Resistance to support

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Daniela Willis
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3 Resistance to support In this example price is clearly consolidated and we can expect a breakout at some time in the future. This breakout could be short or it could be long. 3

4 Resistance to support Consolidation has changed, there has been a breakout up, the resistance level at the top of the consolidation has been breached and some new buyers come into the market, helping to push the price higher, at some point. Traders will decide to take profit and the upward momentum will end and the price will drop back, possibly to the resistance breakout level where buyers will now see value. 4

5 Resistance to support Resistance has become support and there is the possibility that the price will move back to the high and possibly further. 5

6 Support to Resistance In this example price meets the resistance level where sellers come in, pushing the price down and through the lower support level 6

7 Support to Resistance This is now a breakout of the consolidation support level and as with the previous breakout up there is now the possibility of the previous support changing its role to resistance 7

8 Support to Resistance 8

9 GBP/USD Example 9

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15 2.3.4 Tips for Plotting Support and Resistance levels The best support and resistance levels are always the most obvious. Ideally you want to trade levels that many other traders and institutions want to trade. Less is more, only plot significant levels Consider if S/R level is better as a zone Keep it simple Mainly use Daily Timeframe plus some 1 Hour Timeframe 15

16 2.3.5 Round Numbers Markets have a tendency to find support or resistance at round numbers. This is mainly because traders are more likely to enter a complete number into their trading ticket than not. Therefore when a market moves up or down to a round number it is not unusual to see a reversal as numerous take profit limits or stops are hit. Psychological Support and Resistance levels form an important part of a trader's technical analysis. As price reaches a value ending in 50 (ex ) or 00 (ex ), humans often see these levels as a strong potential for interruption in the current movement. The price may hit the line and reverse, it could hover around the level as Bulls and Bears fought for supremacy, or it may punch straight through. A trader should always exercise caution when approaching 00 levels in general and 50 levels if it has previously acted as Support or Resistance. 16

17 2.3.5 Round Numbers Round numbers often feature at support or resistance in the DAX. This chart shows how the market found support at 9400 and

18 2.3.7 Pivot Points A pivot point is a calculated price level and is possible indicator of market movement. A pivot point is calculated as an average of significant prices (high, low, close) from the performance of a market in the prior trading period. If the market in the following period trades above the pivot point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point is seen as bearish. Several methods for calculating Pivots are used but the most common is the arithmetic average of the high, low and closing prices of the pervious session. (P = (H + L + C) / 3.) At Trade Room Plus we only use the standard calculation, with calculations based on the previous day timeframe. This calculation is used by the majority of the big institution traders. It is important to note that calculations should be taken from real market data, and some broker CFD markets may have extended hours and these extension will result in a different pivot point calculation to the one used by institutions and these levels will therefore be less reliable. 18

19 2.3.7 Pivot Points Pivot points are useful for intraday trading and we recommend their use for timeframe trading of 1 hour or less. Generally you can use the automated pivot points for forex markets but we recommend plotting by hand on index markets. 19

20 2.3.7 Pivot Points This chart shows the following pivot levels. Resistance 3, Resistance 2, Resistance 1, Pivot Point, Support 1, Support 2, Support 3 20

21 Trade Room Plus Pivot Point Calculations At Trade Room Plus we publish the standard pivot points for Index markets each day. For index trading we recommend the use of these levels rather than automated broker ones. 21

22 2.3.8 Fibonacci The Fibonacci sequence is named after Italian mathematician Fibonacci. His 1202 book Liber Abaci introduced the sequence to Western European mathematics. Fibonacci sequences are used by traders to identify potential support and resistance levels. The reason Fibonacci levels work is the fact that many traders use them and are therefore looking at the same numbers. It s self fulfilling. 22

23 2.3.8 Fibonacci The Fibonacci tool is a simple tool its not complex or advanced It a mathematical calculation based on golden ratio Best used to give confluence and add to confidence of strength of a level identified through another method Main numbers we look for reversals at are 38.2%, 50% and 61.8% 23

24 ETX Fibonacci Tool Video of Fibonnaci tool 24

25 3. Trading Trading without a strategy will almost certainly eventually result in a significant loss of funds. Many people trade every day without using objective strategies and for a while some will be successful. Probability will always allow a few to succeed for a while. Just toss a coin and see how many fall on the same side. Continued trading in this way will eventually end in greater losses. These people are not traders they are gamblers. Real traders use Trading Strategies A trade strategy is a set of objective rules designating the conditions that must be met for trade entries and exits to occur. A trading strategy includes specifications for trade entries, including trade filters and triggers, as well as rules for trade exits, money management, timeframes, order types, etc. A trading strategy, if based on quantifiable specifications, can be analyzed on historical data to project the future performance of the strategy. Most successful traders adopt and then adapt well known trading strategies to suit their personal trading style, philosophy and the time the trader has available to trade. 25

26 A trader who just looks for one or two entries a week on a daily timeframe may in essence be using the same strategy as another trader who spends 8 hours a day looking for hundreds of trades on a one minute chart their base strategy may be exactly the same but they will have refined their entries and exits to suit their trader personality. 25

27 Web cam direct to audience: Trading is a numbers game that involves loss. It is not possible to trade successfully without taking losses. There is no such thing as a 100% successful strategy and therefore it is clear that traders must expect to take trade losses. A trading strategy with a high win percentage of 70% can be very rewarding for patient and disciplined traders. But for every 10 trades, there may be 3 losses and the trader cannot predict when those losses will fall within series. It is quite possible that the next six or 10 trades could all lose, but the strategy is still performing correctly. The difference between an experienced and inexperienced trader is that the experienced trader expects the loss and will trade through it without changing their approach. The inexperienced trader will see the losses mounting and will change their risk size or not continue trading the strategy. At the end of a longer series the experienced trader will usually have made good profit, whereas the inexperienced trader will not. 26

28 Psychologists have demonstrated through numerous studies and that the effect on the psychological wellbeing of a person is affected by roughly twice as much by loss than by gain. This is called loss aversion. In other words, the psychological pain of a 200 loss is cancelled by the euphoria of just a 100 win. Inexperienced traders tend to let their losses extend more than their gains because of this psychological factor. Once they have made a loss they are more likely to cut the next trade when it shows half the profit of the previous loss or they risk half as much on the next trade and cannot make up the loss. At Trade Room Plus we believe that psychology is the greatest factor in trading success and is the reason why we run a live trade room. In the live trade room we have to demonstrate good psychological trading discipline and this makes us personally profitable. It means that our members can learn from this psychological discipline and share with each other the psychological load. Trading at home or work by yourself is extremely hard without good support. Institutions around the world do not have individual traders who trade in isolation. Every trader has a team around them to help manage risk and psychological issues. It is possible to work on your trading psychology and improve your attitude towards loss. The key tools that we use are: risk management and trade journaling - a trade log. The future is unknown and there is no indicator or calculation or trading strategy or algorithm that can know what will happen next. We may believe that any one of these things might suggest what will happen next, but this is only on a probability scale and may quite easily turn out not to be the case. At Trade Room Plus we therefore do not primarily use too many indicators and we prefer to look for standard chart patterns in the majority of our trading. We are therefore primarily price action technical traders. We may educate ourselves on the fundamental issues and or news around a particular market but we cannot predict how the market will react to a fundamental news change on any market. We therefore primarily use fundamental news to stop us taking a trade or factor in further risk. We are not generally news traders. News may move a market significantly in your favour or equally significantly against you very quickly. The news effect is unpredictable. However, there are many traders that like to take a risk and ride the euphoria of a quick win. We do not recommend this. 26

29 Beware of gambling strategies that are widely promoted for trading. The most common is the Martingale. This is a very risky method of trading. The main idea behind the Martingale system is that statistically you cannot lose all the time, and therefore you should increase the amount allocated in trades, even if they are declining in value, in anticipation of a future increase. The Martingale system is commonly compared to betting in a casino. When a gambler using this method loses, he or she doubles his or her bet. By repeatedly doubling the bet when he or she loses, the gambler will (in theory) eventually even out with a win. Of course, this is assuming the gambler has an unlimited supply of money to bet with. Often the martingale trader will do ok making small amounts of money, but one day a sequence of losses will result in the complete loss of their account. Casino s like Martingale betters because the casino always wins in the end. The record for the number of times one colour has come up in roulette is doubles from a $1 bet requires a 27 th bet of $67,108,864 the martingale gambler always runs out of money eventually! 27

30 3.1 Timeframes One of the most asked questions in trading is: "which timeframe should I trade?" When looking at timeframes. It is important to always remember that significant price levels are not timeframe dependent and will exist on short term charts as well as long term charts. Choice of chart is usually down to trade a personality and is also dependent on the time available for the trader to trade. Generally we recommend a daily timeframe chart for marking up significant highs and lows. Lower time frames can be used to refine entries. Lower timeframes will produce more trading signals than longer timeframes but will require more trader time and management. 28

31 3.6 Trade Strategies with Support and Resistance Levels as Core We will now look at some basic trade strategies that have price levels at their core. These strategies have been used by some of the most successful traders of all time and can be adapted for nearly all markets. These are as follows: Breakout A Breakout A (Pivot Point) Breakout B Double Top Double Bottom 29

32 3.6.1 Common Rules You will find that these trade strategies have common rules, the most important of these is the fact that we want confluence when planning and the trades. Confluence means that we have two or more reasons to pick a level for a trade. By that we mean that the price level that we have identified has been a level before or is a current pivot point or is a Fibonacci level or identified by other support and resistance types. The greater the number of reasons, the greater the number of worldwide traders will be looking at the same level, we will therefore be able to have greater confidence in the success of the potential trade. One potential signal that helps the trading decision is a pin bar reversal signal on or at the identified level. 30

33 3.6.2 Execution Types Trade strategies may be executed manually at market by the trader; they may be traded by orders placed in the market ahead or on confirmation signals after the level has been reached. Execution type is largely a trader personality decision and does depend on the traders own psychological profile. Some traders will prefer to see and execute the trade immediately, but others will prefer to set an order in advance and sit back and let the trade work or not. Confirmation traders usually wait until the price level has been reached and enter the market after a further candle has printed. Experimentation and testing will help determine what type of trader you are and what type of execution suits you are best. 31

34 3.4.3 Breakout A The first trade is Breakout A trade. We are looking for price levels that we think the market will break through and continue. this trade will be taken with the trend. 32

35 A significant level in the market will be identified and an order to buy the market will be placed above the level with the stop below and the last low. 33

36 When the price moves through this level we can expect more buyers enter the market and send the price further. 34

To trade a breakout a we look for a minimum of two touches of the level prior to setting the breakout trade order. Trade be set a few points beyond the price level.

37 To trade a breakout a we look for a minimum of two touches of the level prior to setting the breakout trade order. Trade be set a few points beyond the price level. On a five minute chart and intraday breakout of a pivot level may follow an initial touch or small break of that pivot. The trade is set beyond the last price with a stop beyond the pullback. 35

38 3.4.4 Breakout B A Breakout B follows a Breakout A and is when the market moves back to the breakout level where the support or resistance reverses and the market continues a back in the direction of the original breakout. 36

39 A breakout B is a second opportunity to get with the move and is expected to move to at least the previous high/low and possibly further. It is possible to wait for the the breakout level to hold and print a confirmation candle prior to placing orders. The advantage of a breakout B is that the stop level is defined by the move back through the original breakout level and consequently the risk reward can sometimes be much better than a Breakout A. The disadvantage is that the market may never come back and the Breakout A might have been the best opportunity to get with a new move. 37

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41 3.4.5 Double Top and Double Bottom One the most common chart patterns in trading is the double bottom and double top. In fact this pattern appears so frequently that it alone could serve as evidence that price action is not as wildly random as many academics claim. One way to think of price charts is simply that they express the sum of trader sentiment, and double tops and double bottoms in particular represent a re-testing of temporary highs and lows. Double tops are commonly found during an uptrend in prices where a new high is formed followed by a slight pullback and a retest of the new high, but ultimately failing to surpass the price level established at the first peak. This results in a movement of prices to a lower level and completes the pattern of the double top. The second peak does not have to stop exactly at the price reached from the first peak but should be relatively close. This pattern is usually indicative of a trend that is weakening where buying interest is decreasing. A double bottom is simply the opposite of a double top. This pattern occurs during a downtrend and is a signal of a reversal of the downtrend into an uptrend. This pattern is easily recognizable after the fact by its resemblance to the letter "W". The initial downward move will find a support at the first bottom and then the price action will rally off the support to a temporary new high (the middle of the "W"). Another selloff 39

42 will take place that will reach the same support level of the first bottom, and consequently cause another rally upwards. Lastly, the trend is confirmed when the price breaks through the upper resistance to complete the pattern and reversal. 39

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46 3.4.6 Pin Bar Reversal Signal A pin bar reversal is without doubt one of the most powerful and reliable price action trading signals that can be traded across many different markets and timeframes. The pin bar is very simple to identify and can be a very high probability trading signal once a trader has perfected it and learned under which circumstances they should be traded and the others to which it should be avoided. A pin bar reversal at a level already identified for a reversal trade is a signal to certainly take that trade. A pin bar in itself is not a signal to take a trade. It is only a signal if it occurs at a price level. 43

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50 The middle section of this chart shows where the move back down ends with a pin bar on the 61.8% Fibonacci before moving back up for the double top. 47

51 The pin bar on this significant low on the DAX on 16 October 2014 at 8400 signalled the end of the downtrend and the start of the move that went all up to

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Naked Trading - Double Top Chart Pattern Strategy

Naked Trading - Double Top Chart Pattern Strategy If you really want to learn a profitable way to trade then look no further, the Double Top chart pattern strategy uses simple and sound trading principles