I want you to watch this complimentary video to see how a professional trader uses price action to trade. Don't be deceived by the simplicity of the method. Using just the price and action of the market to trade is one of the most effective ways to get results. http://www.tradeology.com/break-out.html
Trading with price action is basically watching price and the actions of the market. What is the market doing? How does the market react at a turning point. What does the market do after a breakout of a range? What does it do when it reaches support or resistance?
Monday, October 27, 2008
Forex Trading Lessons - These are really good!!
These are a bunch of lessons I received from Mark McRae, thought I'd share them with you guys..
Pivot Points - http://www.tradeology.com/pivotpoint.htmlMACD - http://www.tradeology.com/macd.htmlMoving Averages-http://www.tradeology.com/movingaverage.htmlStochastic - http://www.tradeology.com/stochastic.htmlBreakOut http://www.tradeology.com/breakout.html123 set up - http://www.tradeology.com/forex.htmlFibonacci - http://www.tradeology.com/fibonacci.htmlTargets - http://www.tradeology.com/profittargets.htmlEntry Points - http://www.tradeology.com/lessons/exactintro.html
http://www.tradeology.com/lessons/divergence.html
Pivot Points - http://www.tradeology.com/pivotpoint.htmlMACD - http://www.tradeology.com/macd.htmlMoving Averages-http://www.tradeology.com/movingaverage.htmlStochastic - http://www.tradeology.com/stochastic.htmlBreakOut http://www.tradeology.com/breakout.html123 set up - http://www.tradeology.com/forex.htmlFibonacci - http://www.tradeology.com/fibonacci.htmlTargets - http://www.tradeology.com/profittargets.htmlEntry Points - http://www.tradeology.com/lessons/exactintro.html
http://www.tradeology.com/lessons/divergence.html
MACD (Moving Average Convergence-Divergence)
MACD is one of the most popular indicators in use today and I have a unique way for you to use it. This should really help your trading.Originally constructed by Gerald Appel, an analyst in NewYork. MACD is constructed by making an average of the difference between two moving averages. The difference of the original two moving averages and the moving average of the difference can be plotted as two lines, one fast and one slow.
Moving Average Convergence-Divergence (MACD)
History
Moving Average Convergence-Divergence
(MACD) was originally constructed by Gerald Appel an analyst in New York. Originally designed for analysis of stock trends, it is now widely used in many markets.
MACD is constructed by making an average of the difference between two moving averages. The difference of the original two moving averages and the moving average of the difference can be plotted as two lines, one fast and one slow.
Uses
Most modern charting software now includes MACD as standard. Once selected to display in your charting software it normally shows up as two lines plotted on an open scale against the zero line. These two lines will normally be of different color or one line a solid line and the other a dotted line. Frequently used settings are 12 and 26 period exponential moving averages with 9 period exponential moving average as the signal line.
Although there are three moving averages mentioned you will only see two lines. The simplest method of use is when the two lines cross. If the faster signal line crosses above the slower line then a buy signal is generated and vice versa. It is also used as an overbought and oversold indicator. The higher above the zero both lines are the more overbought it becomes and the lower below the zero line both lines are the more oversold it becomes.
It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold. The last common use of MACD is that of divergence.
If the MACD is making new lows and the price of the security is not making new lows that is one form of divergence (bullish divergence). Also, if the MACD has made a high and starts to head down but price continues up that is another type of divergence (bearish divergence) and may lead to an indication of a change in direction.
Moving Average Convergence-Divergence (MACD)
History
Moving Average Convergence-Divergence
(MACD) was originally constructed by Gerald Appel an analyst in New York. Originally designed for analysis of stock trends, it is now widely used in many markets.
MACD is constructed by making an average of the difference between two moving averages. The difference of the original two moving averages and the moving average of the difference can be plotted as two lines, one fast and one slow.
Uses
Most modern charting software now includes MACD as standard. Once selected to display in your charting software it normally shows up as two lines plotted on an open scale against the zero line. These two lines will normally be of different color or one line a solid line and the other a dotted line. Frequently used settings are 12 and 26 period exponential moving averages with 9 period exponential moving average as the signal line.
Although there are three moving averages mentioned you will only see two lines. The simplest method of use is when the two lines cross. If the faster signal line crosses above the slower line then a buy signal is generated and vice versa. It is also used as an overbought and oversold indicator. The higher above the zero both lines are the more overbought it becomes and the lower below the zero line both lines are the more oversold it becomes.
It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold. The last common use of MACD is that of divergence.
If the MACD is making new lows and the price of the security is not making new lows that is one form of divergence (bullish divergence). Also, if the MACD has made a high and starts to head down but price continues up that is another type of divergence (bearish divergence) and may lead to an indication of a change in direction.
Introduction to Technical Analysis
Traders are constantly searching for different trading systems, refreshing ideas, and new innovations to better refine their trading plans. By investigating the works of the forefathers of technical analysis, Traders can gain an immense knowledge of the workings of the financial markets. Technical analysis is based on three basic premises. First, the market is a discounting mechanism, which means that every fact or information pertaining to the market is already been discounted in the price since there are individuals and groups with large interests and pockets, who are armed with the latest research and findings, and who can afford to stay on top of the latest developments in the market. Second, technical analysis involves the study of mass psychology and the repetition of price patterns or formations. Since crowds behave similarly, price patterns will repeat again and again. Third, markets are either consolidating or trending. When the market is trending, the odds are that the market will continue to trend. The forefathers of technical analysis wrote extensively about technical set ups relating to the markets and noted their own observation pertaining to the mental and psychological aspects of trading as well. Having the trading plan and technical set ups account for nearly ten percent of your success as a trader. Your ability to make timely trade executions and to stay head and shoulders above the crowd accounts for about 90 percent of your success as a trader. Charles Dow, a prolific author and a journalist pioneered the art of technical analysis. He wrote his own observations in a series of editorials and articles in the Wall Street Journal around 1901-1903. Robert Rhea, William Hamilton, and Samuel A. Nelson compiled and formalized Dow work into a body of theories. Each of these authors wrote books in his turn. Samuel Nilson wrote ABC of stock speculation. For example, among the basic tenets of the Dow Theory is that there will always be three different price fluctuations in the market. The primary, the secondary, and the minor trend, which is respectively synonymous to saying daily, weekly, and yearly fluctuations. Successful traders include more than one time frame in their analyses to have a full picture of the whole structure of the market. The hourly chart can be used in conjunction with the daily chart. The daily chart can be used in conjunction with the weekly chart. Equally, Charles Baucker, Richard Wyckoff, Ralph Nelson Elliott made significant contributions to the art of technical analysis. Richard Schabacker, The father of the art of technical analysis in principle, pioneered the concept of chart patterns. He introduced terms such as head and shoulders, triangles, flags. He is also the first individual to use trendlines to define support and resistance levels. Richard Wyckoff coined the concept of testing, and examined meticulously market actions and reactions. He observed and looked for nuances in chart patterns to analyze how a specific price pattern may emerge. For instance, he looked at how the market shook bulls (buyers) before a major rally. Elliott is credited with the concept of waves and that, not only charts, but also waves form patterns, which will repeat themselves again and again. For instance, he introduced the concept of impulse wave which tend to happen in the direction of the trend.
MOMENTUM INDICATORS
Momentum indicators, also called oscillators, are used in technical analysis to measure the velocity of price changes (momentum) both up and down. Every momentum indicator is an oscillator as it oscillates between two extreme levels. These extremes are commonly known as overbought and oversold levels. When an oscillator reaches the upper extreme level, it is said to be overbought. When an oscillator reaches the lower extreme level, this condition is known as oversold. The horizontal line in between these extremes is referred to as the equilibrium line. The Relative Strength Index (RSI), the moving average convergence/divergence (MACD), and the stochastic index are widely used momentum indicators.
RELATIVE STRENGTH INDEX (RSI)
Momentum oscillator developed by J.Welles Wilder in the late 1970s and discussed in his book, New Concepts in Technical Trading Systems. RSI measures the relative strength of the present price movement as increasing from 0 to 100. There are many variations of RSI in use today although Wilder emphasized using a 14 period and setting the significant levels of RSI at 30 for oversold (signaling upturn) and 70 for overbought (signaling downturn). The averages of up days and down days for 14 day periods are plotted. If the financial instrument makes a new high but the RSI does not move beyond its previous high, this divergence suggests reversal. When RSI bounces down and falls below its most recent trough that signals a price reversal.
STOCHASTIC INDEX
Oscillator which measures overbought and oversold conditions in a financial instrument based on moving averages and relative strength concepts. In its simplest form, the stochastic index is expressed as a percentage of the difference between the low and the high price of a financial instrument during the stochastic chosen period. For instance, if the stochastic period is 14days and the high in that period was 50 and the low 40, the difference would be 10. If the price at the time of the calculation of the stochastic index was 40, the stochastic reading would zero. At a price of 50, the stochastic would be 100. At 45, the stochastic would be 50. The stochastic index normally plots a 5 day moving average of the stochastic. Lines representing the 25 percent and 75 percent levels refer to oversold and overbought conditions respectively. If the stochastic index falls below the 25 percent line, that suggests an oversold condition. When the stochastic index rises above the 75 percent line that indicates an overbought condition. An upward reversal through the 25 percent line is a positive breakout and a downward reversal through the 75 percent line is a negative breakout, indicating new uptrend and downtrends respectively.
MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD)
Oscillator developed by Gerald Appel which measures overbought and oversold conditions. MACD, pronounced MACD, makes use of three exponential moving averages a short one, a long one, and a third, which is the moving average of the difference between the other two and represents a signal line on the MACD graph. (MACD is typically shown as a histogram, which plots the difference between the signal line and the MACD line. Trend reversals are signaled by the convergence and divergence of these moving averages. When the histogram crosses the zero line upward, that suggests a positive breakout (a buy signal). If the histogram crosses the zero (equilibrium line downward (a sell signal), that indicates a negative breakout. One of the most popular MACD indicators in use is the 8/17/9 MACD. On a daily MACD, the short moving average would be 8 days, the long one 17 days, and signal line 9 days. On a weekly MACD, the same applies but those same numbers would refer to weeks rather than days. Again, we suggest you to trade with virtual money for as long as possible, before trading your own funds. We will continue this practice of sending educational e-mails in order to help you obtain further knowledge about various financial markets.
MOMENTUM INDICATORS
Momentum indicators, also called oscillators, are used in technical analysis to measure the velocity of price changes (momentum) both up and down. Every momentum indicator is an oscillator as it oscillates between two extreme levels. These extremes are commonly known as overbought and oversold levels. When an oscillator reaches the upper extreme level, it is said to be overbought. When an oscillator reaches the lower extreme level, this condition is known as oversold. The horizontal line in between these extremes is referred to as the equilibrium line. The Relative Strength Index (RSI), the moving average convergence/divergence (MACD), and the stochastic index are widely used momentum indicators.
RELATIVE STRENGTH INDEX (RSI)
Momentum oscillator developed by J.Welles Wilder in the late 1970s and discussed in his book, New Concepts in Technical Trading Systems. RSI measures the relative strength of the present price movement as increasing from 0 to 100. There are many variations of RSI in use today although Wilder emphasized using a 14 period and setting the significant levels of RSI at 30 for oversold (signaling upturn) and 70 for overbought (signaling downturn). The averages of up days and down days for 14 day periods are plotted. If the financial instrument makes a new high but the RSI does not move beyond its previous high, this divergence suggests reversal. When RSI bounces down and falls below its most recent trough that signals a price reversal.
STOCHASTIC INDEX
Oscillator which measures overbought and oversold conditions in a financial instrument based on moving averages and relative strength concepts. In its simplest form, the stochastic index is expressed as a percentage of the difference between the low and the high price of a financial instrument during the stochastic chosen period. For instance, if the stochastic period is 14days and the high in that period was 50 and the low 40, the difference would be 10. If the price at the time of the calculation of the stochastic index was 40, the stochastic reading would zero. At a price of 50, the stochastic would be 100. At 45, the stochastic would be 50. The stochastic index normally plots a 5 day moving average of the stochastic. Lines representing the 25 percent and 75 percent levels refer to oversold and overbought conditions respectively. If the stochastic index falls below the 25 percent line, that suggests an oversold condition. When the stochastic index rises above the 75 percent line that indicates an overbought condition. An upward reversal through the 25 percent line is a positive breakout and a downward reversal through the 75 percent line is a negative breakout, indicating new uptrend and downtrends respectively.
MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD)
Oscillator developed by Gerald Appel which measures overbought and oversold conditions. MACD, pronounced MACD, makes use of three exponential moving averages a short one, a long one, and a third, which is the moving average of the difference between the other two and represents a signal line on the MACD graph. (MACD is typically shown as a histogram, which plots the difference between the signal line and the MACD line. Trend reversals are signaled by the convergence and divergence of these moving averages. When the histogram crosses the zero line upward, that suggests a positive breakout (a buy signal). If the histogram crosses the zero (equilibrium line downward (a sell signal), that indicates a negative breakout. One of the most popular MACD indicators in use is the 8/17/9 MACD. On a daily MACD, the short moving average would be 8 days, the long one 17 days, and signal line 9 days. On a weekly MACD, the same applies but those same numbers would refer to weeks rather than days. Again, we suggest you to trade with virtual money for as long as possible, before trading your own funds. We will continue this practice of sending educational e-mails in order to help you obtain further knowledge about various financial markets.
Friday, October 17, 2008
Pivot Point Trading
You are going to love this lesson. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.
The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels.
The pivot level and levels calculated from that are collectively known as pivot levels.
Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to calculate the pivot levels
The reason pivot point trading is so popular is that pivot points are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).
Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.
If you would rather work the pivot points out by yourself, the formula I use is below:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - LowPivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.
If the market opens above the pivot point then the bias for the day is for long trades as long as price remains above the pivot point. If the market opens below the pivot point then the bias for the day is for short trades as long as the market remains below the pivot point.
The three most important pivot points are R1, S1 and the actual pivot point.
The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.
A perfect set up would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.
This all looks pretty straight forward.
Unfortunately life is not that simple and we have to deal with each trading day the best way we can. I have picked a day at random from last week and what follows are some ideas on how you could have traded that day using pivot points.
On the 12th August 04 the Euro/Dollar (EUR/USD) had the following:
High - 1.2297
Low - 1.2213
Close - 1.2249
This gave us:
Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
Support 1 = 1.2209
Support 2 = 1.2169
Support 3 = 1.2125
Fundamentals - Effects on Currencies
EUR/USDDollar weakness drives
EUR/USD higherUS recovery and strong influx of foreign demand will send EUR/USD lower
If you think the U.S. economy will become weaker and hurt the US Dollar, you click on BUY, which means that you are buying Euros and expecting them to go up against the US Dollar. If you think that there will be increased foreign demand for US assets such as equities and treasuries and that will benefit the US Dollar, click on SELL, which means that you are buying U.S. Dollars, expecting them to climb in value against the Euro.
USD/JPY
Japanese government intervention to weaken their currency sends USD/JPY higher Gains in Nikkei and demand for Japanese assets drive USD/JPY down
If, for example, you think that the Japanese government will continue to weaken the yen in order to help its export industry, you would click on BUY, expecting the U.S. dollar to increase in value against the yen. If you think that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back into the Japanese asset markets, such as the Nikkei, you would click on SELL. This means that you expect the Yen to strengthen against the U.S. Dollar as Japanese investors sell their assets and convert their Dollars back into Yen.
GBP/USD
High Yield and attractive growth in the UK drives GBP/USD higherSpeculation about UK adopting the euro will send the GBP/USD lower
If, for example, you think the British economy will continue to benefit from its high yield and attractive growth, thus buoying the Pound, you would click BUY, which means that you expect the British Pound to strengthen against the U.S. Dollar. If you believe the British are about to commit themselves to adopting the Euro, you would click SELL, expecting the Pound to weaken against the Dollar as the British devalue their currency in anticipation of merging with the euro.
USD/CHF
Global stability and global recovery will send USD/CHF higherUSD/CHF rallies on geopolitical instability
If, for example, you think that the market is headed towards a period of global stability and economic recovery, meaning that investors no longer need to park their money in the safe haven currency such as the Swiss Franc, you would click BUY, expecting the U.S. Dollar to strengthen against the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets, the dollar will continue to weaken, you would click SELL, expecting the Swiss Franc to strengthen against the dollar.
EUR/CHF
Swiss government uses verbal intervention to weaken the Franc, sending EUR/CHF higherIf inflation took off Germany and France it could drive EUR/CHF lower
If, for example, you think the Swiss government wishes to devalue the currency to help exports in Europe, you would click BUY, expecting the Euro to increase in value against the Swiss Franc. If inflation started taking off in Germany and France, you would click SELL expecting the Swiss Franc to increase in value against a devalued Euro.
AUD/USD
Rising commodity prices sends AUD/USD higherDroughts hurt Australian economy and AUD/USD
If, for example, you think that commodity prices are going to rise dramatically, thus benefiting the Australian Dollar, you would click BUY, expecting the Aussie to strengthen against the U.S. Dollar due to Australia's status as one of the world's leading commodity exporters. If you believe that Australia will face another drought, hurting the domestic economy, you would click SELL, expecting the U.S. Dollar to strengthen against the Australian Dollar.
USD/CAD
Canadian economic underperformance against US sends USD/CAD higher Higher interest rates and rebounding labor market in Canada will help to drive USD/CAD lower
If, for example, you think that the U.S. economy is going to rebound while the Canadian economy goes into recession, you would click BUY, expecting the U.S. Dollar to strengthen against the Canadian Dollar. If you believe that the higher yields and rebounding labor market in Canada warrants a higher valuation for the Canadian Dollar against the U.S. dollar, you would click SELL, expecting the Canadian Dollar to decline against the U.S. dollar.
NZD/USD
Bad weather in US increases demand for foreign wheat sending NZD/USD higherNew Zealand Interest rates expected to decrease sending NZD/USD lower
If, for example, you think that Hurricane damage in the US will lead to an increase for wheat imports from foreign nations such as New Zealand, you would click BUY, expecting the New Zealand Dollar to strengthen in value against the U.S. dollar. If you felt that interest rates in New Zealand would fall in the future while interest rates in the US will continue to rise, you would click SELL expecting the New Zealand to drop in value against the U.S. Dollar.
Please Note: The information above is not intended to be a trading recommendation.
EUR/USD higherUS recovery and strong influx of foreign demand will send EUR/USD lower
If you think the U.S. economy will become weaker and hurt the US Dollar, you click on BUY, which means that you are buying Euros and expecting them to go up against the US Dollar. If you think that there will be increased foreign demand for US assets such as equities and treasuries and that will benefit the US Dollar, click on SELL, which means that you are buying U.S. Dollars, expecting them to climb in value against the Euro.
USD/JPY
Japanese government intervention to weaken their currency sends USD/JPY higher Gains in Nikkei and demand for Japanese assets drive USD/JPY down
If, for example, you think that the Japanese government will continue to weaken the yen in order to help its export industry, you would click on BUY, expecting the U.S. dollar to increase in value against the yen. If you think that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back into the Japanese asset markets, such as the Nikkei, you would click on SELL. This means that you expect the Yen to strengthen against the U.S. Dollar as Japanese investors sell their assets and convert their Dollars back into Yen.
GBP/USD
High Yield and attractive growth in the UK drives GBP/USD higherSpeculation about UK adopting the euro will send the GBP/USD lower
If, for example, you think the British economy will continue to benefit from its high yield and attractive growth, thus buoying the Pound, you would click BUY, which means that you expect the British Pound to strengthen against the U.S. Dollar. If you believe the British are about to commit themselves to adopting the Euro, you would click SELL, expecting the Pound to weaken against the Dollar as the British devalue their currency in anticipation of merging with the euro.
USD/CHF
Global stability and global recovery will send USD/CHF higherUSD/CHF rallies on geopolitical instability
If, for example, you think that the market is headed towards a period of global stability and economic recovery, meaning that investors no longer need to park their money in the safe haven currency such as the Swiss Franc, you would click BUY, expecting the U.S. Dollar to strengthen against the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets, the dollar will continue to weaken, you would click SELL, expecting the Swiss Franc to strengthen against the dollar.
EUR/CHF
Swiss government uses verbal intervention to weaken the Franc, sending EUR/CHF higherIf inflation took off Germany and France it could drive EUR/CHF lower
If, for example, you think the Swiss government wishes to devalue the currency to help exports in Europe, you would click BUY, expecting the Euro to increase in value against the Swiss Franc. If inflation started taking off in Germany and France, you would click SELL expecting the Swiss Franc to increase in value against a devalued Euro.
AUD/USD
Rising commodity prices sends AUD/USD higherDroughts hurt Australian economy and AUD/USD
If, for example, you think that commodity prices are going to rise dramatically, thus benefiting the Australian Dollar, you would click BUY, expecting the Aussie to strengthen against the U.S. Dollar due to Australia's status as one of the world's leading commodity exporters. If you believe that Australia will face another drought, hurting the domestic economy, you would click SELL, expecting the U.S. Dollar to strengthen against the Australian Dollar.
USD/CAD
Canadian economic underperformance against US sends USD/CAD higher Higher interest rates and rebounding labor market in Canada will help to drive USD/CAD lower
If, for example, you think that the U.S. economy is going to rebound while the Canadian economy goes into recession, you would click BUY, expecting the U.S. Dollar to strengthen against the Canadian Dollar. If you believe that the higher yields and rebounding labor market in Canada warrants a higher valuation for the Canadian Dollar against the U.S. dollar, you would click SELL, expecting the Canadian Dollar to decline against the U.S. dollar.
NZD/USD
Bad weather in US increases demand for foreign wheat sending NZD/USD higherNew Zealand Interest rates expected to decrease sending NZD/USD lower
If, for example, you think that Hurricane damage in the US will lead to an increase for wheat imports from foreign nations such as New Zealand, you would click BUY, expecting the New Zealand Dollar to strengthen in value against the U.S. dollar. If you felt that interest rates in New Zealand would fall in the future while interest rates in the US will continue to rise, you would click SELL expecting the New Zealand to drop in value against the U.S. Dollar.
Please Note: The information above is not intended to be a trading recommendation.
Range Break Out Part 1.
Range Break Outs form the basis of my core trading. Generally speaking I call most consolidation patterns a range whether it is a triangle in one of its many guise's, a head and shoulder pattern, and so on. The point is to identify a period on the chart when price is contracting which then should lead to a period of expansion
By keeping it simple and not trying to figure out what the pattern is called I can reduce the thinking time significantly and the actual time involved whilst trading as a pattern develop and progresses through its various stages of development as one pattern develops into another and different (text book) rule sets need to be applied. What I am therefore interested in is where are the consolidation patterns extreme levels of support and resistance. This way I can treat them all in the same way and not have to worry about what it is called, has it broken a trend line? Is it a genuine break of the pattern? This list of questions can go on and on depending on the pattern and how price action develops.The two range patterns that I distinguish between are; Intraday or overnight ranges Swing or Longer term ranges The only notable difference between the two set ups is the way I identify a target. Once the range has been identified I can then think about how best to go about trading it. Generally speaking the move into the range dictate the most likely direction of the break out move, 65% of the time it is a continuation pattern 35% of the time it is a reversal pattern. With this figure in mind, if the move into the range is up I will be looking for reversals off the low (more on this later) and break outs of the high of the range. Rules for trading the range once identified. Trade the first pullback after the break out of the established range. Stop loss goes past the event that caused me to get into the trade Targets for intraday trades are based on an average days movement Targets for swing trading (longer term) ranges are the height of the pattern added to the break out point.
Range consideration Ideally the overnight range should have developed near the previous days high or low for higher probability trade set ups. If the overnight range is in the middle of the previous days high low range then this becomes a lower probability set up. (usually price will be consolidating in the bigger picture) If price is in the middle of a larger range then it is also not the best location to look for a trading opportunity. Waiting for price to be at the range highs or lows and assess for reversals or breaks is the highest probability option. Intraday example Looking at a quick example, once the overnight range has been identified and in an "ideal" location I am now waiting for the pattern to "break out" of its consolidation.
By keeping it simple and not trying to figure out what the pattern is called I can reduce the thinking time significantly and the actual time involved whilst trading as a pattern develop and progresses through its various stages of development as one pattern develops into another and different (text book) rule sets need to be applied. What I am therefore interested in is where are the consolidation patterns extreme levels of support and resistance. This way I can treat them all in the same way and not have to worry about what it is called, has it broken a trend line? Is it a genuine break of the pattern? This list of questions can go on and on depending on the pattern and how price action develops.The two range patterns that I distinguish between are; Intraday or overnight ranges Swing or Longer term ranges The only notable difference between the two set ups is the way I identify a target. Once the range has been identified I can then think about how best to go about trading it. Generally speaking the move into the range dictate the most likely direction of the break out move, 65% of the time it is a continuation pattern 35% of the time it is a reversal pattern. With this figure in mind, if the move into the range is up I will be looking for reversals off the low (more on this later) and break outs of the high of the range. Rules for trading the range once identified. Trade the first pullback after the break out of the established range. Stop loss goes past the event that caused me to get into the trade Targets for intraday trades are based on an average days movement Targets for swing trading (longer term) ranges are the height of the pattern added to the break out point.
Range consideration Ideally the overnight range should have developed near the previous days high or low for higher probability trade set ups. If the overnight range is in the middle of the previous days high low range then this becomes a lower probability set up. (usually price will be consolidating in the bigger picture) If price is in the middle of a larger range then it is also not the best location to look for a trading opportunity. Waiting for price to be at the range highs or lows and assess for reversals or breaks is the highest probability option. Intraday example Looking at a quick example, once the overnight range has been identified and in an "ideal" location I am now waiting for the pattern to "break out" of its consolidation.
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