 50 EMA. From there, price broke through the little resistance line at $350 and continued supporting – creeping – up the 20 EMA. Like stocks, November’s pullback took price down to the rising 50 EMA and lower Bollinger as price then broke the “Bull Flag” trendline, triggering another potential entry. As I’ve shown in prior examples – in Netflix and Apple particularly – the BEST way for most traders to play these breakaway moves is to put on positions at one or two specific points in time during a seemingly ‘non-stop’ rally: 1. Buy Pullbacks to rising 20 or 50 EMA, trailing the stop just under these levels 2. Buy Price Breakouts above trendline/price resistance (after supporting on EMA) Depending on your strategy, you’ll graviate to one or the other, though most people feel more comfortable with buying pullbacks than buying breakouts.
The pullback strategy offers a tighter and known stop-loss, while the breakout doesn’t do that (unless you place the stop just under the breakout trendline). Also, breakouts feel like you’re ‘chasing’ the market and makes you worried that the moment you enter, the price will reverse. It might – but the only way to overcome this notion is to see multiple prior examples (like this) of when the set-up worked and the outcome of the breakaway move. Not all breakouts lead to nice moves, so you must protect yourself with a stop-loss in the event any breakout turns into a mean bull or bear trap. Let’s take a final look at the tradeable Copper ETF: JJC
We also get volume insights from JJC that we don’t get from the Copper Index. Notice that on the little breakouts, volume (buying) rose each time, including now – that’s a good sign for buyers. While the index gives us end-of-day data only, the JJC shows up-to-date information – and that the key level to watch here is $60.
So as long as Copper (index) remains above $450 and JJC remains above $60, then we can expect potentially higher prices as the economy recovers (along with consumer confidence) and the Fed maintains its inflationary goals/policies via QE2. A breakdown sharply under these levels – particularly the $56 area in JJC and $420 in Copper would thus dis-confirm a bullish thesis. Corey Rosenbloom, CMT Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade Order your copy of The Complete Trading Course (Wiley Finance) now available. Continue Reading… 1 Comment and 6 Reactions • • • • • • • •
Bullish Divergences and Developing Intraday Structure in US Dollar UUP Jan 30, 2011: 5:26 PM CST
With multi-swing divergences happening in the US Stock Market, what is the similar picture like on the inversely correlated US Dollar Index? As it stands now, it’s bullish but in its earliest stages of potential life. Let’s take a look and learn a quick lesson in confirmation via a simple inter-market cross-check. The US Dollar: 60-min
I posted Thursday on the clear divergences in the S&P 500, and then followed up Friday – after a 20 point move down – regarding “Why Divergences Matter” when the SP500 is at 1,300. While the S&P 500 was deteriorating, the US Dollar Index – intraday as well – was clearly strengthening. This is what you’re supposed to see – at least in the current market environment – and taking the extra step to cross-check the US Dollar Index was helpful in seeing if everything’s playing out like it is supposed to (according to the charts). Before we get to what’s going on now, look back to early January when the US Dollar Index rallied up in a mini-five wave fractal that showed a quadruple-swing negative momentum divergence. Price rotated (consolidated) at the $81.00 index level (known resistance) and then broke sharply lower which took us to the present $78 level where counter-divergences have now formed. I’m a huge fan of 5-wave fractals into clean divergences like this. Now, moving on to today, with the S&P 500 having trouble so far overcoming 1,300, and showing many divergences, the Dollar is showing the opposite picture. You can’t look at internals on the Dollar, but you can look at momentum. The 3/10 Oscillator pushed to a low on January 12th and 13th, calling for LOWER prices yet to come and they did… and did… and did.
Moving under $78, the index showed multiple positive divergences along the way which suggested the downside pressure was weakening, suggesting the potential for a breakout and potential set-up on the breakthrough of the falling trendline. That happened Friday and it was met with a Kick-off signal – a new momentum high as price is not making a new high (a power-signal in many cases). A caveat – a similar situation formed on the triple-swing divergences on January 19th where the Dollar Bulls were only able to swing the price up in an “ABC” corrective fashion – a retracement, not a reversal. That’s certainly possible again as we break a similar trendline with similar momentum divergences – only the present divergences stretch further back than those on the 19th. Anyway – the quick story is that for short-term oriented traders, as long as the Dollar stays above the $78 level or even the $79.50 recent swing low level, we could see at a minimum another little ABC push up to $79 or just shy of $79. If stocks really start to tumble (breaking their daily support levels), then we could see more of a short-term intraday reversal up instead of a retracement. There’s never a guarantee of any method working 100%, but I’ve grown to love intraday divergences and the signal that comes from trendline breaks – if anything for the tight risk to potential reward inherent in these sort of set-ups. Either way, the multi-swing divergences in the Dollar are something for traders to watch as we go forward. Corey Rosenbloom, CMT Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade Order your copy of The Complete Trading Course (Wiley Finance) now available. Continue Reading… 1 Comment and 5 Reactions • • • • • • • •
Lesson in Playing Intraday SPY Reversals with Two Timeframes and Divergences
Jan 6, 2011: 3:59 PM CST
I think it’s important to document interesting examples of trading concepts played out during the day, as it serves both as an educational reference and deepens our knowledge about these concepts, which helps us to trade better the next time a similar set-up or opportunity unfolds in real time. A great educational example – and good followthrough – formed on January 4th intraday reversal play that was telegraphed WELL in advance by various factors – some of which I wanted to show you so you can use them as a reference. They include: Higher Timeframe Dual Support played out on the intraday frame, and then the intraday positive dual divergences that formed that preceded the official “reversal” trade entry trigger for a great intraday opportunity that actually carried into the next session. Here – let’s take it step-by-step and learn from this example:
I want to cut right to the heart of the lesson and call your attention to the DUAL SUPPORT line at the $126.20 level in the SPY. That’s because the level was a prior resistance point at the end of December (shown above) – as old resistance sometimes becomes FUTURE support as price tests this ‘polarity’ level again.
Beyond that, we have the 61.8% Fibonacci Retracement – drawn from December 31’st swing low near $125.30 to January 1st’s $127.60 level. The 61.8% grid level came in – surprise – at the same level as the prior price high at $126.20. As price pulls back, that’s a natural target to play for when shorting intraday, and a natural place where the market MIGHT turn-around and find support if the swing continues down to that level. So – CONCEPT 1: $126.20 was a natural dual support target to play for short, and see if a reversal formed intraday. And on January 4th – that’s exactly what happened – price fell off the open down to the $126.20 target level, so now the game changed to: “WILL support at $126.20 hold?” More importantly with that target in mind, you should be watching the intraday structure in real time to see if there are any clues – such as divergences – that lead you to believe one way or the other that support will hold… or break. It turns out there was a powerful clue that then set-up a trade entry to PLAY for the reversal and bounce up off support. It’s one of my favorite concepts: Dual Intraday Divergences:
(Click for full-size image) Now let’s take this one step at a time – focusing specifically on the dual divergences at 11:45am CST at the $126.20 level we referenced above from the 5-min (and really any higher) timeframe. I discuss this concept frequently, but it’s always fun to look at new examples and trade them. As price fell through the morning session, $126.20 was the higher timeframe dual price and Fibonacci target. The market was an intraday short until then. However, as price tested this level at 11:30am, it became clear to those watching that a triple positive TICK divergence – along with a positive momentum divergence in the 3/10 oscillator – formed at this key price level. Remember, we watch price FIRST and then look to indicators to confirm or disconfirm what’s happening in price. Divergences are non-confirmation signals of a move in progress, and suggest a retracement or perhaps reversal is perhaps yet to form.
Look closely at the vertical highlighted line to see the inner-workings of this Dual TICK and Momentum divergence. At a minimum, that’s a “cover your short” position and then see if a corresponding price breakout signal forms for you to play a reversal/long here. It did. After the initial bounce of $126.20, price broke a rising trendline at $126.30, then – perhaps more importantly – it shattered through the 20 and 50 EMAs on the 1-min chart where I labeled it. The official trigger happened at $126.40 for the entry to play long for an intraday trend reversal – which was made all the more better by the higher timeframe dual support at $126.20. Immediately after the breakthrough, and actually just before it, the TICK formed new intraday highs in what I like to call a “Kick-off” or “Wyckoff Sign of Strength” signal that further increases the odds of a trend reversal. It’s important to know these concepts – divergences and TICK Kick-offs – in advance (study them) so you can recognize them in real time and thus play them appropriately when they develop.
Ok – so in summary (in chronological order): 1. Dual Price and Fibonacci Support at $126.20 2. Test of $126.20 intraday as clear DUAL positive momentum and TICK divergences form 3. Price BREAKTHROUGH of falling trendline and 1-min EMAs 4. “Kick-off” Signal in TICK via new TICK highs as price came UP off the low Taken together, the ‘weight of the evidence’ favors short-term reversal, allowing you to trade confidently with the evidence from the charts. From here, price went back up to form a new high at $127.80, as of January 6th when I’m writing this post. For reference for those of us who are futures traders, here’s the same 1-min chart above of the @ES futures contract:
These are the kinds of lessons I document/teach each day in the Idealized Trades reports for members – archives go back to April 2009. Remember, the more we learn from actual examples – and particular if we keep our own notes and observations – the more confident and better prepared we will be to capitalize on these opportunities when they repeat – and they will – in the future.
Lesson: The Four Early Warning Signals Given Before the Afternoon Reversal Aug 6, 2010: 11:22 PM CST
Were there chart signals the market gave ahead of the afternoon reversal and breakout into the close after the morning Jobs Report drop?
Absolutely – it turns out there were at least four early signs that odds had shifted away from the bears and towards the bulls which was confirmed with the afternoon breakout. I wanted to share a lesson I shared in tonight’s Idealized Trades report – the four chart signals that warned of a likely turnaround in the market. These are classic technical signs that can signal a potential change in trend and it’s important to know them. Let’s start with the 5-min @ES (S&P 500 e-mini futures contract – similar to the SPY ETF) chart:
(click for full-size image) What I do in the first section of each night’s report for members is teach applicable trading lessons from the current day’s activity for use when these signals/trades appear in the future. Let’s start with the four signals I’ve identified that the market gave in advance of the afternoon breakout – which could have given you ample warning to exit your intraday short-sales and/or get long to play the breakout as it developed.
1. Failed Impulse Sell Generally, after a market makes a new price, momentum, and TICK (market internals) low, we would expect lower prices yet to come. A good trade set-up – that I call the “Impulse Sell” – occurs when price rallies into resistance after a sharp downward thrust. We expect lower prices ahead. However, when a high-probability trade set-up fails – as happened in this case when the market traded lower but did not retest the session low – then that is an initial sign of hidden bullish strength that the bulls ‘thwarted’ or busted a classic sell signal. That’s not enough to expect a reversal, but it is the first clue that “Things may not be as bearish as they seem” or “Bulls may be stronger than the chart is revealing – as they just busted a sell set-up.”
2. Rounded Reversal Formation In the reports, I define three types of intraday structures: Trend Day, Range Day, and Rounded Reversal. Rounded Reversals are the ‘enemy’ of trend days. You can also think of it as a “Scallop” or “Arc” pattern, but when price takes on the form of a rounded arc, I call this a “Rounded Reversal” and it has bullish implications of a slow but steady/stable reversal. I drew a green arc under price to show the curvature of the market that also showed hidden bullish strength building.
3. “Kick-off” Sign of Strength We monitor TICK in relation to price highs and lows for confirmation/non-confirmation. TICK should roughly mirror what’s happening in price. Anything unusual – like a divergence – sends a signal. A “Kick-off” occurs when the TICK makes a new intraday high while price is NOT making an intraday high – and the further price is away from making a new intraday high, the more powerful the Kick-off Signal is. Look at #3 at 1:30 CST (13:30). I created an indicator to overlay TICK highs on the price chart, as revealed by little green dots. It helps me see the signal better to spot divergences and Kick-off signals – like this. If you look only at price, you would say “Oh – price is making a new swing high” but if you compare to TICK, you see yet another “Hidden Sign of Strength” as TICK pushed up to a new high on the session. That is a very blatant sign of strength that many traders miss – and it is a very powerful signal that odds strongly favor higher prices yet to come.
4. Bollinger Band and 50 period EMA Breakout I’m not sure this gave you much of a ‘warning’ but it was the final signal needed – the final nail in the bearish coffin for the day – that odds strongly favored a reversal. This was your execution signal to get long – or take your stop-losses if you remained in an intraday short-sale position.
In a very strong candle, price sliced through the upper Bollinger Band and 50 period EMA (blue line) at 1:50 CST. You can get long on the break to new swing price highs to play for a bullish breakout to materialize – I call this a Positive Feedback Loop because short-sellers are rushing to the exits to stop-out and buyers are now trading long for the breakout. We would thus expect price to rally higher as long as the positive feedback loop was in effect – and when they form, they can often go longer than expected – and in this case boosting the market almost all the way to break-even on the session. Again, these are the kind of lessons and examples I consistently teach/describe each day in the daily subscriber reports. Lessons like this can mean the difference in holding stubbornly short after price broke-out into the afternoon session, or playing long to profit from the breakout. The market gave signals and created a narrative of hidden bullish strength… that culminated with a powerful breakout in the close. Corey Rosenbloom, CMT Afraid to Trade.com Follow Corey on Twitter: http://twitter.com/afraidtotrade Continue Reading… 8 Comments and 9 Reactions • • • • • • • •
June Update on India’s Nifty 50 Index Recovery and Range Jun 24, 2010: 10:43 AM CST
Thank you for your requests for updates on India’s “Nifty 50″ Index. There’s actually a very interesting turning point in the index coming up, and a sharp rally that has led to a recent outperformance (to the SP500) of the Nifty index. Let’s see the daily chart and the recent strength:
The price structure of the Nifty (CNXN) mirrored the US S&P 500 almost exactly, though the ‘crash’ phase was not as severe in May – we did not see a retest of the February 2010 low. The iShares ETF symbol for the Nifty Index above is INDY. In addition to the sell-off not being as damaging, the recent recovery or rally phase has actually outperformed the S&P 500 – with the Nifty Index sitting just shy of a new 2010 high. The S&P 500 remains about 10% below the April 2010 high. The kick-off recovery was confirmed with a break back above 5,150 in mid-June as price took out the prior swing high and crossed strongly above the daily moving averages. But, before you get too bullish on the index, notice the strong potential overhead resistance at the 5,350/5,400 level. This level will mark the turning point between a continuation of bullish prices in a breakout phase… or a resumption of the larger consolidation/range pattern as seen on the weekly chart:
The weekly chart reveals the bigger picture. The Nifty is caught in a “Rounded Arc” chart pattern that is forming negative momentum divergences as labeled with the red arrow. From a chart perspective, the price is likely to continue to trade within the boundaries of the overhead resistance arc – currently at 5,300 – and the lower 50 week moving average support, currently at 4,800. That places the index within a 500 index point trading range – which should be a caution sign where we are now – at the upper range of the boundary. Again, a price breakout will signal a new price expansion phase, but until the index rises above 5,400, look for this weekly chart pattern to be the dominant technical structure for the index.
How To Use MACD and MACD Histograms USING MACD HISTOGRAM
MACD is the acronym for “Moving Average Convergence Divergence” Here's a typical MACD chart with a standard setting of 12/26/9 and set to exponential. The 12 day moving average in the price window represents a fast moving average of price. The 26ema is the slow moving average of price. MACD is interesting because it is both an oscillator and a trending indicator. It relies on lagging indicators (moving average of price), yet has predictive power. In the lower window we have a blue line which represents the actual MACD indicator (more on that in a moment) and a red line which is our “9” in the 12/26/9 setting and is a 9-day exponential moving average of the actual MACD indicator. For now, ignore the blue bars in the lower window.
MACD measures the difference between the two moving averages of price. The middle line is the “0” line; when the 12ema of price crosses above the 26 ema of price our MACD indicator in the bottom window (blue) will cross above the zero line simultaneously. When the difference between the two moving averages of price is widening, MACD indicator line (blue in the bottom window) will rise. When MACD is above the zero line and is rising, that means the rate of change of the shorter moving average of price is rising faster than the rate of change for the longer 26 ema of price and the gap between the two is becoming wider indicating bullish momentum. The same is true in reverse, when MACD is below the zero line and the gap is widening-this indicates bearish downside momentum-when the two are close you may see crossovers of MACD and it's 9 day ema of MACD, whether above or below the zero line. MACD is measuring momentum, the 9 day average of MACD is simply providing a signal line when that momentum shifts and the 12 day of price looses it's momentum you may see these crossovers. Here is a shot of Stockfinder-We have been looking at the actual MACD indicator offered in TeleChart. What I did was to create the two moving averages of price, then ask Stockfinder to compute the difference between the two and it gave me the exact same line as the MACD line in TeleChart-both blue. Then I added a 9 day ema to the MACD line I created and you can see we have the exact same indicator. If you look to the right carefully, you will see zero and the crossovers of zero at the exact same time.
Now I've gone 1 step further and asked Stockfinder to plot the difference between my MACD line and its moving average, I converted the line to bars and presto! A self-made MACD Histogram. I hope this helps you understand how this indicator works.
Short term traders may use the crossover of MACD and it's 9 day ema as trade signals, despite being above or below the zero line. For example, on 3/12/09 MACD was below the zero line, but had crossed above the signal line (9 day ema of MACD lower window-red). This crossover, despite being below the zero line, gave the short term trader a buy signal and it didn't cross under until 4/22/09-nearly a 12% gain. The MACD signal recognized the change in momentum and gave a crossover buy signal 10 days before the moving averages of price. However, the MACD was then plagued by a few whipsaw crossovers that would not have yielded profitable trades.
If the longer term trader were to purchase the SPY on a crossover of MACD above the zero line and stay with the trade until it crossed below the zero line, the trade would have made approximately 11.5%. However, here's where the predictive power of MACD comes into play. A strong trend should see the same strong trend in MACD and each of the crossovers or pivot points above the zero line would make higher highs in a strong price trend. The first lower high gives us what is called a negative divergence, which is to say that MACD is signaling fading momentum, even while price may move higher. So if the longer term trader used the same entry signal, a cross above the zero line and used the first cross down showing a negative divergence and got out of the trade there, that trader would have netted 15.25%-a bit better than the first example. The same application in reverse could be used for a short sale. A short term trader recognizing the cross down of the first negative divergence around 6/12/096/15/09 could have gone short and exited upon the first sign of a crossover of MACD above the signal line around 7/14/09 and could have made a quick 5%-using an ULTRA ETF that would have been nearly 10%. Enter the Histogram. A popular way of looking at MACD is by using the blue bars in the bottom window, the MACD Histogram. This indicator does not care whether the MACD indicator line is above or below zero, the Histogram simply measures the difference between the MACD indicator and its 9 day ema. When MACD is above it's ema, the Histogram will be above zero-whether MACD is above or below the zero line. The wider the difference between MACD and it's moving average (greater momentum) the more extreme the bars-higher or lower.
Predictive Power! One of the most effective ways of looking at nearly every indicator out there (nearly) is to look for divergences and MACD divergences are one of the most reliable signals available in Technical Analysis. You have two things that can happen between price and an indicator like MACD-1) Confirmation; this means as price makes higher highs, MACD makes higher highs and this signals a strong, healthy trend. 2) Is Divergence and this is when price and the indicators go their separate ways. For example, price may make higher highs, while the highs in MACD are consecutively lower; this is a negative divergence and tells you that despite rising
prices, the trend has lost its vitality and may be near a reversal. A common practice is to use the MACD Histogram for this purpose and 2 or 3 consecutive divergences in price gives you a strong likelihood that prices are ready to reverse. Back to our TeleChart MACD-look at the strong bars at the start of the new trend, the next top in MACD comes amid advancing prices around May 8th; this is our first warning. The next top in MACD during the first week of June, despite rising prices, is even lower than the previous-this is what I consider to be 2 divergent tops and a signal of a reversal. By the second week of June, the SPY experienced a nearly 1 month decline in prices.
Here's a chart of Oil and not just any chart this is the top of the huge oil bull market. As you can see, September to March 2008, everything was more or less ok, the peaks in MACD were growing, after that trouble was signalled on every peak after that, each got lower and lower creating a negative divergence as price was rising. During July, the downside peaks were growing signaling momentum to the downside. You can see as MACD lost it's momentum, so did price and started moving sideways. We even saw the start of a rally in oil.
In conclusion, MACD can be a very powerful tool for all traders and all timeframes. The weekly chart of the SPY below was right on track in calling the trend.
Don't be afraid to experiment, I typically use a very long MACD which eliminates many whipsaws or false signals. This chart of the SPY and MACD Histogram uses a setting of 52/104/9 and you can see the downside momentum and the divergence right at the March low that kicked off the rally. You can also see fading momentum in the current (what I believe to be) Bear market rally as if forms a Broadening Top.
Using the same settings, applied to a 60 minute chart, you can see the positive divergence at the July lows and a string of negative divergences running throughout August leading me to believe we
are close to a reversal.
Market Direction Tops And How To Spot The Next Bear Market Bear Market, Market Timing / Market Direction Oct 022012
Stock market direction since the market made a new 4 year high on September 14 has analysts and investors worried. The high set on September 14 has not been confirmed and the market for the past 10 days remains unable to breach the September 14 high. The longer it takes for the markets to set a new high in market direction, the more the recent high is suspect. As investors we are always worried. Even in March 2009 as the market set new 10 years lows investors worried. Then when market direction began a recovery, we still worried. This is natural because our life’s savings are tied into risky assets. So worrying is understandable. With us now entering October which brings back a lot of bad memories for investors, particularly those like me who have been investing for decades I thought I would share some charts that may assist in knowing when to consider a market top, no matter how short or long-term, may be in place. Through studying historic charts of other bear markets perhaps we can spot the next bear before it has the chance to shred our portfolios.
Market Direction And Spotting A Top The media is filled with dire predictions for stocks and a plunge in market direction. But this is not new. This has been the case since I started investing back in 1972. I have never seen a year go by without scary warnings of all kinds. Everything from Dow Theory to Black Crosses to Advance Declines to well, you get the picture. Actually market crashes are not all that common. In the past 10 years it seems like they have become more common but in the big picture of the decades of the stock market, crashes are not common. Still though learning how to spot a top is obviously beneficial. Everything from 2000, to 2001, to 2008-2009, and the flash crash of 2010 warrants our being careful. But as retail investors what should we be looking at to determine if some protection should be added to our portfolios.
Look To The Market Direction Charts To answer that question is actually easier than you may think. While nothing is ever perfect I have used the method I am describing below, for years and it has served me well. Let’s look back at a few stock charts beginning with when I was just a youngster in 1973.
S&P Market Direction Chart – 1973 In April 1973 the S&P 500 set a new all time high. The chart below is weekly as I could not find my daily chart for this period in my records. Anyway, with a top in 1973, the market pulled back and broke the 50 day simple moving average (first line), the 100 day exponential moving average (second line) and then the 200 day exponential moving average (third line). From there the market bounced, retested the 200 day and then eventually rallied back to a second high which was not as high as the 1st. This was the double top which occurred in late October 1973. From there the market began a retreat that resulted in a vicious bear market that lasted through to October 1974. The market fell over 50% from its high. Here were the warnings signs. A. The market direction broke through the 50 day moving average on decent volume. B. The market direction then broke the 100 day on stronger volume. The market tried to bounce (can’t see it in the weekly chart) but failed. C. The market direction continued lower and broke the 200 day moving average on average volume. If you study the chart in May through to September 1973 you can see that the same events occurred. The moving averages were broken. There is never a guarantee in stocks. But when the 50 day SMA breaks it is an omen worth considering. When the 100 day EMA breaks consider protection. When the 200 day EMA breaks you should have protection in place. Even if wrong you can always remove the protection for a slight loss but just like insurance, sometimes you pay for something you may never collect on. Think about what happened in 1973. The market made a new top in April, then spent most of the year trying to rally back only to fail in October. The collapse of stocks took a year from October 1973 to October 1974 and the market did not actually begin a strong recovery until January 1975. So a double top in the market does not necessarily mean a sudden collapse of 30% to 50% in stocks.
There are early warnings. In April 1973 there were plenty of warnings. In October to November 1973 there were more warnings and still time to buy protection. Last comment about the market direction chart, note how the strategy of selling out of positions in April and not buying back in until the late Fall would have assisted investors who by the fall of 1973 would have realized that stocks were entering a new bear market and would have stayed away secure in their profits made to April.
The market direction changed in 1973 ushering in a severe bear market for 1974
S&P Market Direction Chart – 1987 The way the media paints the market collapse of 1987 you would have thought it was a shock to everyone. This is far from true. I had shorted a number of large cap stocks in 1987 as there were only a handful of protection methods available. Shorting overbought and overvalued stocks was a good method back then. Today there are much better methods. In 1987 the market had pushed twice in August to make two new highs. It then pulled back and fell through the 50 day simple moving average and hit the 100 day exponential moving average where it bounced. It retested the 100 day in mid December and then climbed past the 50 day. It made a double top on October 2, failed to break that top on October 5 and then pulled back through the 50 day on October 6. Analysts announced that it was nothing and the market would regain its footing to challenge the August high. They were wrong. A) The 50 day SMA was broken on good volume. B) The 100 day EMA was broken and the following day the S&P 500 made a low, lower than any previous low since the August high (marked 1st) C) The 100 day EMA was cleanly broken on larger volume and the next day the 200 day was hit. The market collapse that followed shocked investors. I was holding a number of short positions
which I covered too early as I expected a strong bounce after the one day plunge. I had a number of stock broker friends who actually quit their jobs within a month of the October collapse. The lesson here was that most investors did not look at the double top and failed to consider that the market could sell off bigger than anticipated. There was time in September to consider protection but in early October with larger volumes and the double top, no confirmation, the breaking of the 50 and then 100 day moving averages, the signs where clearly evident.
The market direction top of 1987 was readily spotted but few heeded it.
S&P Market Direction Chart – 2000 I figured in 2000 everyone suspected the stock markets would collapse as the dot com bubble was already breaking. I am using the weekly chart to show the reasons why I though the market was in big trouble. I was surprised at how many friends thought the market would recover and keep going. On March 24 2000 the S&P made a new all time intraday high of 1553.11, but there was no follow through. In April on large volume the market pulled back to the 50 day. It then spent the period from April through to September 1 trying to regain that top. Note how the S&P 500 stayed above the 50 day during most of this period. Many investors and analysts felt that it was only a matter of time before the S&P would regain the March high and continue climbing. A lot of articles during those summer months pushed stocks as being the very best opportunity as they were “under-valued” according to analysts and the summer sell-off was an event not to be missed by investors. On September 1 a second top was made with an intraday high of 1530.11. From there the selling picked up and the S&P broke down. A) The 50 day moving average was quickly broken and not tested as it has previously done during the summer period. B) The 100 day held for a few trading sessions but was retested a number of times. The most telling key was that the market was not advancing but instead retesting 100 day support. It should have been advancing. C) The market direction continued lower and the S&P 500 broke the 100 day support.
I have not included more in the chart as by this point it should have been obvious that the market was in trouble and market direction had changed to down. At the 100 day period in October and into November there was plenty of time to buy protection for what was to come.
I thought everyone was aware of the hurdle facing stock markets in 2000.
S&P Market Direction Chart – 2007 The last period I want to look at is the market direction top in 2007. The S&P 500 market direction continued higher right into July 2007 when on July 16 it recovered to 1555.90 breaking the past high of March 24 2000. The market tried to break that high for a few more trading sessions and then sold off back to the 50 day moving average. Again the 50 day was bounced off and the market spent August and September recovering. On October 11 the S&P 500 made a new all time high of 1576.09. Analysts declared the worry of the summer as over but the new all time high was not confirmed by a continuation of the rally. A) The 50 day was tested but did not hold. B) The 100 day was tested and the market bounced off of it pushing back to the 50 day. C) The 100 day was tested again and failed to hold. From there the rest is as they say, history. Again in late 2007 with the S&P 500 below the 50 day analysts once more told investors that stocks were cheap and this was a time not to be missed. Indeed a lot of stocks did appear cheap, but in 2008 as earnings began to drop stocks became a lot cheaper. Instead that fall was a great opportunity for investors to buy some protection by using the various new bear market products that had become available to investors. Every retail investor should have made some profit from this bear market collapse. Perhaps the best non-stock market clue was when the Federal Reserve assured everyone that all the problems with the housing crisis were well contained. It seems any time government tries to reassure investors, we need to become concerned.
Market Direction And The Lessons Of History What can we learn from the above charts? A) There is never a guarantee that market direction is going to turn south and plunge. But there are lots of chances to buy protection when the moving averages signal that trouble could be brewing. B) With today’s multitude of products there is little excuse for not owning protection when the market direction is signaling there are problems ahead. C) The old strategy of using the moving averages of the 50 simple moving average, 100 and 200 exponential moving averages still holds a lot of creditability even after more than 3 decades. Therefore heed what they are signaling. Even if they are wrong, buying protection can still work out. D) When analysts tell investors stocks are cheap by “historic” or any other measurement consider that they are not. In the end earnings win out. Earnings must support valuations and if earnings fall, stocks will at some point reflect lower earnings. E) Stock Market Direction tops especially new highs, that are not confirmed are suspect especially when they pull back to the 50 day moving average, test it and then fall lower. F) A climbing market needs higher highs and higher lows in order to confirm the market direction as being up. When that simple measuring stick breaks down, consider protection. G) Not only is there time for putting on protection but warning signs often are months in advance of a severe collapse. This means protection can be applied in stages to insure adequate protection if the bear market is indeed starting and the market direction is confirmed as down. H) Bear markets are sneaky. They often start long before investors realize they are underway. I) Finally, no one can truly pinpoint market collapses. The Dow Theory missed most of the above bear market tops. The death crosses have been wrong so many times I often wonder why people even bother writing about them. Everything from advance-decline to insider selling has been flogged at investors as a way to judge market tops. In the end I have found that heeding the 3 longer
term moving averages and watching for a rise in volume as the market breaks the 100 day exponential moving average on it way to the 200 day is as good a signal as any that investors are worried, that they are beginning to unload stocks and institutional investors are not panicked but concerned enough that they too are trimming positions to raise cash. It may seem too simple, but sometimes when it comes to predicting market direction and the next bear market, simple may be all investors need.
Topics covered in this chapter: •
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Get a deeper level of understanding by learning how to look beyond the charts and understand the supply, the demand and the order flow responsible for the creation of price action. How to look at charts without indicators. How to maximize gains and reduce risk with the precise identification of recurring price action patterns. More than 30 illustrations to help you recognize breakouts, reversals, pullbacks and gaps. Stop chasing the market and learn to anticipate the movements in the exchange rates with a proactive attitude. The most frequent mistakes aspiring traders do when supply, demand and order flow are not well understood concepts.
Understanding what is happening behind the scenes is the key to develop any trading method. Don't look at candles on your screen as just red and green pictures and patterns as they are the expression of supply and demand. Understanding these concepts will make all the difference in your Forex trading career. It will give you the ability to trade based on what the market is expressing through price action. This resource can be useful to shift through the mountain of news and information that is produced every day and trade what you really see on the charts. "What is Price Action?" is a question frequently asked by aspiring traders. This chapter attempts to explain that there are no secrets when it comes to exploring the foot print of exchange rates across a chart. Nevertheless price action is more than just swing highs and swing lows. Rest assured this chapter will not leave you in the dark. It’s easy to brush support and resistance analysis off as not important. Although obvious, this concept is rather abstract and requires some practice to be effectively used. Understanding a concept from a theoretical point of view is not synonymous with having integrated it into the practice. This section breaks down the dynamics of price action, and with the help of lots of charts, you will thoroughly understand this concept and learn how to trade with it. This new knowledge will make you see the charts with a new sense of objectivity and trade in a much more relaxed and proactive manner.
1. Supply and demand - still abstract for you? The reactions of traders towards the market is what moves the exchange rates. These, in turn, reflect all the information: generally speaking, prices fall when most participants think they are too high and rise when they are considered too low. There is no inherent logic to the market nor a higher intelligence that can be decoded. It is rather the opposite: the market consists of a mass of rational individuals whose reactions are certainly not always driven by rational logic. They are more likely to vacillate between periods of greed and periods of fear. There are so many market participants and so many reasons why each one of them decides to buy or sell at a given moment that no system would be capable of decoding this mass behavior considering all its variables. Commonly, it is said that chartism, by its very nature, is more an art than a science. This is a correct postulate if we consider that markets are made by human beings and not by analytical methods. All
traders, in some way, pay attention to price levels but the way they react to them is never exactly the same. Becoming a trader requires you to learn how to behave in such an unpredictable environment. It's essential to create a strategic framework with which identify the behavior patterns made by market participants. This knowledge will give the trader a statistical advantage to act upon the market. To start developing your analytical skills, it is essential to be able to identify supply and demand levels and to measure their strength. One of the advantages of supply and demand levels is their consistency and the fact that they remain visible in a chart for days, weeks, and in some cases for months and years. Not surprisingly, most trading manuals start by shedding light on this issue as it's one of the pillars of technical analysis. By its logic, it's a simple concept to understand, however, it's also where most inexperienced traders fail. Who has not opened a position and seen how the market immediately turned in the opposite direction to finally liquidate it at the stop loss? To compound the problem: how many times has the market turned to your original direction after the position has been closed for a loss? The PFX Team invites you to take a step back to economics 101 to make sure you understand the subject: Supply is the measure of how much of a particular commodity is available at any one time. As the supply of a currency increases, the currency becomes less valuable. Conversely, as the supply of a currency decreases, the currency becomes more valuable. On the other side of the economic equation, we find demand. Demand is the measure of how much of a particular commodity people want at any one time. Demand for a currency has the opposite effect on the value of a currency than does supply. As the demand for a currency increases, the currency becomes more valuable. Conversely, as the demand for a currency decreases, the currency becomes less valuable. To illustrate how supply and demand interact to determine an ideal exchange rate in the Forex market, we are going to use a standard supply and demand graph. Supply is represented by a diagonal line that is sloping up from a low point at the left end of the line to a high point at the right end of the line. Demand is represented by a diagonal line that is sloping down from a high point at the left end of the line to a low point at the right end of the line. Finally, the ideal exchange rate is represented by the point where the two diagonal lines intersect. Continue Reading... Next, Sam Seiden recalls what are the basic conditions in a free floating currency market: The foreign currency (Forex) market is where global exchange rates are derived for everyone including market speculators and end users of currency. People and companies buy and sell currency much like you would buy and sell anything else. Strong economies have strong currencies. When we trade the Forex markets, we are trading economies. Therefore, supply and demand for currency depends on the current and expected perceived health of a country's economy. [...] Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values based on pure supply and demand for currency.
Continue Reading... In another article, Sam Seiden resumes the main principles which characterize today's financial markets. The first principle states that "Price movement in any free market is a function of an ongoing supply and demand relationship within that market". The second law states that "Any and all influences on price are reflected in price." Lastly, the third law says that "The origin of motion/change in price is an equation where one of two competing forces (buyers and sellers) becomes zero at a specific price." First, understand that there are always two competing forces at work in the market, buyers and sellers. Our goal is to quantify those forces and identify price levels where the imbalance is greatest as this creates change, or movement in price. Continue Reading...
What is a support? A support level is a price level below the current one, where the demand was stronger than supply, driving the price upwards. Demand is synonymous with bullish, bulls and buying.
At a support level, general expectation dictates that demand will outstrip supply, so a fall in price would be slowed down by the time price reaches that level. Consequently the price is expected to bounce back upward because support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The market, understood as the will of millions of investors, considers a price level low enough and acceptable to purchase, so when the price reaches that value, purchases soar. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy. As demand increases, prices advance higher.
What is a resistance? On a chart, a resistance level is an identified maximum level where the supply has exceeded the demand, stopping the upward momentum in the exchange rate, and eventually making it drop from there. Supply is synonymous with bearish, bears and selling.
If the market believes that a price level is very high, sales soar at the time price reaches that value. In other words, a resistance level is a reference price where selling pressure is greater than the demand. In many cases this pressure is so great it can halt the rapid escalation of prices. The levels of support and resistance are detected primarily by analyzing the evolution of price action on a chart and identifying where prices halted after a rising or falling period. Resistance thus is the price level at which selling pressure is expected to be strong enough to prevent the price from rising further. The logic dictates that as the price rises towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. When the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above it. In this lesson and adjacent video of the Forex Essentials Course, the PFX team shows different chart types by looking at support and resistance levels. Additionally, James Chen provides us with valuable information about another type of charts, the Point and Figure, to visualize price action: In short, some may characterize point & figure charting as trading based upon pure price action. This is because only price, which is undeniably the most important aspect of technical analysis, is
customarily included on this type of chart (in the form of X's and O's). Other data that can readily be found on bar and candlestick charts, like time and period opens/closes, are generally excluded on point & figure charts. This leaves only the uncluttered purity of price action. In another blog post James also speaks about a variation of the Japaneese Candlestick charts, the Heikin Ashi: The distinct look of Heikin Ashi charts is noticeable on the very first glance. During trending periods, virtually uninterrupted series of solid or hollow candles are the rule. This means that even during minor retracements in a strong trend, Heikin Ashi charts will essentially show a onedirectional run. Therefore, during these trending periods, Heikin Ashi charts work their best in indicating whether a trend has ended or is still intact. As you notice, there are different ways to visualize price action. Important for you to know is that all price actions as you see on the charts are derived from market participants buying and selling currencies. Despite the fact there are several ways to capture price action on a chart, we make use of Japanese candlesticks throughout the chapters of the Learning Center.
What happens at support and resistance levels? If you have read texts on chartism, then you already know the saying: "When a resistance is broken up, we are in an uptrend and resistance becomes support. And vice versa, when support is broken down, we are in a down trend and support becomes resistance.” Despite being true, this theory does not explain what really happens behind the charts. A simplistic explanation such as: "Who cares how it works? The truth is that it works" or "This works because everyone uses it" should not suffice when seeking to understand the dynamics of supply and demand. The concept of support and resistance is quite easy to understand, and it has some components which will improve your chart analysis: the relation between supply and demand which exists at any price level can be measured using several procedures as you will learn here. Also the time factor is an important ingredient in the analysis and should be also considered. This Unit and the Practice Chapter A thoroughly deal with both aspects. Let's start to visualize the potential amount of supply and demand on a chart. In this EUR/USD 4HR chart you can see how the supply is running out as the price moves away from the resistance area at the initial high of 0.9080, from where it trends downwards. At 0.9080 is where most of the supply is concentrated until it gets exhausted at the low level around 0.8750.
Similarly, we see from the chart below that demand decreases as the price rises after bouncing at the low level of 0.8750, when the demand was at its highest.
A support level is a price level considered attractive by a large number of buyers. If the demand to buy a given currency is high enough (higher than the willingness to sell), a downward move in the exchange rate will eventually slow down and even reverse. This is what happened around the 0.8750 level: the strength of the buyers was able to stop the pressure from the sellers. Does this happen always? Well, not always but it happens with an astonishing high frequency. James Chen tells us more about what is usually called a self-fulfilling prophecy: A quick note about the important role of the "self-fulfilling prophecy" in Forex trading and technical analysis. One of the key reasons that many aspects of technical analysis, especially such important concepts as support and resistance, often seem to work remarkably well has to do with this phenomenon. A self-fulfilling prophecy is a forecast that causes itself to become true. In the case of Forex trading and technical analysis, a certain support/resistance level may be valid and respected to a significant extent simply because that level is well-known, and is therefore watched and acted upon by a critical mass of traders. So, for example, a 38.2% Fibonacci level, an R1 pivot point, and a key uptrend support line do not in themselves really have magical predictive properties. It is more the fact these these levels are so universally accepted and therefore so closely watched and traded by so many traders, that they often take on considerable price action significance. The role of the self-fulfilling prophecy is one of the keys to effective technical analysis in the Forex market as well as all other financial trading markets. Continue reading...
Good observation! We will soon clarify this for you, but don't underestimate James Chen's words because more than often they will provide you with an advantage in the market. In fact, supply and demand are two forces that coexist in the market at any given time. As shown in the picture below where the two forces are exposed, price action speed slowed down in the middle of the chart and consolidated temporarily at a level where the two forces were fairly equal. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.
Buyers and sellers create two opposing forces that move prices. Buyers want to buy cheap and then sell more expensive. And sellers, conversely, are always looking to sell expensive to buy cheaper afterwards. So each pip that the exchange rate moves shows the game of power between the two sides: if the exchange rate rises by only one pip, it means that buyers are winning, and a pip down move shows that sellers, for that instant, have imposed their willingness to sell. A level of support or resistance is a level at which a critical mass of traders (or capital) coincide in their aim to buy or sell a certain currency. These levels are identified by the way traders react to them and because they show a tendency to reoccur. It's not that market participants agree on what to do at a certain price level, they just coincide on their assessment that the exchange rate is too high to buy (resistance) or too low to sell (support). So it's not even a question of the quantity of traders deciding how to react to a certain level, but the imbalance between buyers and sellers at a certain price level. The fact that certain price levels have been significant in the past is telling us that they may have sufficient impact on price movements in the future. Sometimes, levels of support and resistance are very clear on the charts and remain intact for a long time. This phenomenon is called the "memory" of the market. When the price reaches a new low and then rises significantly, both the buyers who bought at that low and the ones who lost the opportunity to buy will be willing to enter long when the price reaches that level again. Following this dynamic, the phenomenon can be repeated until the balance of buyers and sellers changes. This is what ultimately happens, otherwise price action would take place between two price levels only and the market would be ranging endlessly. But the market is rather complex and many variables can affect price action. The general belief of what was a good price to buy (a support) may weaken until the price finally breaks down.
Take a look at the chart below: support did not hold and the break below support signals that no more buyers were willing to buy at that level (green line). So a break below a support level indicates a new willingness to sell as sellers have reduced their expectations and are willing to sell at even lower prices. But equally, the break signals a lack of incentive to buy.
Similarly, a supply level does not hold indefinitely and a break above the resistance level is a sign that supply is exhausted and the demand exceeded it. A break of a resistance is not necessarily indicating a huge demand, it's just that demand is considerably higher than supply, or that supply is inexistent. Observe the chart below: a break out above resistance proves a new willingness to buy and/or a lack of incentive to sell. When price breaks a resistance level and reaches new peaks, this means that buyers have increased their expectations and are now willing to buy at higher prices. It also means, and this is equally important, that sellers don't feel coerced to sell at that level and prefer to wait until prices rise above the resistance level. When a resistance level is broken, we need to identify another resistance at a higher price level. As price approaches that higher level, sellers will be gaining strength again as buyers will tend to stop buying at higher prices. At this stage, pay special attention to the fact that price action is something that always happens between levels of maximum supply and demand. As a trader, you want to train
your analytic eye to identify those areas between maximum supply and demand levels, which price can recover when breaking one level to reach the next one.
Don't think of market participants as two opposed groups of well defined buyers and sellers. Remember the Forex is a double direction market, where each buyer turns into a seller when he or she closes his or her positions. To liquidate a position in the Forex means to invert the action you initially did to enter the market. If you bought low and the price went higher, you will be a seller by closing the position for a profit. When the supply is exhausted, as shown on the right side of the previous chart, the resistance is broken and the price continues its ascending move. Usually, when a resistance is broken, it becomes a support, should price return to this level again as there is likely to be an increase in demand. Each moment in the market is unique and many factors and reasons can motivate traders to open and close positions. But one of the factors which may have contributed to accelerate the rapid rise in the price as seen in the chart above is the activation of stop loss orders from short positions. Each stop loss order in a short position is in fact an active buy limit order and can thus accelerate an upward move. More information about types of orders, can be found in the Chapter 3 of this Unit. By now you should have at least a basic understanding of how support and resistance works in the markets. It's always important to visualize support and resistance as an imbalance between supply and demand forces where demand creates support when traders show willingness to buy or readjust
their expectations and start to buy at higher prices. But a weak demand also contributes to create resistance when traders disagree in buying at higher prices. On the other hand, supply creates resistance when traders are ready to sell and it also contributes to form support when traders stop to sell lower. This means that support and resistance are not to be seen as a battle between bulls and bears, but rather as an imbalance of two forces. And ultimately price moves stronger precisely when one of the forces ceases to exist. If supply decreases, it will be overwhelmed by forces of demand. The greater this imbalance is, the faster the price will rise. In an uptrend, for example, demand is not the only cause of the increase. For prices to rise, sellers have to absorb that demand. In the market there is always a counterpart for each position, that is why the two forces are always present, but representing opposite intentions. Remember that the exchange rate you see on your platform is the most recent traded price, a price on which a buyer and a seller agreed to do an exchange. Sam Seiden simplifies the above theory and explains price action as being characterized by 3 main principles: Principle 1: Price movement in any free market is a function of an ongoing supply and demand relationship within that market. [...] A market is always in one of three states: First, it can be in a state where demand exceeds supply which means there is competition to buy and that leads to higher prices. What does this look like on a price chart? A "pivot low" is a perfect example. Second, it can be in a state where supply exceeds demand which means there is competition to sell and this leads to declining prices. What does this look like on a price chart? A "pivot high" is a perfect example. Third, it can be in a state of equilibrium. At equilibrium, there is no competition to buy or sell because the market is at a price where everyone can buy or sell as much as they want. However, as the market moves away from equilibrium, competition increases which forces price back to equilibrium. In other words, competition eliminates itself by forcing markets back to equilibrium. Even though equilibrium is where the majority of candles are, we don't necessarily want to trade in that area. [...] Principle 2: Any and all influences on price are reflected in price. At any given moment, there is tons of financial information being created and passed on around the planet. This information can be in the form of an earnings report, news, income statement, analyst opinion, economic report, terrorist attack, and so on. All this information creates thoughts and perceptions that are different for everyone depending on their individual BELIEF system. Be careful to notice that most humans assume others' belief systems are the same as their own. This, of course, is simply not true. [...]
Principle 3: The origin of motion/change in price is an equation where one of two competing forces (buyers and sellers) becomes zero at a specific price. Let's now put numbers to the simple supply and demand I keep mentioning. Here, we have 300 buyers and 200 sellers at $20.50. Price will remain stable, meaning supply and demand will appear to be in equilibrium until the 200th seller sells. Price will begin to increase or CHANGE when the last seller has sold. It is when the last seller sells that we are left with 100 buyers and no sellers. One of the two competing forces has exhausted itself. In this case, it was the sellers. What appeared to be supply/demand equilibrium was actually disequilibrium or imbalance. It just took a certain amount of time for this unbalanced equation to play out. In other words, motion (of price) occurs when one of the two competing forces becomes zero. The two competing forces are, again, supply and demand. The time it took for that imbalanced relationship to produce movement is purely a function of the actions of the two competing forces. Read full article and continue reading... The above reasoning explains why markets don't remain stuck between two horizontal extremes when supply and demand interact. If support and resistance held forever, then trading would be easy indeed. We could simply enter and exit as the price seesaws up and down between support and resistance levels. But the fact is that active markets dissipate directional forces because every buyer must eventually sell and every seller must eventually buy in order to cash profits. This induces to price action reversals and the whole process can be seen as a cycle that equalizes trader's action and reactions over time. As you will see later, a chart may print a strong downtrend on the daily chart, a rally on the 60 minute chart, and sideways congestion on the 5-minute chart, all at the same time. While this cycle process may seem chaotic, it actually reflects the dissipation of the supply and demand polarity. Derek Frey clearly defines what is a resistance and what is a support from his perspective: One of the most basic things about trading is support and resistance. Yet many do not fully understand how to find what is a "good" or "true" support or resist level. I will attempt to clear this up once and for all. The chart above is a current daily chart of the Eur/USD on it you can see a red line that i drew to indicate where the strongest level of support is. So how was able to find that? Simply by finding what the last most significant resistance level is. And that is the "secret". Real support was formally a resistance level and real resistance was formally a support level. This works in all markets and time frames but is most relevant on the Daily time frame. The only exception is if it is making an all time new high or low. So if you want to find support look for resistance and if you want to find resistance look for support.
Whose Supply and Demand Is It? Wed, Nov 26 2008, 05:47 GMT by Sam Seiden - Online Trading Academy | View company's profile Vote up: 11 Vote down: 2 Share on email Share on print Share on facebook_likeShare RSS
Lessons from the Pros Subscribe to the Weekly Newsletter published by Online Trading Academy. Receive the full newsletter with charts! When I use the terms "supply" and "demand", I am simply replacing them with the terms "resistance" and "support". Why do this? Understand that the words resistance and support mean many different things to different traders. For one trader, support may be a Fibonacci price level. For another, support might be a pivot low, and for someone else, support may mean a pullback in price to a rising moving average. There is really only one definition of supply and demand, however. Demand: A price at which someone is willing and able to buy something. Demand = (Support) = where to buy. Supply: The price at which someone is willing and able to sell something. Supply = (Resistance) = where to sell. The markets are purely a function of supply / demand, and human behavior. Trading opportunity exists when this simple and straight forward equation is out of balance. The logical question is: What does this look like on a price chart?
In the Online Trading Academy Extended Learning Track (XLT) class, I make sure students learn to look beyond the green and red candles on the screen and instead, understand the supply, demand, and order flow responsible for the creation of the candles. This takes the trader to a deeper level of understanding and helps them attain an edge in a career where owning the edge means the difference between success and failure. Having started my career on the institution side of trading, I can confirm what you already know: Institutions derive profits from retail traders and investors. Therefore, wouldn't it be nice to know where institutions are buying and selling? Most traders are in search of sophisticated, expensive software and fancy algorithms to help them identify where all the large banks and institutions are
buying and selling. If you know what you are looking for, simple price action on charts reveals everything you need to know.
Notice the three candles that are basing sideways just above the numbers 100 (for sellers) and 2000 (for buyers). That sideways price action gives the illusion that supply and demand are in balance at that price level. The truth is, that equation was always out of balance. It simply takes a period of time for that unbalanced equation to play out. Once the last seller sells and you have buyers left at that price level, price must rise. Who is the main source of demand at that level? It's not retail, I can assure you of that. Retail traders don't have the buying power to cause a rally in price like that. Institutions certainly do, however. How do I know this? My career began on the floor of the Chicago Mercantile Exchange handling institutional order flow. I quickly learned to spot what bank/institution/central bank demand and supply looks like on a price chart. Ironically, where the smart money buys is where retail sells. Where smart money sells is where retail buys.
How to trade futures step by step, understanding The "long Term Participants View". The "Long Term Participants View" of The Market activity is essential to understand how to trade futures, and go with the Directional move (trend), after spotting Supply and Demand Levels. Let's examine every step one at a time. ***Click on charts to enlarge***
Step 0
Will required the Daily Chart of the product traded. 1. Open up your daily chart and look for the last low and last high that The Market made [places where it changed trend (direction) or rotated]. Step 0 helps us see (in case you do not know) how far to go back to analyze the market activity. This Step also help us see further back, The Market activity that developed over the last months. The "Big Picture" is called.
The Circles represent the last lowest low (from a pullback) and last highest high that The Market made, before the change in trend. From the red circle to the green circle the last swing (last trend) is formed and therefore, the one we will always use to analyze The Market and trade. I know you are wondering again what a Last swing is:
look at it simply, as the last change in trend or direction that The Market made in a daily and a 30 minute chart. In the above chart It changed direction (or rotated) from downtrend to uptrend in the red circle (The Market made a pullback from a bigger move). Then it changed from uptrend to downtrend in the green circle (finished the move up).
Step 1
(Chart Below) 2. Open up your 30 min chart 3. Go back at least 1 month and a half to 3 months. This ensures you cover the Last Swing.
Step 2
(Chart Below) Take the area from the red circle to the green circle (Last Swing on daily chart of step 0) and mark up: 4. The Highs and Lows [places where The Market turned, rotated or changed trend (direction)]. (Highlighted with circles on the chart) 5. Areas or Levels where The Price has bounced several times (squares on the chart). 6. And Gaps (number 1 and 2).
As you can see, normally Gaps and Highs & Lows (places where it stopped moving and reversed) can overlap, forming a stronger level of Support (Demand) or Resistance (Supply)
Step 3
(Chart Below) Step 3 is comprised of "two questions" that make us ponder over 2 very issues or things, so we can think as traders, which is pretty Difficult. (Do not worry with time you will get the hang of all this). Let's go with the questions. 7. Where is the market trying to go (up, down, sideways ?). 8. How good is it trying to go there (a fast move upwards, downwards, slow move?). This two questions are crucial to understand how to trade futures since you should "try" to see, from a long term view, who is in control of the market. Are Buyers in control or Sellers?. If we move uptrend, then buyers are in control, therefore, we have a "biased" towards buying. if we move downtrend, then Sellers are, and therefore, we have a "biased" towards selling. How sharp is the move?. If moving uptrend, is the move fast and sharp or slow?. A fast move indicates huge buying pressure and slow move indicates that buyers might be running out of steam. In the 30 min chart Below and the one we analyze in step 2, The Market is coming from an uptrend (black arrow sloping upwards) and now The Market is moving into a sideways movement or “bracket” (parallel black arrows), therefore, in the "Long Term Participants View" or Other Timeframe activity buyers and sellers have the same force (Sideways Market). This answers our first question to understand how to trade futures. The Market is trying to consolidate or go "Sideways". We now know that The Market has equal strength, either up or down, buyers and sellers are moving into a "range" from "The Long Term Participants View".
The Below Chart also indicates that within the forming range (parallel black arrows) there have been moves of equal force by Buyers and Sellers . This answers our question 2. How good is It trying to go into a sideways move?. Very well, would be the answer, since We can see that The Market has moved up and down within the range. Concluding, We give power to Buyers and Sellers just as Equal
Note something my friend, if you also want to understand how to trade any instruments, not just futures, or how to trade stocks, This "Long Term Participants View" of The market applies just as equal. Ok, we have now finished analyzing how to trade futures from the "Long Term Participants View" of The Market. Now, let's move into the "Short Term Participants View" of The Market and examine how to trade futures integrating the "long term" with the "short "term" Activity.
Futures Trading Charts are the map to the treasure, they show you two things: Supply Demand Futures Trading Charts are the main tool a futures trader needs. Futures charts are the map, they provide all the information you need to spot Supply and Demand. Let's look at what Demand and Supply is in futures trading charts. (take into account that the same principles explained here remained for commodities charts, stock charts, forex charts, or all trading charts available.)
What is Demand, Support or floor?. (it is the same thing, and will be used interchangeably) (so bear with me pleasee!). Demand or Support is a level where buying pressure exceeds selling pressure, where a decline in price is halted. It is a Level for you to Buy, Why?. Because in the Auction Process a directional move (trend) is stopped by an opposite response. If the market is moving down, buyers stop it at Support. If the Directional move is not stopped, Price advertises lower (keeps the trend moving down) for an opposite response (more buyers) to shut off the directional downward move. Let's look at just one example of all the futures trading charts you will be seeing.
What is Supply, resistance or ceiling (it is the same thing, and will be used interchangeably). Supply or Resistance is a level where selling pressure exceeds buying pressure and a rally is halted. It is a level for you to Sell, Why?. Because in The Auction Process, a directional move (trend) is stopped by an opposite response. If moving up sellers stopped it at a Resistance price. If the directional move is not stopped, price advertises higher (keeps trending up) for an opposite response (more sellers than before) to shut off the directional up move. Just the opposite of Demand.
This leave us with an either win or lose situation. If you spot correctly the shut off of the directional move OR spot correctly that, THAT directional move (trend) was going to continue, you have a winner trade. IF you spot it incorrectly, you have a loser trade, and the market continues to seek opposite response to shut off the directional move or better said balance the market and meet equilibrium. ***One thing here, when looking at futures trading charts and trading in general***. Don’t be scared of being wrong, it is part of trading, cost of this business, your entry fee to find if your bet was right or not. Eventually, being Right 7 out 10 times is easy, it is rather easy. Applying a system, having the discipline to follow it, and follow extreme money management rules, is what could complicate matters and what is really hard. But Don't worry that is what i am here for, I'll be with you all the time. So, do your best! and try to learn and practice through this web, books, videos and The Market itself (the best teacher). Pulling money out of the market will come as a secondary result of doing things right (I'll bet you so).
Now...
Where Do we find these Areas of Supply and Demand on futures trading charts. 1. Previous price areas where Highs and Lows are marked. Also called places where price STOP AND REVERSED (ROTATED) or CHANGED TREND. 2. Place where price has being rejected several times. 3. Gaps. 4. Vpoc of previous day or days
Let's define them: 1. Whenever price trends and changes direction it makes a high or low, that is our first Supply or Demand area (price).
2. Whenever price is rejected or has bounced several times of a price, it forms a Supply or Demand area. 3. Whenever price gaps up or down from a previous day session if forms an area of Supply or Demand on that gap. 4. Whenever price is away from the highest traded price of yesterday for at least the whole range of yesterday’s range and then moves toward that High Volume Area, it forms and area of Supply or Demand. (You will learn more about Volume Profiles later on). Let's Look at a chart to clarify this 4 points:
The green circle provided Support from a previous High plus a Gap formed at the same level. (number 1 right on top of the blue line, the High. And number 2, the Gap). (note:number 1 in the bottom of the chart is a Low formed). Last but no least there is one more thing you need to remember when looking at futures trading Charts. Once a Support Level (Demand) is broken it becomes a Resistance level (Supply) and vice versa. This is mainly a simple story of emotions, fear & greed. Let's check that out... Once a Resistance level (Supply) is broken, there are very few Sellers left, and they have lost money (they are in pain), and now there are more buyers present to push prices higher. (The sellers may also jump ship and join the buyers).
Psychologically this area (the one broken) now becomes an area of pain for Sellers and an area of gain for buyers, so with memory of this area, both previous buyers and sellers step up and buy again and this level now becomes support. (Demand level). The reverse is true when a support area (Demand) is taken out. The chart bellow shows those emotion in play. Once price breaks Resistance (Supply Level) it becomes Support (Demand Level).
Ok, we have finished looking at the main tool of a futures trader, Futures Trading Charts. let's go and take a look at the most traded price volume,what is called Volume Point of Control (Vpoc) and what a Volume Profile is.
Nikkei versus Dow The Nikkei is a widely traded index of major Japanese shares. It is considered the Dow Jones Industrial Index of Japan. You would think that since the world’s major economies are globalised and inter-connected that the world’s stock markets would move more or less in sync. After all, a slowdown in the USA and Europe should result in a similar move in Japan and China as these countries are export-driven. But compare the Nikkei with the Dow on these daily charts going back to the pre-credit crunch days:
(Click on image above for larger version)
(Click on image above for larger version) Following the 2007-2009 collapse, the Nikkei managed to rally to the exact 38% Fibonacci level (blue bar) – and has declined ever since. That was a great place to short the Nikkei.
In the Dow, we saw a similar collapse, but the Dow rallied to a deeper 62% Fibonacci retrace before hitting resistance. That was also a great place for a short trade. But here, the Dow has rallied, unlike the Nikkei. Maybe markets are not so inter-connected after all. Let’s take a look at recent action in the Nikkei:
(Click on image above for larger version) The decline off the April peak is a clear five-wave affair – complete with a positive momentum divergence at the wave five low. That is pure textbook and indicates the main trend is down. But when you see this pattern, you know a rally lies ahead and it becomes a good idea to cover shorts. The first rally carried to the Fibonacci 38% retrace (blue arrow) and after a series of overlapping waves (indicating a likely pause in the bear market), the market made two stabs at the Fibonacci 50% level (blue bars) and is currently challenging recent market lows. The rallies to the 50% level were ideal places to enter short trades, of course. I find that the shallow 38% retraces normally indicate a prompt resumption in the downtrend, while the 50% and deeper retraces normally indicate more work before the bear market can get back on track. EUR versus USD The euro has been in a bear market for some time, but with a recent large correction.
(Click on image above for larger version) Following Monday’s 1.28 low – a new low for the move – the market this week has rallied in a clear A-B-C form (indicating a correction), and has made it back to the Fibonacci 62% retrace with a slight overshoot (purple bar). These ‘pigtails’ are quite common and usually mark the end of the move. Again, a short trade at the 62% area was indicated. And finally… GBP versus USD This market has been swinging wildly recently with no clear direction. Here is the action over the past few days:
(Click on image above for larger version) From Friday’s high the decline occurred in five waves: with a nice positive momentum
divergence at wave 5; then a rally to the 36% Fibonacci level; then a dip; and then a run up to the 50% level. This last run completed a nice A-B-C (purple lines) corrective pattern. The odds favour a declining market, which would be confirmed by a move below Monday’s low – and in fact as I write, this move has just occurred in the past minute!
AUDUSD has been rising steadily and also gapped up slightly at the start of this week. 0.94050 is the high of 2009 and 2010. That's an area where we've seen and imbalance of supply and demand on a number of occasions and we've not seen it broken above in over 2 years. We can see on the weekly, daily and 4hr charts below that price is flirting with the upper Bollinger Bands as it enters this previous supply region. The last fall from this dizzy height was in April/May of this year. Price could well break above the 2 yr high, but then again if there is plenty of supply in this region, the 'potential' move down makes this pair's price action, worth keeping a close eye on.
