EUR/USD

This is for those starting out to help you better understand and see how the trend moves through support and resistance.

This is an incredibly valuable skill in determining where you will enter and the best place to exit.  It will also help in finding safe places to put your stop loss so that you give yourself a fighting chance when you are in a trade.

Start with the first picture and do not open the next until I move onto the next one in the post.  This will help in seeing the structure of the market moves and trending patterns as it moves THROUGH support and resistance.

Picture One:

The red lines represent the various floors of a building.  We can move upward from floor to floor or we can move downward from floor to floor.

Picture Two:

Imagine we take a magical bouncing ball that does not stop bouncing once set in motion.  When we bounce the ball on the floor at level one the ball bounces between the ceiling and the floor over and over until it finds a hole in the ceiling and passes through to the next level.  There we have the same effect.  The ball bounces off the ceiling and floor until it finds a hole in the ceiling and passes through.  This continues for each level with the ball passing through the hole in the ceiling of the next level.  This is like the basic price movement in a market.  The red lines represent support and resistance and the price moves between them until moving to the next level.  Note how at each point previous resistance becomes support.

Picture Three:

After the ball completes its move through the building we find that we can take a line and connect the high and low points to show the trend of the ball as it moved through the various levels.  These black lines are the trend lines that contain the upward trend of the price as it moved from one level to the next.

Picture Four:

I’ve color coded each level so you can see how they sit on top of one another like the levels of a building.

Picture Five:

This is the most recent H4 trend for the EUR/USD pair.  You can see the same pattern as in the previous pictures here in a real market situation.  The trend is a bear trend marked by LHs (lower highs) and LLs (lower lows).  The price moves between the support and resistance and then moves to the next level.  Obviously the market is not as simplified as my above drawings, but you can see that there is not an incredible amount of difference.  Note that the blue lines represent the general range of S/R.  Support and resistance is usually in a range because over time when the price returns to these areas traders are exiting and entering the market at different times causing the price to be in a general range of support or resistance.

Let’s examine here a change in sentiment with GBP/JPY.

Note that the attached file is GBP/JPY H4

Starting from the left we see a descending trend pattern.  The orange circles show us lower highs and lower lows.  This shows us the market trend is bearish.  The red circle is another LH post but the candle pattern here should draw our attention.  Up to the red circle we’ve seen selling along the way.  The price would rise hit, post a LH, and then sellers would come in posting LLs along the way, but when we get to this red circle at the end of last week we see an area where bears should have had better control of the market.  I made a post on Friday in the forums that said that I would suspect that this area will be broken this week because something just wasn’t right.  Synapse also pointed this out and said this area was ripe to be broken next week.   At the open of the market this week the price gaped low and some selling followed, but when it pulled back it posted these two higher lows within the bear pattern.  This of course was not a long signal in any way, but we are noticing that something may be up.

Let’s run through the numbers:

1. At this point we see the price meet both resistance and a trend line, but the bears did a very poor job of controling the market.  The bulls head strong and we had a close near that resistance -note worthy in my opinion.  Sellers did come in and a short at numbe 1 would not have been a foolishg thing to do since the trend line had not been broken, and it would have been in line with past history.  Sellers had been selling in these areas before.

2. At this point we see two higher lows post forming that green line connecting with the red line and giving us a symetrical triangle pattern.  These higher lows should tip us off as to what might be coming so we watch that green line area for a break below for a continuation of the falling wedge or a potential change in sentiment that might be on the horizon.

3. We see here a break of the trend line.  This tells us that the trend line is weakening and the bulls are attempting to take control.  What we do not do is assume though that the trend is over and the reason is because until it crosses through the 122.60 – 122.80 area we still have a lower high price.  Once it moves through 122.60 – 122.80 we are seeing the market post a higher high denoting that sentiment is changing and the bulls are taking control and the trend is shifting.  As long as the price stays below 122.60 – 122.80 we denote a possible ranging market that could very well fall back into a bear trend.

4.  The swing point (last LH) does not hold and resistance is broken for a nice trade to the next point of resistance.

5. We see the price attempt to continue, fail and fall back to test previous resistnce (now support) before resuming it’s bull move.

Sentiment is now changing.  We are posting HHs and the blue circles where we saw some HLs then form the bottom part of what appears to be the new trend.  How long will this last?  One only knows, but when sentiment changes from bull to bear we will most likely see these same signs that show us that the bull sentiment is changing and the bears are seeking to post LHs and LLs to move the price back down.

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Example of trading with the trend at a point where trend and resistance meet.

Note the attached chart is GBP/JPY H4.

There are two charts. The larger H4 chart shows the overall picture. You can see along the top trend line how lower highs are posted. Because of the economic crisis the bottom drops out making it a very unusual set of circumstances, but still along the way the market is showings where it is trending and ranging.

In the h4 chart up close we see the trade opportunity at the red 1. Here we see lower highs being posted. We have our resistance marked and are ready to trade when the price reaches this point. The short enter here was between 122.60 and 122.80 roughly. I got out with about 150 pips though the trade was good for 200 pips total.

At present the price has returned to this range and is testing this area again. Because of the quick return and the pressure being put on this resistance we are likely to see it break soon; next week if the price does not gap high over the weekend. Since the line is near term and only weeks old we must take this into account. If there is not a gap above this line you can play the break next week one of two ways. You can trade the break of this area on break (using the Nick B method for breaks) or you can wait for a pullback and confirmation of this line (your planned exit would be 123.75 – 123.95). Many times a price area will be broken and then retested before the price continues in the direction of the break.

These can be good times to enter because the risk can be small since your stop loss does not have to be too far away. At times you can nail the entry

to the pip.

PLEASE REMEMBER WITH GBP/JPY THAT WE ARE TRADING IN AN AREA WHERE THE PRICE HAS NEVER BEEN BEFORE. THESE LINES ARE ONLY WEEKS OLD SO PROCEED WITH CAUTION.

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GBP/JPY H4 Trade Scenarios

See attached image.  Image is GBP/JPY H4.

We have a short range falling wedge.  Normally this is considered a reversal pattern, but we need to take into account 1) what we know presently about the plight of Sterling and 2) the area we are in has no long term history.

Looking at the chart lets walk through the numbers.

1.  We have support here as the lowest point the price has ever been before.  We also have a downside trend line.  But this trend line is more in the guessing range since we don’t have much more to confirm than a couple of touches.  We will be looking for shorts below 188.86, but will need pay attention to the possible trend support though my guess is that it is weak if that is where it is.

2. Here we see topside trend line forming the bear move.  Note how we are seeing HLs (higher lows) posted as the price moves.  On Friday last there was a great short off this line when it converged with decent resistance.  That move ended up being 200 pips.  If you choose to trade the trend line I would proceed with caution based on the fact that we know that trend lines do not hold as much weight as support and resistance.  For the sake of learning let’s say that the attached picture shows the present price at the top side trend line and we choose to short.  Where would be the safest place for our stop?  Above the trend line or above resistance at the red 3 area?  The safest place would be at the red 3 area because that is the last line of defense for the current trend.  Remember that a trend is supported by LHs and LLs in a bear move and HHs and HLs in a bull move.  We would not want to put our stop above the trend line on a short in the example I’m giving because the price could easily move through the trend but will run into that area of resistance and then move back down and fall right back into the bear trend pattern.  If this happened the theory holds that the price did not technically post a lower high which means that the bear trend is still in effect.  This happens all the time so trading trend lines in between S/R requires you to remember that S/R trumps that trend line and has more influence.

3.  Here we are looking for longs over shorts.  Though this area has been a place where sellers have sold before, for the price to return here would require it to break the trend line so though the price was shorted here before and we would not rule out a short again we are taking into account that bulls were able to push the price beyond the boundaries of the trend line.  Through this zone we are looking to enter long with our stop on the other side of support.  The target off this H4 chart would be 123.93 and that is where we would be looking to exit.

4. If we are long at this point we would be looking to exit our position since this is an obstacle to continuation.  But we would want to hold if we suspect that a continuation is in order so that is a judgment call based on when the price would arrive at this location.  News may be coming out or maybe has come out in favor of your direction, etc. etc.  The goal is to get our profits to run when we can.  That’s when real profits are made.

Possible shorts may be here too but if you take a short here then you’ll need to be paying attention to bottom side trend lines that have formed since at this point sentiment would have changed from the previous trend and we should see now higher highs and higher lows being posted since it would now be a bull move, whereas before it was a bear move.

5. Through the red 4 we would be looking for longs

Use H1 and lower to help filter your H4 chart for entry/exits, but remember that if you are trading off an H4 frame with H4 S/R then you don’t want to exit on a M15 or lower chart.  You can use lower frames to monitor, but exiting an H4 chart on M5 is silly since your entry was designed for a longer target trade.

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This chart we are looking at is a good example of how we can see and mark where the market changes sentiment.

Note that the attached chart is GBP/JPY H1.

Remember that as we are establishing support and resistance we are also paying attention to the (HH) higher highs and (HL) higher lows of a bull market and the (LH) lower highs and (LL) lower lows of a bear market. As the market posts HH and HL or LH and LL it is helping us to establish where the real trend line is being established.

Look at the attached image.

The red circles mark where we are seeing higher lows. The blue circles mark where we are seeing higher highs. As long as HLs and HHs are posted then we can follow the bull sentiment of the market.

Let’s look at the green circle now. In this area we have a good example of why we always give more weight to support and resistance over trend lines. The trend area is broken, but see how it gives credence to the line of resistance. Knowing that support and resistance trumps trend lines keeps us from going long there and potentially buying into an area where selling is about to take place. I’m sure novice traders took longs in that area off what they thought was a break outside the trend area and then got stung when it reversed on them at resistance (140.82).

Now look at the highest point in this chart. We see that a new high is posted keeping in line with the present sentiment. But things are about to change and we can know that they are changing.

As sellers come in at the top the price begins to descend. When it reaches the 139.20 area we are at the bottom of trend. It’s a difficult decision at this point and evaluating other charts is important to help us trade this area if you choose. For example if you look at a D1 chart this may assist you in holding off a few more sessions to see what the price is going to do since it was starting to appear as though things might be changing.

We see that the price extends through this trend area, BUT we do not consider it a change in sentiment until it breaks the last HL. In this case it is about where that red line is located. As long as the price remains above this line we still consider the sentiment bullish. The price could have remained above this area, ranged and then resumed its bull move. Once the price broke this area we see that the sentiment is changing. A HL is not posted but now we see a new low posted. When buyers come in and push the price back up you see the orange circles take over and now we are posting LHs and LLs.

At the huge red ! mark we see a great trade signal. First note how we see the sentiment changing to a bear market. At the red ! mark there is a long shadow that extends upward, NOTE where it is in relation to the last highest point in this area (the previous orange circle). Though that shadow is pushing the limits of the trend it does not break higher than the last LH so we consider the bear sentiment to still be in effect and the price moves back down revealing to us an evening star and a good entry point.

The red NO area is a no trade zone (assuming you are not scalping off of M1 or M5 charts). If you missed the entry at the top, trading in this area is like sticking your hand in a blender that could turn on at any moment. The next best trade opportunity in my opinion was at 137.30. I shorted this area and made some decent pips and shorted it again on a pull back picking up the added momentum of the change in sentiment and the desire of the market to post a new low in order to keep the trend.

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If you are new to forex make sure you memorize at least 15 to 20 of the most used and noted candlestick formations. It would be highly beneficial for you to read one or both of the following books:
Amazon.com: Japanese Candlestick Charting Techniques, Second Edition: Steve Nison: Books
Amazon.com: Candlesticks Explained: Martin J. Pring: Books

As well it would be very helpful to memorize and be able to identify the most basic chart patterns and what they mean:
Chart Patterns – StockCharts.com

Read this so you’ll stop letting your losses run.

http://rapidshare.com/files/190966165/Fairy_God_Trader.pdf

Accurately finding support and resistance is unequivocally the first and most important step in trading.  If you are unwilling to make this a priority and work at mastering this skill you will be substantially handicapping your trading.

Step 1:
Open your platform and begin with a H4 chart and find areas that have been used as BOTH support and resistance. Remember that lines change polarity and at one point a line may serve as resistance and later as support. Often there is a range of S/R that could be a couple pips to 40 or so. Be as accurate as possible. Mark the top and bottom of this S/R range because in later steps you will look at lower time frames to help pin point in that range the line the banks will be watching. The reason we start with H4 has to do with economics. Value is determined over time. If you were to sell me your car and I was not allowed to look at any information other than information about that car on the day you were selling it to me I would have a hard time determining what the value of the car should be, and you would have a hard time giving me an accurate price. But, over time we can determine the value of the car based on past history of when it was made, what was it sold for before, past demand and supply of this car, etc. etc. The 4 hour time frame severs best in giving us a combination of the most current and reliable lines. A day chart is a tad too long and makes it a bit difficult to accurately determine levels, and an hourly a bit too short to be as reliable as we would like.

Step 2:
Taking the support and resistance range found on the H4 chart move to a lower frame (M15 to M5) and search this area for a more accurate assessment of support and resistance. The M5 or M15 frame serves as a microscope for each H4 session and will show you with detail what happened over each four hour period allowing you to see even more clearly where the price was finding the most S/R. Evaluate the last few times price used this level and buyers and sellers were in the market. Look for the place where the price has bounced the most (M5 will give you more detail). This point will hold the most significance in the S/R range you found on H4. Since people are entering and exiting the market at different points around support and resistance, often there will be more than one line choice on H4 (that is why we create a range) so by looking at lower frames you can more accurately determine value and find the price that is best. The more accurately you can determine value the more you can reduce the draw down on your trades. It will help you tighten your stop losses and risk less to gain more.

Step 3:
Now that you have your strongest areas of support mapped out you can begin to look for areas of support and resistance starting with a H1 or M30 chart that exist between your most significant S/R lines. There are many opportunities for trades between your H4 S/R lines and your D1 lines (step 4). Remember though, trades taken on S/R in smaller time frames means that your targets need to be smaller. If you are taking a trade off M5 S/R then you should not be targeting a 100 pip gain. This process of placing lines shows you how time frames should work together and how to properly use lower frames. And you should also be encouraged to know that you don’t have wait for trades to come to those H4 lines. You can trade lower level time frames off S/R, but PLEASE, PLEASE, note that the lower you go the riskier the trade becomes because S/R on lower frames (the S/R we find between your strongest support lines found on H4) becomes increasingly less reliable. The logic behind this is that in the lower frames the opinion of the field of traders begins to broaden. So if you have 20 groups of traders and they all have a different opinion you can see how crazy that could become. That is why I often call these areas “no trade zones” because the risk is so high. With H4 lines (higher frame lines) the opinion of the field of traders is far more unified. Your 20 groups of traders have the same opinion and will most likely react the same way, thus giving you easy gains and potentially substantial gains of 100 or more pips. The more unified the field, the higher the probability of success, and those trades are the ones that pay the most.

Step 4:
Go to your D1 chart and evaluate S/R levels there off what you found on your H4 chart. The D1, M1, and W1 charts will also give you lines for future trades with huge payouts, but start with H4 first and then compare with D1 and higher.

NOTE:
Do not use M5 – M30 to originate support and resistance levels. Use M5-M30 for precision, to determine the exact point of support or resistance AFTER your S/R ranges have been established on H4. Do realize though that once we find that line we don’t just throw out the range. Those small S/R ranges are there for a reason because people are exiting and entering the market at different times. Just make note of this so you don’t panic if you take a trade off a line and you have some draw down.

The easier that support and resistance is to spot increases the chances of that line being an area for the price to react so that we see previous buyers sell and people waiting to sell enter or where previous sellers buy and people waiting to buy enter. The easy to spot lines are the ones that most often pay the most and have a higher probability of success based on the fact that the majority of banks will stake larger positions in those areas.

If a line has become an area where the price has floundered back and forth then that area’s significance diminishes. The more the banks do not pay attention to a line the more we do not give it credence. We are insignificant so we follow their lead.

About trading against the trend: Your choice to trade against the trend should be determined be a ratio. The higher the time frame the safer it is the trade against the trend. The lower the time frame the more risky it becomes to trade against the trend. I would suggest that if you are taking trades off S/R on M5 or M15 that you never trade against the trend. Some people say never trade against the trend. I think this is ridiculous to say never, but just know that it does increase risk so you better have some experience under your belt. We can never be 100% positive. All we can do is reduce risk and increase probability.