We are what we think; all that we are, arises with our thoughts; with our thoughts, we make the world.

5-Trends, Support, and Resistance

Drawing trendlines, support, and resistance.

Drawing trendlines help determine the direction the market is going.

Drawing trendlines help determine the direction the market is going.

My charting software from Market Traders, MTI4.0, makes it easy to draw trendlines. The green line is a trendline and it makes it very easy to see that the market is making lower LOWS and lower HIGHS. We are in a downtrend.

Ths will would be a good time to sell first and buy later.

Can you see how the market moves in waves, up and down? Overall we are going down. The best time to sell is after we hit a high and we start moving down again.

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Select your preferred time frame and then go up to the next higher time frame. There you make a strategic decision to go long or short based on the direction of the trend. You would then return to your preferred time frame to make tactical decisions about where to enter and exit (place stop and profit target). Adding the dimension of time to your analysis gives you an edge over the other tunnel vision traders who trade off on only one time frame.

There is obviously a limit to how many time frames you can study. You don’t want a screen full of charts telling you different things. Use at least two, but not more than three time frames because adding more will just confuse the geewillikers out of you and you’ll suffer from analysis paralysis and go crazy.

We like to use three time frames. The largest time frame we consider our main trend, the next time frame down as my medium trend and the smallest time frame as the short-term trend.

You can use any time frame you like as long as there is enough time difference between them to see a difference in their movement. You might use:

  • 1 minute, 5 minute, and 30 minute
  • 5 minute, 30 minute, and 4 hour
  • 15 minute, 1 hour, and 4 hour
  • 1 hour, 4 hour, and daily
  • 4 hour, daily, and weekly and so on.

When you’re trying to decide how much time in between charts, just make sure there is enough difference for the smaller time frame to move back and forth without every move reflecting in the larger time frame. If the time frames are too close, you won’t be able to tell the difference which would be pretty useless.

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The strength of support and resistance at the different pivot levels is determined by the number of times the price bounces off the pivot level.

The more times a currency pair touches a pivot level then reverses, the stronger the level is. Pivoting simply means reaching a support or resistance level and then reversing. Hence, the word “pivot”.

If the pair is nearing an upper resistance level, you could sell the pair and place a tight protective stop just above the resistance level.

If the pair keeps moving higher and breaks out above the resistance level, this would be considered an upside “breakout”. You would also get stopped out of your short order but if you believe that the breakout has good follow-through buying strength, you can reenter with a long position. You would then place your protective stop just below the former resistance level that was just penetrated and is now acting as support.

If the pair is nearing a lower support level, you could buy the pair and place a stop below the support level.

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A pivot point and its support/resistance levels are areas at which the direction of price movement can possibly change. Pivot points are especially useful to short-term traders who are looking to take advantage of small price movements.

Pivot points can be used by both range-bound traders and breakout traders. Range-bound traders use pivot points to identify reversal points. Breakout traders use pivot points to recognize key levels that need to be broken for a move to be classified as a real deal breakout.

Pivot Points

PP is the pivot point.

You see 3 lines of resistance, R1, R2, and R3.

You see 3 lines of support, S1, S2, and S3.

There is an indicator that will also draw the mid pivot points between these lines. They can also be useful at times.

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TrendlinesTrend lines are probably the most common form of technical analysis used today. They are probably one of the most underutilized as well.

In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).

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The Forex is a fight between the bulls (buyers) and the bears (sellers).
Continue reading

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