There are two strategies for trading with support and resistance, first of all, wait for confirmation or secondly, we can second guess the level is going to work.
1.Waiting for Confirmation
As you can see in the picture, let’s say we’re waiting for confirmation.
We’ve got a chart here. The market’s been falling. Maybe we think the market’s going to turn around and the level we’re watching is old low down marked on the picture. So if we’re looking for confirmation, it’s not enough that the market just heads back to that level. We want to see, again, support coming into a place where we have a market that’s sliding.
Maybe, we wait for it. If we’re looking at candlesticks and this doesn’t really matter whether we’re looking at a daily chart, an hourly chart, 10-minute chart. We wait for at least one period where the market turns around. So maybe we have a positive candlestick.
We have a sign of buying come in. That’s our first bit of confirmation. And of course, the reverse applies if we’re selling into resistance. We’re looking for a day when the market does at least go down.
This is the price of gold example. We’re looking at a daily chart. So every day, every candle represents a day’s worth of trading. From September 2017, we saw the price of gold in recovery. We did see sell-offs, but the market turned around and moved higher.
So as you can see in the picture. This is up to the 25th of October. And we might think the same thing is happening again. We’ve had a run-up. We’ve had a sell-off. The markets bounced back. We’re coming back to the old support. What’s going to happen?
We might want to be a buyer, but we’re going to wait for confirmation. So we can see the support is at 1260. So what we’re waiting for is at the very least one day where the market goes up. We want to see it turn around if it goes sailing through the support. There’s no trade confirmation waiting for is one positive day.
So we have our day where the market has pushed lower. But as you can see o the picture, it’s turned around on the day and it’s closed pretty much near the highs of the day. So for some people, that will be enough to confirm this point is valid. So it would be a buyer around about what, 12.73, 12.74, obvious place the stop-loss down below 12.60. And we’re in the trade.
As you can see in the picture, there is our turnaround. It took a week of sitting on that support. But so far, at least, the market has moved about 13 dollars higher. So that is a good example of waiting to come on confirmation ahead of previous support would have set us up with a good trade.
Now we’re looking at a very different time frame. We’re looking now a confirmation of a sale near resistance. As you can see on the picture, we’re looking at dollar-yen. It’s a 10-minute candlestick. Every candle represents 10 minutes worth of trading. This is the early hours of the 7th of November. The market rallies up from 113.70 rallies up 60, 70 points up to 1144.33. We see the market drop out of the trend line.
This has made us think if this is an opportunity to sell if we go back to hair and fail? Is this our opportunity to sell short? But again, we are looking for confirmations and maybe we want to see at least one 10 minute candlestick where the market runs out of steam. If it blasts through the level, there’s no short.
The resistance level is if we walk forward 10 minutes, 9:20 in the morning, UK time, traded as high as 114.33. We’ve seen this candlestick here trade up to 114.29, so within four points of the high and it’s turned around.
Our trade here could be if we’re going to be a seller at 114.18, with a stop somewhere above, let’s say 114.14, 114.15, something like that. But we’re taking that as our confirmation of resistance. Short term resistance, It was only formed about seven hours earlier, but that’s our signal.
Over the course of the next nine hours as you can see on the picture, it does actually end up being the turning point. There was no way of knowing when we put the trade on that the market was going to drop about 50 points. But it was a low-risk logical place to go short because we had a definite reference point. If the trade doesn’t work out, we get out for a small and manageable loss.
Arguably, that’s the more disciplined way of doing it. Wait for the market to confirm this is a valid level. But if we want to be more aggressive, we can anticipate that a level is going to hold. So again, let’s take a quick look at how it should work in the theoretical world.
2. Guess the Level Is Going to Work
When it comes to anticipating support or resistance holding. It’s a much more aggressive trade. We’re hoping that we get in it may be a better price or rather than waiting for the market to turn round. We’re buying or selling when the levels approach. So, for example, going back to this chart here, we just are a buyer as you can see on the picture with our stop loss below. So we are in effect, we’re second-guessing the market is going to turn around. But accepting that risk, of course, it could just sail straight through. So we’re giving up the extra confirmation, but we’re hoping to get in as near as possible to that big level.
Now, clearly, there are going to be more examples of anticipating because it’s going to work. I think a lot less off often than are looking for confirmation.
So here’s our more aggressive strategy. This is euro dollar 0 spread four-hour candlestick as you can see on the picture. Every candle represents four hours worth of trading. This is the middle of October. So the market Eurodollar is traded as high as 118.80 and is sold off pretty hard, sold off down to 117.30. So we’ve seen one hundred and fifty point decline. The market is bouncing back, but we think that that level is going to hold. We think that the old resistance It’s going to be a barrier.
The level is 118.80. Let’s say our stop-loss is 118.95. You can see during this four hour period, the market traded as high as 118.57-118.60. So we may decide to be a seller at one 118.40 where this market has traded, so we were waiting for it to just push a little bit higher than we’re going to sell because we’re gonna assume that all resistance is gonna hold. It is a more aggressive strategy because we’re second-guessing the resistance.
Let’s see what happened over the next four hours. As you can see in the picture, the market has pushed higher. Let’s say we got filled at 118.40 but is carried on higher still. So at the moment, the trade is underwater. We’re down 15, 20 points, but we’re still guessing that that old resistance is going to hold. It was a big level and we did see it tested on the way on the way down. But that’s what we’re assuming here.
We then go over the next four hours, fairly indecisive candle. If we were waiting for confirmation, this could well be the confirmation for some. But we’re taking a more aggressive stance here. We’re already in the trade.
Let’s see what happened next. As it turned out, the market did turn down. If we if we’d have waited for a more negative candle for confirmation, we wouldn’t have been getting in until the point that you can see on the picture. So anticipating it higher risk, but arguably gives us a better feel. But the risk is the market would have just gone sailing through that. old level.
Let’s look at another example. As you can see in the picture, now we’ve got a much more short-term example. It’s a 10-minute chart of the German 30. Like many stock markets, it has had a very strong year being dragged higher by U.S. stock markets. What we’re looking at here, each catalyst represents 10 minutes worth of trading is the 7th of November. We’ve seen the market hold at 13340, and you can see it has quite a few goes that are marked on the picture.
So we see the market pushing down. Again, our aggressive strategy will be to be a buyer. Now, assuming this level is going to hold. What happens next?
And the DAX, the German 30 index, just sailed through the level like a knife through butter. So if we had been waiting for a confirmation there, we’d never have done the trades. But we run the risk of the market turning around shortly. But this shows why it’s even more important if you’re taking an aggressive approach and anticipating levels hold that you have stop losses in place because here’s a clear example where the market didn’t care about previous support and went sailing through.
You can see one of the drawbacks there of trying to anticipate is that you end up just jumping out in something that is a runaway train. The upside is you’ll get better entries. The downside is, as we saw with that DAX example, bang, it just goes sailing through the level. I think it maybe if you’re new to trading and then maybe the logical the safer way to do it, first of all, is to wait for the confirmation. It builds up the discipline, it builds up the patience. And I think these are both incredibly important factors when it comes to trading.
5 Important Candlesticks Observations and Tips
These are the five important candlesticks observations that give us an idea of what’s really happening with a price under the hood.
1. Wick Length
Candlesticks, as we know, they’ve got a body and a wick with a tail. So it’s important to know how long the wick is. Obviously, the longer the wick, longer the indecision has been on the call and the bigger move is after the extension. So if that was a daily candle, it means that we’ve come to a low here at some point. But whatever reason, we’ve pushed back up and we’ve closed, assuming that’s our close if it’s a red candle as you can see on the picture.
The longer that wick, the further the price has gone and come back. That’s useful information. If we’re getting long wicks all the time and that means that its indecision has changed and has moved quite a lot in a direction against that initial pulse. Which might indicate a turning point or a change in sentiment midday, midweek or whatever it may be that’s worth looking at the wick length.
2. The Ratio of Wicks to Tails
For wicks, as you can see on this picture in this example to be upside and tails to be a downside. The whole point here is that if you have got a lot of let’s say moves to the upside that failed in the middle of the candle, that could be construed as bearish.
If you see a lot of times it’s pushing up on the day and it’s closing at lows, pushing up again and then closing at lows, that’s a bearish pattern as opposed to all the way around, pushing down the day and closing at highs. So if you’ve got a ratio, we’ve got far more wicks than tails potentially. Again, you got to put this all in context, but potentially that’s a bit more of a bearish path.
3. Body Position
The body is obviously the meat of the candlestick of the open and close. Where is that? You’ve got a couple of options.
So we’ve got a body position right in the middle of the range, just like a cave where we can extend the highs or we extend into the lows. You can reject both sides and we’re not closing some in the middle. We open and close some in the middle and we try both sides and no one really will win the battle. It’s a bit nothing going on, especially with the first candlestick that you can see on the picture.
What about the second one? This one is much better. Before, we were talking about similar candlestick, we were talking about the wick length. And now we are talking about the position of the body. The body’s right at the top, because wick length could still be the same regardless of the size of the body. Wick could still end up going the same depth lower. The range would be wider but you would still have the same wick length.
But the body is right at the top, that could indicate some strength, potentially. The fact that we did push to lows and fail, push back up, same as the body’s massive, that would indicate perhaps a trend. They opened at lows, closed to highs, opened to highs, closed at the low, solid trend. A good solid reason to potentially take a trade in the direction of the trend the next day, depending on the position.
4. Size of the Body
The size of it, is it relatively big compared to the other candlesticks as well? Is a relatively big compared to the wick? Is it relatively big compared to the prior day, the previous week? Whatever it may be, the size of the body, very similar, of course, to the position. But it depends a lot. If it’s opening at lows, closing at highs, it’s a lot different from opening at lows, pushing highs, failing and closing at the midpoint, distinct different type of trade environment.
5. Body to Wick Ratio
If we look at the body size and the wick size, it’s similar to the wick length, but it’s the ratio for constantly getting all the time. Indecision, indecision, indecision. You’re going to find that the body is often half of the wick because most the time you get that kind of scenario where opens the highs, pushes down to lows, comes back up, tries to reclaim and can’t quite.
You get that 50 percent of the whole range. Or is the candlestick body whole of the range and the wick looks like a little tiny bit? In other words, it’s just been a range extension day and the wicks just been a little bit of noise towards the end of the day, whatever it is very small wick.
Super important are two completely different scenarios on how to get a picture of the type of environment you’re in. You start to look at all these attributes for your candlesticks. You start to build out a bigger picture. Who’s in control? Are they truly in control? If you’ve got a couple of solid candlesticks in a row, what’re the general conditions? I’ve got a lot of wicks as opposed to bodies. What about If we have a lot of bodies and no wicks and there’s a lot of distinct movement and supply-demand imbalance?
So multiple different openings appear when we start to analyze this. And I think a lot of us do this subconsciously, but sometimes it’s worth to ask yourself what are you really looking at? What is the actual point?
Effective Breakout Trading Strategy for Beginners
It will come to a point when the market will break out through previous support or resistance, and that can often signal the start of a new trend.
If a market really starts moving, then clearly it’s going to break through a level.
As you can see in the first picture, we’ve got resistance there. The market rallies up, market sentiment shifts. Sellers come back in and push the price down. Breakout is when it’s approaching it again, we’re expecting it to run out of steam but it doesn’t. This is a breakout to the upside.
And of course, If we add a line beneath that breakout, we will have a breakout to the downside. So traditionally, it’s a sign that sentiment has changed. And in this example, the normal expectation would be for the market to move higher. They can be difficult to trade because you get false breakouts. But there are a couple of different ways of trading this.
1. Go for It
One way is that when the market breaks the level, in this example we just buy, of course, if it was breaking to the downside we would be a seller. So we’re jumping in straight away. If that level is 100, let’s say the market trades to 102, which is going to buy in and hope the market is going to move higher when it comes to stops.
This is where it can be difficult. Breakouts tend not to be very clean and suddenly the market just zooms up nice and easily. There will be an element of the market shopping around. So I think it’s an idea to have our stop somewhere back in the breakout zone.
2. Be Patient
Maybe an easier way of placing stocks is to be a bit more patient. So the market breaks out rather than buying straightaway. Perhaps one approach is to wait to see what happens next. If the market maybe pulls back a little bit, then shows some strength and starts to move. We have maybe an obvious area to have a tighter stop. We’ve seen the market break out. It’s been a bit of selling to push it back, but the markets run it again. So, maybe buying like you can see in the previous picture with a tight stop.
And there is an approach that some traders may prefer. The downside, of course, is if the market breaks out and takes off and doesn’t pull back, then you miss out on the move. But they can be a bit tricky to trade because it doesn’t necessarily mean it’s going to be a clean break. So let’s look at a few examples and the different ways that maybe we can try to profit.
Here’s a short-term example on a foreign exchange pair euro-dollar zero spreads that you can see on the picture. So this is the end of October through to the first week in November. And we’ve seen the euro slid heavily as rallied, but it really can’t get through 1,1691.
If the market breaks through 1,1690, well, maybe you set an order at 1,17 and you want to be a buyer. So you can see on the picture that this was a problem back on the 2nd November, 3rd November and again comes back up to it on the 10th of November. The market really doesn’t want to rally up through 1,17.
But if we look at the 14th of November, so 7 to 8 o’clock in the morning UK time, we do see that level break.
So if we’re just buying the breakout, an aggressive strategy would be a buy now and maybe we put our stop-loss under the most recent lows. The lows that were set during the early hours in the morning may be down around about 1,1655, that sort of area. But either way, the breakout is the signal to buy in this example. So we’re in straight away.
Just on the break-in this example, it went well. There’s our break as you can see on the picture.
The market doesn’t really look back. And in fairly short order, it’s 150 points higher. So it moved almost in a straight line. If we were trading our stop-loss up, we would have caught a chunk of the move. But as a good example, I think where just buying that breakouts right away, big level. And the market did really rally and it would have been a profitable trade. But sticking with this same euro-dollar chart, for now, I thought it’s important to highlight an example where it didn’t work.
You know, we had the lows from back here. 27th of October lows around about 1,1570. The market breaks below those on the 7th of November. So, If we just sold the breakout there with the stop-loss, we didn’t get any follow-through ended up being a false break and we would have been stopped there. So this does highlight, why it’s always important to have some sort of risk control in place, some stop If it doesn’t work out.
Now for longer-term breakouts, it would be interesting to look at the daily chart of an individual share. On this picture, you can see Facebook shares, just to see really how the breakouts have performed. So, September 2016 rallies out to about a $133 a share. Rallies back there again in October 2016.
And it’s not until the next year set to February 2017 that we finally get the break, and the break of this is a big level. This big barrier did signal the next rally higher and we didn’t get much of a pullback. But look at the picture what happens in April. It does get a bit messy. And we’ve got that level at 154. The market sort of pokes through during the day, but keeps giving it up, then pokes through again.
So if you’re a bull on the break out there, we would have had to stand quite a big move against it. The logical place for stop-losses was probably below those old lows. So it’s not as clear cut that you’re guaranteed to make money on a breakout because you do get false breakouts and you do get quite a bit of choppy trading.
We have these old highs for Facebook from July 2017, around about 1,75. And towards the end of October, we’ve seen the level break.
Plenty of people are broken out and pulled back, so now we’re seeing a bit more strength. And maybe one idea for a stop-loss is underneath that low from the end of October. So somewhere below 1,67.
But hopefully, you can see just because a market breaks out doesn’t necessarily mean it’s going to carry on straight away in that direction. But it can be a good sign, the sentiment is shifting. We’re looking to sell a breakout to the downside, but we’re going to be patient.
So, as you can see in the picture, that is the short term chart of the German stock market index from the beginning of November. And this is an hourly candlestick. So the market gapped higher left a lower 13300, came back down to a 7th in November. And it holds and then it breaks. Now, if we are being patient, we’d be looking to sell short. But maybe we want to see a bit of a bounce back to get a better price to sell short and have a better place to set our stop.
If we’d been waiting here, we never really got it, because the markets sold off so heavily. 13300 was the level and it traded down a good couple 100 points over the next six hours or so.
So we would have missed out if we were waiting for a better opportunity there. But it has given us, I think, another level if we’re looking at short-term breakouts. Let’s pick up on these lows and think about selling short if those lows are broken.
So we’re watching 13104, the break. We’re not going to set it straight away. We want to see it break, then rally, run out of steam, then sell short.
What happens? So once again, when the level breaks, we see a really sharp sell-off and the market drops, what, 150 points, but it does bounce back, runs out of steam. Near the breakout point. So, again, as you can see this could be an opportunity now where we’ve been a bit more patient selling short, maybe putting a stop-loss up above these highs here.
As you can see on the next picture, the rally back to the breakout point ends up failing again. So if we were going short-13018, the market does sell off even deeper down towards 12860 area. So there is an example where we have missed the breakout here because the market never really pulled back. But a bit of patience there, we got a better entry, maybe a logical point for the stop and ended up being a pretty good trade in the end.
That is a good example because we have missed our first of all on that big move by being maybe too patient. But we did call the second move. Good entry, good stop and a nice move afterward. So breakouts, they don’t work all the time like everything else, there is no holy grail some magic system.
But they can be an easy way of spotting when a potential new trend is starting. And if you’re a little bit patient, giving you a good balance of risk versus reward, where it comes to where you place your stop and what your target’s going to be.
Top 3 Ways How to Actually Identify a Trend in Forex Trading
Trading with trends in the market can not only add accuracy to a trading strategy but can also add to the risk-reward ratio of that same strategy, overall increasing the profit potential of any strategy you use.
These are the top three ways how to actually identify a trend.
1. Using Two Different Moving Averages
This is the most simple way to identify a trend and by far the most non-subjective. And what I mean by that is that it’s very easy to identify when it comes to this way of identifying a trend. So for me, the two that worked best in my own personal trading was the 200-day moving average and the 100-day moving average. As you can see on the picture, the red line being the 200-day and the blue line being the 100-day moving average.
Now, with this being the case, the reason this is so non-subjective and frankly hard to mess up is that all you’re looking for is your 100 day moving average to be below or above your 200-day moving average in order to identify this market as in an up or a downtrend.
A lot of people, whenever they consider moving averages in trading, think about crossover strategies and actually placing trades based around a moving average. That is not a very good way to trade because of how these indicators lag.
Moving averages are going to be a lagging indicator and these are going to be lagging even when it comes to identifying a trend. But when it comes to the easy, non-subjective way to look at the market and identified as either in an uptrend or a downtrend, these moving averages can work really well, especially for beginner traders that have trouble identifying market trends using only market structure.
You can see an example of a crossover on this picture.
This is a moving average crossover and I’m not talking about trading when the market crosses over. That’s not a very intelligent entry reason. But what I’m talking about is waiting on that cross of those moving averages to identify the market afterward as downtrend as soon as this cross happens.
What you can do is say after the cross, if my 100-day moving average, the blue line is below my 200-day moving average 100 below the 200, then I only look for short trade to using my specific entry reason.
But that’s how you would use this specific way of identifying a trend in order to trade in the markets. And as simple as this sounds, it would add a ridiculous amount of accuracy to most of your trades.
And it’s not even the fact that you have a difficult time identifying trends, using structure, maybe you just see it as a little bit too subjective and you can’t come up with the perfect set of rules in order to do that.
If you can if you look at a chart and you can’t automatically tell what trend it’s in, then you probably need to try to find a new way to identify a trend for now until you get a little better at identifying mark market structure and identifying market trends.
And it really doesn’t matter what the moving averages are when it comes to the numbers, you can use a 50 and 100, you can use a 20 and a 50. As long as one is smaller than the other one, this will work.
The 100-day and the 200-day exponential moving average is what I chose to use in this scenario as you can see on this picture. Where the first crossover is, you can see that while the blue line is above our red line, what we’re looking for is long trades, looking for the market to continue that trend in the upper direction. And on the spot where the second crossover is and while the blue line is below our red line, we’re looking for short trades and a continuation of a downtrend.
So that’s our first and most simple way of identifying the trend that I’ve used in my own personal trading.
2. Using One Moving Average
Now we’re going to take a look at a different way of identifying trend still using a moving average. But instead of having two moving averages, what we’re gonna do is just take off the 100-day moving average. And this is going to be the second most simple way to identify market trends.
And in this case, instead of waiting on the moving average crawls, as you can see on the picture, that moving average cross happened right there where it’s marked. So this way of identifying a trend, although a bit more complicated and subjective than using a moving average cross to identify a trend, will give you a faster trend identification. As you can tell, the market breaks below the 200-day moving average and this is where our downtrend started when using the moving average cross.
So it gives you a little bit of a faster signal, but it can also be a bit more subjective because you don’t want to be trading trend continuation while the market is consolidating. And in this area, as you can see in the picture, these consolidation areas can be extremely tricky to find when using just one moving average in order to identify a trend.
The moving average that I used when only using one moving average has varied between the 20 one hundred and 200-day moving averages. For this example, we’re going to use the 200. What I would do is just test strategies with each of those. Being your trend ID if you’d like to use this non-subjective way of identifying the trend and see which one works best for you.
So using just one moving average to identify trends is an extremely simple process. All you should be doing is looking for price action above the moving average or below the moving average. And when the moving average is going sideways like on the picture.
Choose not to trade. When price action is touching and bouncing off of the moving average multiple times, that’s when you should stay out of the market when using this way of identifying a trend. Stay out of the market at least for trend continuation trades and for counter-trend trades such as advance patterns and other things.
This type of market right in here works really well. But today we’re talking about trade continuation trade. So in that case, what I’d be looking for is this moving average to be moving up or down price action to be above or below it and then looking for into reasons based on that trend ID. In the case of the above, we’d be looking for only long trades. In the case of below, we’d be looking for only short trades.
3. Using Only Price Action
So now, we’re going to move on to the third way of identifying a trend, and that is going to be the most complicated to understand and learn. But for me, in my own personal trading, it has also proven to be the most profitable, that is using only price action.
And as I said, this can be extremely tricky. It can also be much more subjective. So it’s very important to have very specific rules when identifying trends, using only price action.
The rules that you should be using is called the break and closed below and above rule.
As you can see on the picture, what you should be looking for in this case is for a market to create a low, then a lower high, followed by a breaking close below that previous low. And in order for the trend to be a continuation of the trend, you should continue to look for the same thing over and over.
So, yes, you can see on this picture that we would still be considered in a downtrend because we’ve had this low be broken and closed below after a lower high. Then we had this low that was broken and closed below after lower high. What we’re expecting now is a continuation of that trend, a lower high, followed by breaking close below this previous low.
And this is the way you would identify a trend using only price action, using only structure. This definitely gives the fastest signals of a possible reversal, gives the fastest signals of trend continuation, and is proving to be one of the more profitable ways for me to identify a trend in my own personal trading.
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