So let’s wrap up with a review of the key takeaways from our sessions this month. And a look ahead to next month’s education theme.
This month we have developed our understanding and application of some key trading principals.
- We have looked at the core principals of support and resistance, and how to capitalise on price expansions away from these zones.
- We have looked at some key concepts with respect to identifying trend as price action develops out of consolidation.
- We have addressed techniques to help gauge price action driven targets through our application of trend channels.
- Finally we have dipped into the LFX tool kit and underpinned our newly acquired skills with LFX Psych Indicator a market driven objective indicator which allows us to enter the market at prime locations in a timely stress free manner.
Let’s wrap these sessions with a refresher check list of our new trading skills, and a look at how we can tie these up to profitably trade the market.
Support and Resistance Breakouts:
- identify higher time frame, the drop down onto the lower time frames to find periods of consolidation with defined highs and lows with a view to trading a break of the consolidation in the direction of the higher time frame trend
- price forming defined support or resistance lines with a minimum of two touch points to confirm a support or resistance level on the lower trading time frame
- look for periods of consolidation to form and then trade short or long from the interim double tops or bottoms these ranges form. Slightly more aggressive strategy but again the risk is tight and the rewards are very healthy indeed
- Use a higher time frame to determine the key support and resistance zones on lower time frames.
- Essentially, the best way to find major trend lines is to zoom out on your charts and use higher time frame highs and lows to determine the trend.
- A trend line cannot bisect other highs or lows. It needs to stay above or below the price action: it may touch highs and lows, but not pass through them
- Identify two key reference points in the new trend, if the new trend is up we want to connect the initial low with the first higher low after a new higher high. If the new trend is down we want to connect the first lower high with the second lower high after a new lower low
- copy the trend line that connects the two key turning points we place the copied trendline parallel to the first trendline using the low or high depending on new trend.
- This gives us the potential range for the emerging channel. With the channel now defined, this shows us that when price reaches the low of the bullish channel, we have a reasonable chance of a long trade entry.
- copying the trendline and overlaying from the swing high prior to the primary low in the new trend, we can get a reasonable idea of where the next resistance should be. Remember, we’re not really using these as entry points for trades since the trend is bullish, so we want to be buying, not selling
- Cross above and below 50 provides our trade bias allowing us to trade with the trend. To help with this our indicator has a Basic and Advanced setting to further support trend following
- A straight forward and profitable strategy to employ with the Psych Indicator is to trade in the direction of the arrow alerts on the price charts
- follow the directional signals created by the arrow alerts on the chart. When an arrow alert prints we can play the break of the bar that closes in the direction of the arrow alert
- can also use the Psych indicator to take profits on positions or to help us trail our stops to secure larger profits on longer trends in the market
Dropping to the Lower/Trading Time frame we can see how the psych indicator gives excellent risk reward entries into the the higher time frame down trend
Let’s quickly walk through the process step by step now…
Using GBPUSD during the time frames above the process we want to follow works in the following way
- identify the probable trend on the higher daily time frame, applying our trendline.
- Drop to our trading time frame the one hour chart. Identifying two touch support and resistance levels we can define potential trade levels to enter at high probability levels to align with the higher time frame trend.
- For further confirmation or to use as a separate entry method to take advantage of the higher time frame trend we can also apply the Psych Indicator to give objective entry levels with a reduced risk and enhanced reward ratio.
- Finally we want to address potential profit targets. For this we can use a two pronged approach. We can define short and medium term trade objectives using our trend channel techniques. We can also use the psych indicator to effectively manage our trades towards those objective trailing our stops when we get counter position alerts from the psych indicator.
Take some time to practice this methodology and it will prove an excellent addition to your trading arsenal. In time once you are familiar with the techniques and tools discussed you will see the evidence of their efficacy in the growing bottom line of your trading account!
Next month we are going to take a closer look at market dynamics from an order flow analysis perspective looking at tools and techniques to capitalise from the natural money flow of the markets.