4 ENTRY Techniques using Horizontal support and resistance
4.1 Historic Support and Resistance, Price Patterns and Channels
4.2 Recent Highs and Lows
Besides the support and resistance levels mentioned before most traders treat recent highs and recent lows as important support and resistance levels. These are levels that can be treated as bounce levels for Bounce traders or potential breakout levels for Breakout traders.
When the price approaches a recent high or low treat it as a possible support and resistance area where the bulls and bears will put up a fight.
- If you are a bounce trader you can expect some short term or scalping bounce opportunities
- If you are a breakout trader wait until a new high or low is confirmed for good breakout trades.
4.3 Round numbers
Round numbers (such as 1.5000 or 1.3200) create natural support and resistance levels for certain currencies. That is because the big players in the market (governments) are particularly sensitive to the price moving over big round numbers. The chart below shows the EURUSD trading in a range of 400 pips. And notice the amount of BOUNCE trade opportunities compared to breakout trade opportunities.
If you are a bounce trader assume that the price will bounce when it reaches a round number and enter on the round number with an appropriate stop of 50 or so pips and a 50 pip target. Some traders use round number grids to trade this way.
4.4 Using Candle stick formations
Most Forex traders use charts setup as candle charts. Candles give so much information at a glance. Japanese candles give a good visual summary of the path the price took during the single (one) time span of the chart.
If we say that we are using a 1 hour chart this means that every candle on the chart represents the price movement the price took during that 1 hour. A 1 hour candle would therefore equal the movement of the 12 five minute candles that can be found on the 5 minute chart.
The key information obtained from every candle is; the price high, the price low, the opening price, the closing price and the direction of movement from its colour.
The area between the opening and closing price is the body of the candle and represents the actual gains or losses made by the BEARS or the BULLS. If the price goes up (the BULLS have made gains) during the period of the candle, the body is normally blue. When the price goes down (the BEARS have made gains) the colour is normally red. When the opening price is equal to the closing price there is no body. If the BULLS or the BEARS make BIG gains during the period of the candle you get a LONG Candle.
Trends are easy to see due the BULL and BEAR coloured candles. They give a good representation of the battle between the BULLS and the BEARS during every period of the chart.
Historic breakout points and bounce points are easy to see and are normally represented by Long candles.
The most important reversal candle formations are spikes (thin long candle wick) and railway tracks (2 candles going in opposite directions at the end on a trend) Bearish spikes show that the BULLS were nicely in charge and suddenly powerful BEAR orders not only stopped their progress but reversed the trend completely. One of the strongest market intervention moves you can find. The opposite applies to bullish spikes and railway tracks.
The Problem with trading candle sticks is that they are lagging signals. Their formation has to take place before you can trade them. This gives some pips back to the market and makes them somewhat less effective. Unlike the support and resistance and volume entries which can be made very close to the turning point.
They are however very powerful signals at the end of a trend and at the start of a new trend. You would enter on the close of the candle once the spike or railways tracks have been confirmed.
There will be a more detailed module on candle stick trading in the Simple N-Easy series to be published at a later stage.
Strongest Candle stick signal ever
The candle formation shown on the left is one of the strongest reversal technical indicators you can ever receive.
The price tries to make new highs (the blue candle with the spike) and is rejected. It then makes a bigger effort to make new highs and is not only rejected (as shown by the big spike) but pushed back so much that the candle changes colour to red.
You need to enter on the close of the red candle and manage the transaction from there on. The stop is at the top of the spike. The target is unsure and needs to be managed.
Basic technique on How to trade turning points using Candles
- 1 Set your charts to candle sticks on your selected timeframe (Can be used on all time frames)
- 2 Trade the reversal based on the close of the reversal candle once the reversal formation has been confirmed
- 3 Trade in a reasonable volatile time of day (See time of day module)
- 4 Enter stops and targets appropriate to your currency, timeframe and time of day
- 5 Amend this approach based on your own experience.
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