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This article is written with the intent to explain basic supply and demand economics and how retail

forex traders could benefit from this knowledge. Most retail forex traders are not finance geek and
have limited knowledge about market dynamics and how forex market operates.
Early Trading Years
I entered the world of forex trading about four years ago and I came from a Management
background. When I started trading, I did not have any clue whatsoever about forex market. I used
to visit different trading forums and financial news websites in search of a profitable system, where
I saw different explanation of price movements. Some financial news website would say that the
reason S !ollar fell against "uro because it reached a #$% fibonacci retracement, whereas another
forum would state that the price fell because it hit &$$ day moving average, other financial experts
would argue that prices fell cause it touched a descending trend line and a bunch of experts would
say that price fell cause it reached a resistance level.
's a novice trader, I used to scratch my head because all these different explanations were too much
for me to grasp and it was hard to keep up with it. 's a result, I used to fill my charts with tons of
indicators, where it was sometimes hard to even see price candles. I knew that there has to be some
logical explanation for all these price movements. So I decided to dig deep and do some research
and find the one idea that above all is what drives the market and is displayed on our charts. It did
not took me long to reali(e that all these price movements, I see on currency charts are result of
supply and demand imbalance. If price is moving up it means there are more willing buyers for that
currency at that point in time and if it is moving down it means there are more willing sellers for
that particular currency. )rice is simply moving from one (one to another (one to fill these orders.
The information I am presenting in this article about Supply & Demand is learned and attained from
numerous sources and I will try my level best to explain it in the simplest of form. Some folks
might disagree with my point of view, but I always believe that two people might see similar thing
and have completely different point of view. So let*s get started+
,. What is the definition of Supply -
'. Supply is the .uantity of an item available for buyers at a certain price.
,. What is the definition of demand -
'. !emand is the .uantity of an item which is wanted by buyers at a certain price.
,. What is imbalance of Supply / !emand-
'. 0I1 If the available Supply of an item exceeds the demand for it then prices tend to fall.
0II1 If demand for a certain item exceeds the available supply then prices tend to rise.
,. What is )rice e.uilibrium -
'. The market price at which the supply of an item e.uals the .uantity demanded.
2rom above definitions, we now understand what is supply, demand, imbalance of supply &
demand and price equilibrium. 3ow let*s go into further details with some examples.
2rom above definitions, we now understand what
is supply, demand, imbalance of supply &
demand and price equilibrium. 3ow let*s
go into further details with some examples.
Example - Supply Exceeds Demand
2rom the above explanation, we now know that
supply and demand are fundamental driver of
price. 3ow lets look it into simple context to
better understand how supply exceeds demand. 4et*s assume its winter season
and a customer goes to an electronics retail store to buy something. 's he enters a
store he sees a sign board offering #$% discount on air conditioners, but he hardly see anybody
interested in buying it, despite the low price. What could be the reason for it. The simple and logical
reason is since its winter, and the weather is cold, this item is not wanted by buyers cause it*s of no
use to them right now, however since the store is aware that there is lack of demand for this item,
they are offering discounted price to entice buyers. This is classic example of supply exceeding
demand vi(. there is less demand for air conditioner in winter season, but more supply available, as
such item was offered at a discounted price.
Example - Demand Exceeds Supply
3ow lets look at similar scenario to understand how demand exceeds supply. It*s winter season and
a customer goes to an electronic retail store to buy a 5eater, but it was out of stock, so he goes to
another store hoping he would get it there, but unfortunately they are also out of stock. Thereafter,
he goes to third store and finally he sees heaters available, at that store, but the problem is there are
lot of customers already standing in line to buy it. Moreover, there is no discount offered on heater,
in fact the price is much higher than normal, but lot of customers are still buying it. This is classic
example of demand exceeding supply vi(. there is more demand for heater being a winter season,
but available supply is limited. Since many stores are out of stock, this particular store which have
heaters raised the price due to excessive demand.
Example - Price Equilibrium
3ow here is another scenario to understand )rice e.uilibrium. It*s winter season and a customer
went to an electronic retail store to buy a 5eater, there he sees enough heaters available at the store
and some people are buying it. The store is not offering any discount nor the price is higher than
normal. Since there was enough .uantity available for this item and limited number of customers
are buying it, the customer decides to check another store to see, if he can get a better price. 5e
knows that this item will not be out of stock for the time being, so he visits another store and notice
the same scenario as store one. This is classic example of price e.uilibrium vi(. a supply of heater
by retail store / demand by customers are e.ual, as such price is not at discount nor it is higher
than normal.
How to identify Supply & Demand e!els on "orex #$art
3ow that we have better understanding of price e.uilibrium and imbalance of Supply / !emand.
We will go a step further and see how we can benefit from this knowledge in forex market.
's in any market the purpose of trader 6 speculator 6 investor is to buy an item or instrument at
discount 0wholesale price1 and sell at retail price, the forex market is no different. We as retail
traders are unable to see actual buy6sell orders in forex market, but we can apply our knowledge of
supply / demand to identify our next level of interest, where we believe smart money 0large
players 6 institutional traders, real market movers1 are most likely to place their orders. 7ur main
area of interest would be, where price made a substantial move from a particular (one and where
actual imbalance of supply and demand between buyers and sellers occurred. It could be a series of
candles or one candle, but it should clearly show a decision point where either buyers or sellers took
charge. 7nce a (one is identified, our 8ob is to wait until price approaches that (one again. We could
either place a limit order or watch price action to enter trade at that (one.
's with any system or strategy we cannot be &$$% sure that price will again respect that (one, but
there is a higher probability than not that price would react at that (one, considering the way price
left that level the first time, suggest that buyers6sellers consider it as an important (one. 4et*s look at
attached chart example, which is self explanatory+
Price Structure
There are four common structures that are used to identify supply / demand levels on forex charts+
&1 !rop9 :ase9 ;ally
<1 ;ally9:ase9!rop
=1 ;ally9:ase9;ally
>1 !rop9:ase9!rop
I firmly believe that once a trader understands supply / demand dynamics and trade with patience,
discipline and proper risk management, he6she could achieve success in trading.
Here are some of my fa!orite %uotes from successful traders&
!on*t think about what the market*s going to do, you have absolutely no control over that.
Think about what you*re going to do if it gets there.
'll we can do at best is look for historical reasons and apply this to a level or price area for
possible future moves. Trading is neither science or art, it is a reflection of what value
humans place on a particular financial instrument at a given point in time.
If you must play, decide upon three things at the start+ the rules of the game, the stakes, and
.uitting time
T$e Holy 'rail of Trading ()*)+
Risk Management / Part 2 - by Ken
)art & of this article can be found here 9 @
In the following practical demonstration of ;isk Management, I have scrolled ";6S! chart back
to 7ct <$&$ as the starting point of this exercise. Ahart contains only Ahaos Semafor indicator for
showing = levels highs and lows. )urely for information not for our entry and exit decisions.
Time to get on with our &$ exercise trades.
Trade ,&
We have one fresh supply (one and one demand (one. The fresh word here refers to (ones are not
been visited by price yet. Then we have some mid supply (ones which we will ignore unless we see
some decent opportunity. 3ow we wait and see what price does.
3:. I use an alert indicator which plays a sound when price is approaching wherever I place the
alerter's horizontal line. I don't have to sit and watch the price on any particular chart. lease see
end of this article for the indicators mentioned!used in this e"ercise.

See how price sliced through the first mid9weak (one. We cannot see any decent )' here to prompt
us to sell, especially considering demand at bottom was established with an engulfing candle. So we
ignore it. If upper supply works and price turns down towards demand then so be it. We*ll wait for
the next opportunity. !o not worry about missed opportunities. Markets present no ends of entry
opportunities on a daily basis.

's expected all weak (ones are taken out. 'fter price touched the main supply (one we have been
watching, it produced a 8uicy bear engulfing candle. 3ow we are looking for an entry opportunity
that fits in with our ;isk )rofile. It comes first and second candle after the engulfing one. Since we
are all excited and cannot wait we enter as soon as price hits our stop range. 3ow we have to wait
and see without doing anything stupid in the meantime.
)lease note that this entry doesn*t fit conventional supply and demand trading. Textbook entry
would have been when price traveled further up within supply (one so that we can have our >$ pips
stop 8ust outside Babove the upper borderC the supply (one. 5owever, after price hitting supply (one
then seeing such a nice engulfing bear bar we decided it*s worth taking the risk and entered at first
possible opportunity.

The price hit our first target. !ecision time. !o we close or let it run- 7bviously, we don*t take a
long time here to think about closing or not. We should already have a pretty good idea by now
what we*d be doing when price hit the TD&.
We already know that best possible signal we hope to see on charts is a nice engulfing candle on
right place. Meaning in and around strong (ones. We have a nice engulfing and a decent )'. In this
occasion we decide to move our stop break9even E, define TD< and let it run.

Since price sliced through our TD<, we decide to move our stop to TD< and let it run. 4ooking for
the price to hit the bottom demand or at least come bit more close to it.

We were proven to be right on this occasion. With patience and without unreasonable fear we have
managed to maximi(e our gain by sensible trailing. We put our third and final target 8ust off the
demand (one to ensure .uick exit. 7ften price can mess around before hitting the actual (one.
Some may ask why that bull engulfing candle pattern on the way down didn*t work. 4ook at where
it formed- !o you see any decent (one around there- :esides, we put off from our entry radar
levels between the supply and demand (ones we decided to trade.
)lease note that not all price movement as straightforward as the above one. That*s why it*s very
important that when we catch a nice opportunity we don*t waste it with premature exits.
Trade , is closed wit$ )-. pips gain/

Trade )&
In accordance to our ;isk )rofile and dirt simple trading plan we take the buy in the demand (one.
7ur stop works out to be 8ust outside of the demand (one which is ideal.
3ow, there are various approaches on entries in and around supply and demand (ones. Some enter
when price hits the (one, some wait and see if the the candle makes it into (one, closes inside the
(one, or goes through therefore invalidate the (one. There are others who wait to see if price is
going to be contained in the (one by watching )' to give them some clues.
"ach approach has it*s own advantages and disadvantages. Waiting for )' confirmation may take
some time and it*ll most likely will happen outside the (one thus increasing stop pips count. 7f
course it*s still not guaranteed it*ll work. 7n the other hand taking the trade when price hits the (one
will reduce our stop pips count but we do not have any indication or clue if it*ll be contained within
the (one or not.
In my case I do not subscribe to any particular one. I use all of them depending on the (one and how
price travels, the speed price hits the (one. The above is a good example of for the first approach.
We have a fresh fairly strong looking (one which is established with an engulfing bull candle and
hitting the (one with fairly big 5& candle.

's you can see price hit our TD& nicely. Instead of closing we expanded our TD to about from F$
pips to &<$ pips and moved our stop to break9even E &G pips. 7ur TD< is almost hit but not .uite.
Since we moved :" to plus &G pips we can afford to wait and see.
'll looking good so far. We locked our trade. We are fairly safe. We won*t be taking any loss on
this trade unless something unexpected happens or we leave this trade like this over the weekend
and market gaps down to well below our entry price.

TD< also hit with a nice big bull candle. Instead of closing we decided to trail. Moved TD further
up and moved our stop to break9even E &<< pips.
We could have moved our TD further up but notice the left boxed dirty price action (one. We don*t
want to get involved in any dirty price action. It*s best to take what we have Bonce hit the dirty (oneC
and run. If TD= hit we*d be achieving over >+& reward ratio. 3o point getting greedy. If it slices
through the dirty (one so be it. We*ll wait for the next opportunity.
's this trade is fairly secured, we may go ahead and look for another trading opportunity on another

TD= is hit comfortably and Trade ) closed wit$ ,0. pips gain/
There is a nice bear engulfing candle in dirty (one which established a new supply (one. Why didn*t
we take a sell order around there. Well we already decided we*ll only trade clean and strong (ones.
What about that current bull engulfing candle then. 're we not going to trade it- Hes we would
consider this buy after a good engulfing bull bar around previous spike. 'dditionally, price has been
bounced from fresh demand and not reached any serious supply yet. 5owever, we cannot take this
buy trade as stop would be bigger than our ;isk )rofile allows us. We need to wait for the next
candle and see if it*s going to come to within our >$ pips range.

Trade 1&

nfortunately, price didn*t come down enough to allow us enter with a maximum >$ pips stop as
defined in our ;isk profile in fresh demand (one. 5owever, we took a sell order in fresh supply
(one without waiting candle finish or )' config. 'll was good other than amount of time price took
to reach supply (one.
's you can see it hit our stop and this Trade 1 closed wit$ 2. pips loss/

Trade 2&

' new (one established at new high with an bear engulfing candle. If the risk is small, newly
established (one looks attractive, looks a worth try. We will have to wait and see what kind of risk
level it*ll offer on the next candle.

We have our entry with bit lower than our maximum stop of >$ pips

Instead of closing we decided to trail as the candle following the one hit the target worked out
nicely. So, we moved the stop to TD&. 4ocked our F$ pips gain and moved the TD further down.

'gain instead of closing we decided to trail. Selling pressure looks .uite promising. 'lready sliced
through a minor ranging (one and gunned into bigger one. !ecided to go for the full monty by
moving target all the way down. 5owever, this doesn*t mean we will not keep trailing at reasonable

Target hit on weaker demand (one. Trade 2 closed wit$ 2.3 pips gain/
're we going to buy here- 3ot as yet. It*s a weak demand (one and we don*t see any convincing )'
as yet. So, we wait and see.

3ow we have our bull engulfing candle. 7nly downside is it*s on a weak (one. We can not take the
entry as yet. )rice is well out of our stop range.

Trade 3&
"ven though )' and levels have some warning signs for buyers we went ahead and bought it.
Managed to reduce stop si(e to <I pips.

Stop is hit. Trade 3 is closed wit$ )0 pips loss/
4ower main (one hit. We have to remember it*s no longer fresh (one. This is the second visit. We
cannot enter a buy. It*s outside of or stop range.

Since the lower demand was not fresh we decided to wait and see the finish of the big bear candle.
"ventually, it took out lower demand. "stablished new supply (one and selling pressure is still on.

Trade 4&
"ven though it*s a minor supply we take the sell trade almost within the (one. We could have sold
bit higher and therefore reduce our stop amount but we wanted a bit of )' confirmation. ' weak
but some indication that sell is still on. We had better indication as to where price may be heading
on the near left. 3ote those big engulfing bear candles within6around the supply (one.
Some call it previous demand (one turned into supply (one. That*s a bit too techie for me. The fact
is that sellers are in charge as we can see on the chart. 'll the remaining buyers from the origin of
the demand (one already used their buying power and remaining ones are wasted at subse.uent
'dditionally worth noting that we see on the charts new lower highs and two demand (ones are
taken out without much difficulty. "specially the lower main one taken out with such a (eal that we
need to take notice of heavy selling pressure. What this means is that selling the peaks may be
better option than buying in minor demand (ones.

When TD& is hit, we moved our stop :"EG and TD< to &&F pips. We let it runJ trusting our analysis
about heavy selling. We could have taken well over &<$ pips with further trailing but let it run and
it*s almost hitting our stop.

7n this occasion we got back previous low, but sometimes price takes the stop by a couple of pips
or so. 2or those who cannot handle frustration when such thing happens best to trail more closely or
close the position when TD& is reached.
Trade 4 closed wit$ ).- pips gain

Trade 0&

Why we took this long entry when we were convinced there are heavy sellers and were saying best
to sell peaks. )rice created a form of gap and hit the re8ection point. This knowledge may be out of
the beginner*s domain. So, lets 8ust say we see heavy selling up to a certain point then re8ection.
Since it fits to our stop range we want to try this newly established (one.

Kust short of our TD&. It looks turning against us. We don*t want the winning trade to turn into a
looser so we moved stop to :"E&$

Since we have a nice bull candle it would be shame to close here rather than trailing. So we move
the stop to TD& and TD expanded to TD< for &L$ pips.

TD< is hit and decided to close due to price structure on the left. Trade 0 closed wit$ ,4. pips

Trade 5&

Since we already have a supply (one 8ust above, we have decided to go with the newly established
supply (one 8ust below the existing one.
Note: #onventional supply and demand trading method advises us to wait for the price to visit the
established zone before entering the trade. $he reason for this is that establishing zone usually
ta%es more than a couple of candle. &owever, in this e"ercise we have been ta%ing trades 'ust after
a zone created. (e go in early if we see attractive ) when establishing a zone. )nd of course we
always %eep left of the chart under constant observation. (e loo% at left and trade the right.

Trade is developing nicely. TD& is hit. Instead of close we have moved stop to :"E<G pips and
expanded the target all the way down to near demand. 3ow we are targeting 8ust over <#$ pips. It
would be real nice if we get it. That would be over &+L reward ratio.

What the heck.. Since price moving nicely in our direction we have the opportunity to move stop to
our TD< and let it run. 5eavy selling pressure. We know overall market direction is south BdownC.
The downside is if it turns from here we*d be loosing a buy entry in demand (one.

!emand is taken out with ease. We have locked &+I reward ratio by moving our stop bit further
down. 3ow we can sit and relax. 4et the price do it*s thing. See what else it may offer. 't this point
it doesn*t matter a bit if it turns and hit our stop. If it doesn*t then we may be onto something bigger
here. 5owever, we will still trail it at a reasonable distance.

;un is still on. We have no rush to exit. We 8ust have to keep our greed in check here and let the
price do it*s thing. 'fter all we don*t catch such moves every day.

Traders with enough screen time will know that once price hits an important psychological level it*s
bound to react. We are trading ";6S! and it hit sub &.=$. 4ets assume we are new and not
familiar with such stuff. So we leave our trailing as it*s at L#< pips.

's expected bounced from new territories of &.<G. 7ur stop is hit. Trade 5 is closed wit$ 43) pips

Trade -&
We have missed the lower demand while waiting for our previous trade. !ecided to enter a long on
upper demand. Aouldn*t take previous hits as it was not in range of our stop. 's you can see our
initial TD is already hit. 3ot closing it. Moving stop to :"E and expanding the TD.

We will start trailing here as we don*t want to give back most of our gains.

Since it took out previous highs we keep trailing it. 'lready secured about <F< pips. 4et see if
market is willing to give us more.

Alosed here manually after seeing re8ection and especially engulfing bear candle. Trade - closed
wit$ 1.0 pips gain/

Trade &$+
We couldn*t take the sell order as it was 8ust outside our stop range by & or < pips. We 8ust cannot
say what*s & or < pips. We could take that sell. 4ook how it worked fine. Hes, but we cannot
compromise on our ;isk profile. 7nce it*s defined we must keep it*s rules to the pips, until we
decide to work out a new one. We 8ust cannot work out a new ;isk )rofile to fit in our current trade.
So best is too keep it if it*s working until it doesn*t over a period of time. !iscipline must be there at
all times.
We enter a buy order in newly established demand (one with smaller stop than our maximum.

Initial TD is hit. 'gain instead of close we started to trail by moving stop :"E=# and expanding the

nfortunately, on this occasion price didn*t go in our direction. It hit our stop. Trade ,. is closed
wit$ 13 pips gain/
So, we*ve looked at what the M'A! is, where all it*s components are derived from and what trading
signals it produces. 3ow we*re looking at how to trade with the M'A!. Traders use the M'A!
indicator in a number of ways to realise a trading opening.
The M'A! !ivergence
The M'A! 5istogram Arossover and !ivergence
The Signal6Trigger 4ine Arossover
The M'A! (ero line crossover
In our last section on The M'A!, the indicator is best used in trending mar7ets and s$ouldn8t
really be used in range bound mar7ets 9 not e!en to predict a new trend/ T$e :;#D
indicator allows us to determine $ow strong a trend really is 0or if weMre in a range1. If the
:;#D is $o!ering and flat around t$e <ero line t$en t$is identifies a range bound mar7et
and if t$e :;#D is trending strongly t$roug$ or from <ero =up or down> t$en t$ere will be a
strong trend trend. We can see this in the below Mc!onalds Ahart.
sing M'A! to Identify Trends
So the M'A! and it*s histogram should be used for trading in trending markets. 7nce we have
established a primary trend 0!ow Theory Tenet &1 there are a number of ways we can trade wit$
t$e :;#D on t$e continuation or t$is trend from it?s retracement 0Secondary Trend1.
Trading t$e :;#D Di!ergence
The M'A! !ivergence is either loved or hated by traders and often gives us false signals. The
!ivergence between the market price and the M'A! is signalling weakness in trend. When the
M'A! is moving in the opposite direction to the market price this is a signal that the markets
momentum M'H reverse at some point. :e aware though, that there are plenty of situations where
trend hasn*t reversed on M'A! divergences.
In the below chart we have examples of positive and negative divergence. )ositive divergence is
seen when the M'A! is increasing 0making higher peaks and higher troughs1, while less than (ero,
against a downtrend in price 0lower peaks and lower troughs1 N This is a :ullish !ivergence
0although the market is still in a bearish primary trend, we anticipate a bullish retracement or
reversal1. ' negative divergence occurs when The M'A! trends down, while above (ero, against
an up trend in price N ' :earish !ivergence.
These !ivergences occurs because the current price momentum still outpace itMs, growing opposite
momentum. This opposite momentum may take some time to be strong enough to win the day. Hou
can see in this case the Momentum did change while the M'A! was in positive and negative
divergence, indicated by the yellow line.
M'A! !ivergence
The M'A! divergence is an indicator which really needs to be used in con8unction with other
indicators. The M'A! divergence tells us trend may reverse at some point due to a shift in
momentum. 7ther indicators needed will include volume. Oolume is important here because as
momentum wanes volume should decrease, indicating a lack of conviction in the current trend.
T$is di!ergence =along wit$ $istogram resistance> is particularly useful if t$e di!ergence
s$ows a secondary trend =retracement> possible re!ersal/ This may indicate the primary trend is
about to begin again, which is a signal for trend traders to enter the market.
6nstead of an indicator t$at is going to trigger trading signals@ :;#D Di!ergence is really an
early warning system/ Many traders will wait for the trend to confirm its reversal before entering
the market 9 using t$e :;#D di!ergence as a filter@ only entering :;#D*signal line crosso!er
signals after a di!ergence. 's we can see in the above chart the green circles represent possible
entry points where the M'A! crosses the signal line. Trend traders may give the &st circled entry
point a miss, as it*s against the primary trend and hopefully 8ust a retracement to the downward
trend resistance line. The <nd entry point would interest a trend trader though, as it*s signalling a
trend and momentum continuation. Many divergences will last for a long time, so patience is
Trading t$e :;#D Histogram
's well as setting up trading strategies around the M'A! divergence and its signal, traders may
also set up trading strategies around the M'A! 5istogram. ;emember, the M'A! histogram is
a derivative of the M'A! and it*s G day M' signal 9 measuring the distance between the two,
therefore changes in momentum. There are two ways of using M'A! histogram to trade 9 The (ero
crossover and the divergence. The crossover will produce actual trading signals, where momentum
and trend has changed, while the divergence is more subtle. The histogram divergence is almost a
filter, or early warning system. It allows traders to see slight changes in momentum 0even though
price trend looks the same to the naked eye1, which may lead to a full blown trend reversal in the
future. Traders may filter out all M'A!6signal line triggers that aren*t associated with a
Trading t$e :;#D Histogram Aero #rosso!er
The 5istogram (ero line crossover occurs when the M'A! e.uals the M'A! G9day moving
average 0it*s signal1. It*s exactly the same as trading the M'A!6signal line crossover as discussed
later in this section, 8ust graphically different. So, we won*t spend much time on it here.
Trading signals are triggered when the the histogram crosses it*s (ero line. When the histogram
crosses above the (ero line buy signals are triggered and when the histogram crosses below the (ero
line, sells signals are generated. I*ve shown this in the chart below. 's shown these signals occur
when the M'A! and it*s signal cross. 7nce again, the :;#D $istogram s$ould only be used in a
trend following strategy/
Trading The M'A! 5istogram Arossover
Trading T$e Histogram Di!ergence
The histogram divergence is used to anticipate a M'A!9Signal crossover 9 an early warning system
if you like, when trading with the trend. It can be used effectively as a filter to all those
M'A!6signal line crossovers, filtering out crossovers that donMt have a divergence associated with
it. There are < types of histogram divergence 9 The )eak9Trough and Slant divergences. In both
cases a full9bodied di!ergence generating o!er a few wee7s is a better indicator than a shallow
divergence developing over a few days N so go long and large, not short and shallow.
We have two examples of the Pea7-Troug$ Histogram Di!ergence N one )ositive and one
negative. ' negative 0or bearish1 divergence forms when the histogram makes consecutive lower
peaks and the M'A! and price form consecutive higher peaks N price momentum is weakening in a
similar way to the M'A! divergence above. This can be seen in PThe M'A! 5istogram )eak9
Trough 3egative !ivergenceP Ahart .
We have a histogram negative divergence indicating a possible price reversal to the bearish side.
This price reversal is confirmed when the M'A! crosses below the signal, which could be a trade
entry point to short the S! against Kapanese Hen 0green circle1. 's with the M'A! divergence
the 5istogram divergence indicates many false trade signalsJ so itMs used as part of an overall
trading strategy where other trading tools are also utilised.
The M'A! 5istogram )eak9Trough 3egative !ivergence
' )ositive histogram !ivergence forms when the M'A! and price form lower troughs and the
histogram forms higher troughs N price momentum is turning away from the downside, to a bullish
trend. This can be seen on the above chart QM'A! 5istogram )ositive !ivergenceR where the
lower well9defined troughs on the M'A! are highlighted in ;ed and the 5igher well9defined
troughs in the histogram are highlighted in green. 3otice M'A! moved to a lower low in late May,
but the histogram formed a higher low. It follows, if traders are using this divergence as an early
warning signal before committing, a good entry level maybe Kun Lth or Kun &=th when the M'A!
crosses above the signal6trigger. ;emember, this is a trend following indicator.
The M'A! )eak9Trough )ositive !ivergence
T$e Slant di!ergence acts the same way as the peak9trough histogram divergence, but is minus the
peaks and troughs. The 5istogram in both the positive 0bullish1 and negative 0bearish1 divergences
will slope towards the (ero line indicating that price momentum is wea7ening and the price of the
security is maybe about to turn. 0;emember the histogram measures the distance between M'A!
and itMs G9day moving average signal line. Momentum weakens as these lines converge1.
In the below chart we*ve (oomed into a section of an I:M weekly chart following a primary up
trend. Within this primary up trend we can see two retracements. Two positive histogram slant
divergences have been highlighted, where the histogram diverges with the price and the M'A!
itself, indicating a momentum change. If traders are using the histogram divergence as an early
warning to possible momentum change then they will act on the buy signals where the M'A!
crosses the signal line 0or where the histogram crosses (ero1. These buy triggers are highlighted
with green circles. These two bullish divergences bring I:M out of retracement back on to the
primary trend.
Hou can also see two negative divergences, one a peak9trough divergence 0May9Kul GG1 and one a
possible slant divergence 0!ec GF1. Trend traders will use these negative divergences to highlight
where the primary trend maybe about to retrace and sell on the M'A!9signal crossover.
;emember, other indicators should be used as part of your trading strategy.
T$e :;#D Signal*Trigger #rosso!er
We touched upon the trading possibilities of the M'A! price crossover in the section N QThe
Moving 'verage Aonvergence !ivergence N M'A!R. The signal crossover is the most common
M'A! signal 9 when the M'A! crosses above the G9day "M' 0"xponential Moving 'verage1
trigger line a buy 0or exit the short1 signal is created and when the M'A! crosses below the signal
line a sell6short signal is created. T$is is a great signal confirmation in itself@ or Bust after a
di!ergence and is generally traded with other indicators to get a clearer picture of where
momentum is going. 'gain, this is better used in trending markets.
:elow, we have an S/) #$$ hourly chart in a primary up trend. We can see how traders utilise this
indicator in a trading environment. 7n the <<nd the M'A! 0:lue line1 crosses below the G9day
"M' trigger line. This indicates that traders should sell a long position. Indeed, momentum shifted
to the downside until the M'A! crossed above our trigger 0white line1 on the <Ith. This crossover
on the <Ith is a buy signal where momentum reversed again to continue the primary trend. In effect
the area between this sell signal and buy signal is a primary trend retracement.
The signal to exit this long position comes on the #th when the blue M'A! crosses under the white
signal. Trend traders may sell here and await the retracement to follow it*s course. 7n the Ith we
can see a criss9cross buy6sell signal. 'nyone entering a buy here would have been burned, as price
continued to fall and a .uick strong sell signal developed. In fact we can see a negative divergence
here, indicating a turn in momentum to the downside. This turn to the down side may have been a
retracement or full blown trend reversal. 7ther indicators need to be utilised to indicate whether the
retracement is to continue,or not... se volume, 2ibonacci retracements and see where support and
resistance are before trading.
M'A! Signal 4ine Arossover
In the above example I*ve indicated that traders will sell on the retracements and buy on the
continuation of the primary trend. This may not be the case for all traders. 's part of a trading
strategy, a long9term trader may be happy to keep his long position going into a retracement.
5e6she may have a long position that only gets sold when long term trend lines are broken, or when
previous support areas are lost. :y the end of this course, hopefully you*ll be aware of many
trading strategies and pick the one best for your needs.
If you find yourself in a situation where you see a buy signal crossover 0M'A! crosses above G9
day signal1 above the (ero line. or a sell signal crossover below the (ero line, this indicates
momentum is continuing and these signals are still valid. Kust be aware of any divergence that you
see, indicating the possible change in momentum in the future.
T$e :;#D Aero ine #rosso!er
's the name suggests the M'A! (ero line crossover highlights buy6short positions that may be
profitable to a trader. C$en t$e :;#D crosses t$e <ero line it indicates t$at momentum $as
already re!ersed. Traders will employ other indicators into their trading strategy to try to
determine whether itMs still a good trade to enter into. To determine a strong trading signal The
M'A! will pass the (ero line in a strong manner at a decent angle. This will also coincide with a
strong histogram indicating good price momentum continuation. If the M'A! crosses (ero flatly or
8ust above the (ero line this indicates a range, which isnMt good to trade with The M'A!.
In the Ahart :elow This strong signal is highlighted on the left where the M'A! is also moving
away from the G9day trigger line. This strong M'A! and rising histogram 0the difference between
M'A! and trigger1 shows good rising price momentum N a good buy signal. In this situation the
trade sell signal occurs when the M'A! crosses under the signal. 's the M'A! heads towards
(ero a QM'A! (ero line crossoverR trade should be anticipated, but only if it crosses in a strong
manner. We can see that when the :;#D crosses bac7 across <ero and t$e $istogram is strong
9 a good s$ort signal. We can exit the trade at the next M'A!6signal crossover.
In the below example out trading profits are indicated by the green and red trend lines. If we had
traded the M'A! signal6trigger crossover our profits would have been greater between the two
trades 0indicated by the grey trend lines1. 5owever, using the M'A! (ero line crossover is an extra
confirmation that momentum has turned and strong, as well as triggering less false signals. In effect
the (ero line crossover is another way of looking at the double moving average crossover, as when
the M'A! crosses (ero, the < moving averages cross each other.
M'A! (ero line crossover
#$anging T$e :;#D Parameters
The standard setting for M'A! is the difference between the &< and <L9period "M's. Ahartists
looking for more sensitivity may try a shorter short9term moving average and a longer long9term
moving average. M'A!0#,=#,#1 is more sensitive than M'A!0&<,<L,G1 and might be better suited
for weekly charts. Ahartists looking for less sensitivity may consider lengthening the moving
averages. ' less sensitive M'A! will still oscillate above6below (ero, but the centerline crossovers
and signal line crossovers will be less fre.uent.
To Sum Dp
The M'A! and M'A! 5istogram are great for spotting trend, identifying changes in trend / price
momentum and establishing trading trigger entry / exit points. Many trend following trading
strategies will have M'A! at their heart. The M'A! can*t tell us if prices are overbought or
oversold though and as the M'A! is a derivative of price it*s difficult to compare Momentum
against different stocks, or against historical prices of the same market. :ut it*s uni.ue in bringing
together trend and momentum. To compare other markets and historical prices we can use the
)ercentage )rice 7scillator 0))71. This is M'A!*s cousin and we*ll talk about this next.
We can set the indicators price action sensitivity. The sensitivity of the indicator to price action
determines how .uickly the trader enters the move and how accurate these trading signals are. If the
indicator is set to low sensitivity then you generate less false signals, but you may see the move too
late, or not see it at all. With high sensitivity you are more likely to catch the move into the trade,
but you may generate false trading signals. 2or instance a swing trader 0trading with a hori(on of >
to # days1 may set the M'A! to =, &$, &L once they*ve drill down to an hourly chart from a daily
chart. ;educing the parameters of the moving averages will increase the sensitivity and highlight
more signals 9 good and bad. Dood charting software will allow the parameters to be changed.
Technical analysis is not an exact science and although these indicators can increase the probability
of making the correct trade, many will go against you and large losses can be incurred. Hour own
trading strategy needs to be formed and hopefully you*ll be on your way to achieving this on
completion of this course.
2ibonacci 02ull name+ 4eonardo )isano1 was a &=th Aentury Italian mathematician who developed a
se.uence of mathematical numbers, which described how life is bound by the same mathematical
principles. We can use his findings to interpret 0in mathematical and charting terms1 how the
individual ceases to act alone, but acts as a collective, making group decisions. We*ll find out how
2ibonacci*s 0shortened to 2ib*s1 mathematical relationship between his se.uences of numbers and
crowd mentality plays a critically important role in charting, as well as in nature itself. ' more in
depth look at 2ibonacci numbers can be found on Wikipedia etcS but for now, we as traders only
need to know the basics.
2ibonacciMs numbers are+
$, &, &, <, =, #, F, &=, <&, =>, ##, FG, &>>, etc.
"ach number is simply the sum of the < proceeding numbers. ItMs remarkable characteristic is the
ratio between the numbers 9 "ach number is approximately &.L&F times greater than the proceeding
number. This ratio strengthens as we climb higher in numbers. In mathematical learning this is
sometimes called retracement studies.
The key 2ib ratios are+
L&.F% 0the golden ;ule1 9 !ivide & number by itMs following number. I.e. &=6<& T $.L&G
=F.<% 9 divide & number by the number < places up. I.e. ##6&>> T $.=F&G
<=.L% 9 divide & number by the number = places up. I.e. <&6FG T $.<=#GL
The ratio of 4,/5 is 7nown as t$e E'olden FatioG. ItMs found in all walks of life and forms the
building blocks in the laws of nature. The golden ratio can be seen throughout the mathematical
construction of nature N 2rom architecture, sunflowers, snailMs shells / spiral galaxies. 2or example
the ratio of female bees to male bees in a hive is &.L&F and the difference between the distance from
your fingertips to your shoulder and your fingertips to your elbow has the Dolden ;atio. T$is
'olden Fatio is also found in finance.
"ibonacci in Tec$nical ;nalysis
The &st thing to note is, when using PThe 2ibonacci ;etracementP we are working on the basis that
a trend will continue and the reversals are corrective in nature. In other words the retracement*s are
temporary pull9backs and up9turns within a larger trend. The section on Pretracement or reversal N a
checklistP will help to identify whether the trend is correcting or reversing.
Most Aharting Software will have the 2ibonacci Tool that can be utilised by chartists. The 2ib
retracement is created by taking < extreme points 0usually a peak and trough1 on a chart. The
extreme points of the 2ib are divided vertically by 2ibMs ratios N <=.L%, =F.<% and L&.F%. ' #$%
retracement is also added, because it is an important psychological number. This #$% level was
derived from !ow theory and the assertion that a #$% retracement is psychologically on the mind
of the collective. These ratios between peak and trough are then drawn hori(ontally on the chart and
are used as stated in the above paragraph to highlight potential trend retracement support and
resistance areas. These areas are useful for trade entry and exit.
W2M 9 2ibonacci ;etracement
The above Whole 2oods chart shows how 2ib is drawn and used. The 2ib is drawn between the
trough of a trend 0price U=>1 and it*s peak at ULL.#L. The charting software automatically draws on
the ratios at <=.L, =F.<, #$, L&.F and &$$ 0Sometimes a IF.& will also be drawn1. See how, as weMve
circled, these ratios offer reversal, support and resistance opportunities. HouMll see that &$$ on our
2ib scale 0right hand side on the chart1 signals the start of the drawn line, this is because it will take
a &$$% price reversal to get back to this price level of U=>.
"ibonacci ;ssumptions and Fules
These ratios donMt always hold, but do offer good technical indication for the trader especially when
used with other indicators and price action. Since '44 traders are aware of 2ibs and use them
WI!"4H the ratio levels tend to become self9prophesising, especially is you draw the 2ib between
obvious peaks and troughs. 2ib lines can be drawn from candle body to candle body, or from
shadow 0or wick1 highs and shadow lows, but itMs best not to mix bodies and shadows. They can
also be drawn from any peak, trough in any timeframe and be perfectly valid in tech analysis.
5owever, "ibs wor7 better o!er t$e longer term. The shorter the timeframe then the less reliable
the data can be as volatility skews support and resistance levels. ItMs like any survey N the more data
the better the result. 2ibs can be used in any chart time9frame, but 8ust bear in mind that itMs better to
use multi9time frame analysis focusing on a daily chart over a longer period prior to focusing down.
'lways use other tech analysis in con8unction with 2ibs. Aandlesticks, )rice action, volume, chart
patterns / indicators are always worth confirming &st.
Trading "ibonacci - ; eading 6ndicator for Entry
2ibonacci is sometimes thought of as leading indicator particularly if used in a trend. 's we
have discussed price doesnMt always go up in a trend, as a trend has periods of consolidation.
Traders will use 2ibonacci ;etracement to predict the price downturn6up turn in a period of trend
consolidation and then look for entry points if the trend is to continue. T$e "ib le!els of )1/4@ 15/)@
3.@ 4,/5 are ;lert Aones that traders can anticipate trades from N hence a leading indicator. Veep in
mind that these fib levels are not hard reversal, support and resistance levelsJ but are <ones for
potential tec$ analysis.
In our example of ";6S! below in mid 'pril a strong up trend reached a long consolidation
point until late 'ugust where the trend continued with higher lows and higher highs. This
bottoming of the consolidation occurred on the #$% 2ib retracement line where the currency pairing
bottomed a couple of times before taking off. IMve circled the #$% 2ibs that traders Many looking to
enter at. HouMll also see a =F.<% retracement where bull traders entered, but this rally was very
short lived. ;s a leading indicator T$e "ib is allowing traders to forecast w$ere a re!ersal
:;Y ta7e place and M'H indicate trading opportunities when used with price action and
technical analysis. ' trend is deemed stronger if the consolidation hits the =F.<% retracement then
rebounds to continue the trend.
";6S! 9 2ibonacci as a 4eading Indicator
"ibonacci Trading #onfirmation
Aombining 2ib retracement with other tech analysis is a must. In our ";6S! chart above we
have a stochastic oscillator. 3otice how an oversold <$ crossover line, a stochastic 6 # period M'
cross over and #$% retracement align on the <>th6<#th 'ug. ThereMs also a spinning top indicating a
possible reversal 0See )rice action Module #1. :efore trading, traders like to get confirmation.
Aonfirmation in the way of+
' double confirmation of 2ib support levels
Aandlestick patterns 0see price action module #1
Increased volume on trend continuation
Moving averages support / resistance levels met
Trend 4ines Met
)revious ;esistance becomes support and vice9versa 0below chart1
4ooking back at previous support and resistance levels is a good idea to get confirmation that the
2ib retracement is holding. These historical levels can be previous 2ib extension levels, or other
levels set by moving averages, significant round numbers, etc... In the chart below, look how a
previous resistance level now become support and this coincides with a #$% retracement. This
level is highlighted with a blue line. This #$% 2ib ;etrace, is not only support from a previous
resistance level, it also holds = times. This is good trading confirmation.
S!6A52 9 2ibonacci "xtension now becomes Support
Trading "ibonacci - Setting Profit Targets wit$ t$e Extension
2ibonacci can be used to calculate profit9taking levels. WeMll use the same 2ibonacci set9up as
above on the ";6S! and highlight the whole profit set9up in a new chart of ";6S! below.
The 2ib is kept in the same place, so we have an up trend between Kune and 'ug with a retracement
to the end of 'ug. To calculate profit targets we can use 2ibonacci "xtensions. The most common
of which are $.=F< and $.L&F.
We use T$e ;H#D "ibonacci pattern to establis$ our trading strategy. The start point of our
2ib is labelled ', while the end of the 2ib is labelled : N ThatMs the easy bit. 3ow it gets a wee bit
harder as we need to establish our trade entry point. If we have established weMre in a trend and
weMve recogni(ed the down turn is a consolidation period prior to the trend continuing then we need
to find our entry point 0The section ;etracement or ;eversal N a Ahecklist, in this module should
help here1.
In or example, using 2ib retracement, the ";6S! retraces back to #$% on <>th 'ug with a
stochastic oversold signal. We could have entered here, or we could have entered on the =&st 'ug
or &$th Sep. 't both these later dates the #$% retracement $as been confirmed@ indicating
support. In our example entry was =&st of 'ug as a double bounce on support is good
confirmation that support will hold 0volumes can help here where buying pressure will increase on
support N not shown. SM' will also help confirmation1. This 4ong 0:H1 entry point is our A
point. Be aware of support and resistance levels and trading channels, as your profit targets
could be affected be these.
";6S! 9 2ibonacci "xtension to Set )rofit Targets
7ur profit target needs to be set now. This is where 2ib "xtensions come into play. Some software
applies these automatically, but others you will need to edit yourself. sually you can edit the
properties of 2ibonacci to achieve this. HouMll see on our example IMve had to edit the 2ib with a
9=F.<, 9#$ and NL&.F to get the extensions N these are our $.=F<, $.#$ and $.L&F extensions. Hou can
calculate the 2ib extension yourself by the following formula where ' T the &$$% retracement and
: is the $% retracement.
p tend+ ! T : E W0:9'1 x 2ib "xtensionX !owntrend+ ! T : N W0'9:1 x 2ib "xtensionX
6mportant& Some traders will calculate from ; meaning our ./4,5 extension becomes ,/4,5 9
Bust be aware of t$is w$en loo7ing at ot$er resources/
In our ";6S! example our profit target at ! occur on &>th 7ct. If our entry point is #$%
retracement, our target should be #$% extension 0or &.# in some software1. The same applies for
=F.<% and L&.F% etcS We could have reduced our expectations here and taken profit at the =F.<
extension, which would have also been profitable. ItMs almost like a self9fulfilling event, as most
technical traders will be looking at the same stand out 2ibonacci to profit. The #$% extension was
hit on the button, prior to profit taking. 3otice how the 2Y pairing hits the L&.F% extension exactly
prior to a reverse 9 This has now become an important resistance level as can be seen to the far right
of our chart.
Example "ibonacci Trade
2ibonacci Simple Trend Trade 0sing above ";6S! chart1
!raw 2ib and get 2ib retracement confirmation 0see above1
Aonfirmation set at point 0A1
)rofit Target 0!1 is #$% 0or &.#$1 extension line
Stop64oss placed either at next 2ib level below entry point 0in this case L&.F%1. This allows
the trade to breathe, but may be a little to much for some. It all depends on your risk
threshold. ' longer term trader may place the stop way back at the &$$% retracement, while
a day trader may place the stop under the last candle bottom
;isk6;eward. If target is ! 0&.>&1, entry 0A1 is &.<L and you lace a stop at &.<># 0under
L&.F%1 your risk reward is profit 0!190A1 T $.&# 6 potential loss 0A19Stop T $.$&# T &$+&.
Set trailing stop under trend line, moving averages of below the last candle low.
"ibonacci Extensions - "uture Support and Fesistance
's indicated in the above paragraph, 2ibonacci extensions can form important support and
resistance levels for future price action. 's seen in the above ";6S! currency pairing chart the
3ovember high at extension level L&.F% now becomes resistance for future price moves in Kanuary
<$&&. Support and resistance levels can be seen along the length of the extension as we go ever
higher. 2or instance the &.=F<% 0or <.&=F%1, &L&.F% 0or <L&.F%1, etc.. may also become an
important support6resistance level in the future too.
To Sum Dp
The value of 2ibonacci*s numbers is clear to see in nature as well as in finance and should be an
important part of your trading strategy. 's we*ve seen 2ibonacci is a trading tool used by many
Ahartists to anticipate trade entry points as well as setting profit targets and stop6loss positions.
5owever, it*s not an all9in9one trading solution and should always be utilised with other technical
There*s a strong relationship between 2ibonacci, human nature and crowd mentality. 7ne theory
that we*ll go on to talk about is The "lliot Wave, which used 2ibonacci as it*s basis. This theory and
the psychology of trading need to be looked at at this point.
Some points to note are+
o *ibonacci ratio retracements don+t always happen, but play around with *ibs to
satisfy yourself of it+s worth to your own trading strategy.
o Be aware of support and resistance levels and trading channels, as your profit
targets will be affected be these too.
o Its best to trade in the direction of the trend.
o ,se -ulti.timeframe analysis, other chart patterns, price action and other tech
analysis for confirmation of trend, entry and e"it.
Pea7 and Troug$ ;nalysis
)eak and Trough 'nalysis is a useful tool to identify when a security is trending or is in a period of
consolidation. Spotting trend is important for trend traders as many trend traders will only trade
when there*s a definite trend to be seen. Trading in a trend tends to let your profits run and is
usually more predictable than range trading. 5owever many traders do trade in ranges and we*ll
study this and other types of trading in future sections. )eak and trough analysis is also useful to
gain points of entry to the trade, especially if combined with other technical indicators. 'gain, we*ll
delve deeper into technical indicators in future sections.
's we*ve seen in our section on !ow Theory price action never goes up or down in a uniform
manner, it (ig(ag*s. This (ig(ag motions forms the peaks and troughs in charts. In an up trend each
new peak is higher than the previously observed peak and each new trough is higher than the last
observed trough. In a down trend each new peak is lower than the previously observed peak and
each new trough is also lower than the last observed trough. This is what defines a trend 9 higher
highs 0peaks1 and higher lows 0troughs1 for the up trend and lower highs and lower lows for the
down trend.
Some charting software will highlights peaks and troughs for traders 0%9(ig(ag indicator1, but
spotting them yourself is possible. To do so, one must bring up your chart focusing on primary
trend and simply highlight all the significant highs and lows. 'fter a while you*ll get used to
spotting them... This should indicate whether you*re in a long term trend, or not. Hour primary trend
is determined by your trading hori(on, i.e. if you are a day trend trader 0in and out of a trade within
a day or thereabouts1 you may want to focus on a primary trend of a few months. ' trend traders
will then usually only trade in the direction of the long term trend.
In our 2orex example of the S!6K)H cross9pairing, a down trend looked like it had started in May
<$&$ and finished in 3ov <$&$, but by highlighting the main peaks and troughs with arrows we can
see the circled red arrows indicated there weren*t lower lows until Kune <$&$. The down trend
actually started in Kune <$&$ with consecutive lower highs and lower lows. Trend trading would
have been difficult prior to Kune <$&$, as technically the price may still have been in a range.
)eak and Trough 'nalysis
Aombining )eak and Trough 'nalysis with other trend spotting technical indicators like moving
averages is '4W'HS wise in forming trading strategies. It*s also wise to make sure the timeframe
isn*t too short, so remember to use Multi9Timeframe 'nalysis to figure out the markets general
:e aware that if the trend 8ourneys into a consolidation range, it can do so for .uite some time. In
general a range can last between ==% and LL% of the length of the trend, but not in all cases. !on*t
be fooled thinking that the trend will reverse after this consolidation period either. The trend can
continue on it*s merry way after this consolidation. We*ll go on to talk about consolidation chart
patterns in later sections.
It$er :et$ods of Spotting Trend
Some define trend as a deviation from a range as indicated by Hollinger bands. 2or others, a trend
occurs when prices are contained by an upward or downward sloping ).-period :o!ing ;!erage.
7thers will utilise The 'verage !irectional Index 0;DJ1 to identify trend. 'll of these indicators
can be found under Module = in our course.
Trend Traders
;egardless of how one defines trend, the goal of trend trading is the same 9 Boin t$e mo!e early
and $old t$e position until t$e trend re!erses. The basic mindset of trend trader is PI am right or I
am out-P The implied bet all trend traders make is that price will continue in its present direction. If
it doesn*t there is little reason to hold onto the trade. Therefore, trend traders typically trade with
tight stops and often make many probative forays into the market in order to make the right entry.
:y nature, trend trading generates far more losing trades than winning trades and re.uires rigorous
risk control. The usual rule of thumb is that trend traders should never risk more than <% of their
capital on any given trade. Module I has more on Managing Money
Many of the most successful traders will only trade when there*s a trend present and some like to
catch the new trend early on the reversal. Whatever the trading style, all traders need to know the
difference between a trend retracement and a full9blown trend reversal.
We*ve gone through some of the indicators, chart patterns and talked support and resistance already,
but 7nowing retracement !ersus re!ersal is a must. Whether you*re looking to use 2ibonacci,
Moving 'verages or Trend 4ines as part of a trend following strategy, or looking for the reversal,
then itMs worthwhile identifying whether the change in a trend is a correction or a complete turn9
Traders thus face the following dilemma+
If they*re in a position relying on the trend continuing, do they hold onto their position- $his
could lead to losses if the retracement turns out to be a longer term reversal.
They could close their position and re9enter if the price starts moving with the overall trend
again. /f course there could be a missed trade opportunity if price sharply moves on.
-oney is also wasted on spreads if you decide to re.enter.
They could close the position permanently. $his could result in a loss 0if price went against
you1 or a huge profit 0if you closed at a top or bottom1 depending on the structure of your
trade and what happens after.
:ecause reversals can happen at any time, choosing the best option isn*t always easy. This is why
using trailing stops can be a great risk management techni.ue when trading with the trend 0See the
Module on ;isk Management1 . Hou can employ it to protect your profits and make sure that you
will always walk away with some pips in the event that a long9term reversal happens. In our
Moving 'verages and )arabolic S'; section 0amongst others1 we*ve explained some trading
examples utilising the trailing stop.
Fetracement or Fe!ersal - T$e Difference
In a retracement or correction the long9term trend is still intact, so if you gambled on a full9blown
reversal it could have been a costly trade. ItMs important to know the difference between the two, as
this will influence our decisions to hold, sell or buy the security with a view to picking it up later
; retracement is defined as a temporary price movement against the established trend. 'nother
way to look at it is an area of price movement that moves against the trend but returns to continue
the trend.
Fe!ersals are defined as a change in the overall trend of price. When an uptrend switches to a
downtrend, a reversal occurs. When a downtrend switches to an uptrend, a reversal also occurs.
Fetracement or Fe!ersal - ; #$ec7 list
There are key differences between the reversal and retracement as highlighted in the following
check list.
Retracement or
Reversal Check
Retracement / Correction Reversal
Volume Small Selling Volume Large Selling Volume
Money Flow Buying Interest during decline is
still present and selling interest in a
up trend is still present
Buying interest is small in a
down trend and selling
interest is small in up trend.
Both force price to reverse
Chart Patterns Continuation Patterns !edges"
#riangles" Flag $ Pennant%
&eversal Patterns 'ead $
Shoulders" (ou)le #op%
#ime Frame #hey are short lived #hese are Longer #erm
Fundamentals *o Change Change or Speculation of change
Candlestic+s Lots of Indecision Candles with
long shadows and small )odies
&eversal Candles lic+ engulfing"
soldiers etc,
This list is by no means fool proof, but give a trader a base for understanding the corrective nature
of a market. Kust remember to be aware of the time frame you*re dealing in. ' weekly chart
looking out # years may see a retracement, but that very same retracement may be a reversal on a
daily chart 9 ;emember time9frame analysis.
6dentifying Fetracement
There are a few ways to identify retracements other than the checklist above. These are+
&. 2ibonacci ;etracements
<. )ivot )oints
=. Trend 4ines
>. Aandlestick )atterns
,/"ibonacci Fetracement
' popular way to identify retracements is to use 2ibs. 2or the most part, price retracements hang
around the =F.<%, #$.$% and L&.F% 2ib level before continuing the overall trend. 6f price goes
beyond t$ese le!els@ it :ay signal t$at a re!ersal is $appening. 's you may have figured out by
now, technical analysis isn*t an exact science, which means nothing certain...
2or an in depth look at 2ibonacci ;etracement see our section earlier in the Module.
)/Pi!ot Points
'nother way to see if price is staging a reversal is to use pivot points 0intra9day only1. In an
uptrend, traders will look at the pivot or lower support points 0S&, S<, S=1 and wait for them to hold
or break. If broken, a reversal could be in the makingZ In a downtrend, traders will look at the
pivot / higher resistance points 0;&, ;<, ;=1 and wait for it to hold or break.
)ivot )oints 9 ;eversal or ;etracement
1/Trend ines
The last method is to use trend lines. When a ma8or trend line is broken, a reversal may be in effect.
We*ve already looked at how to draw trend lines, how support and resistance can affect trend and
how moving averages can act as trend lines, so if you*re unsure then please revisit the relevant
2/ #andlestic7 Patterns
:y using trend lines in con8unction with candlestick chart patterns discussed in Module #, a trader
may be able to get a high probability of a reversal.
To Sum Dp
Hou now have the tools to try to differentiate between a retracement and a reversal. Dsing t$e
K#$ec7 istK and t$e K6dentifying FetracementK section will gi!e you a fig$ting c$ance.
While these methods can identify the difference between retracements and reversals, they aren*t the
only way. 't the end of the day, nothing can substitute for practice and experience. With enough
trading time, you can find a method that suits your trading personality in identifying retracements
and reversals.
;eversals can happen at any time. ;etracements can turn into reversals without warning. This
makes using trailing stops very important. With trailing stops, you can effectively prevent yourself
from exiting a position too early during a retracement and exit a reversal in a pinch.
T$e Hullis$ Engulfing Pattern
Trading wit$ Engulfing Patterns - by Fic$ard Lri!o
What .ualifies as an engulfing candle is fairly simple+ as long as the body of a candle engulfs the
previous candle in terms of the body and wicks, it would be considered an engulfing candle
0Sometimes you may find trader*s don*t count the wicks1. 's such, it can indicate that a move in the
opposite direction of the candle that was QengulfedRmay take place.
In other words, if a bullish candle is engulfed by bearish candle, the higher probability direction to
trade the pair will be to short it. If a bearish candle is engulfed by a bullish candle, the higher
probability direction to trade the pair will be to buy it.
;emember, 8ust because a trader sees an engulfing candle does not mean that a move in the
opposite direction is assured. 's far as being certain goes, a trader can be certain that a candle is an
engulfing candle, but we can never be certain of what may transpire on the chart going forward.
Veep in mind, as is the case when interpreting candlesticks, a trader cannot make a decision
regarding what a candle might turn out to be until that candle is closed. So, always wait for a
candle to close before making a trading decision based on whether it*s engulfing or not.
; simple trading strategy is to take a trade when the engulfing candlestick is in the direction of
the main trend. In other words, in a correctional take profits retracement we would look for bullish
engulfing candles and in a short bullish correction we would look for bearish engulfing candles.
Should the trade be taken, the stop can be placed below the bullish engulfing candle in an uptrend
and above the bearish engulfing candle in a down trend. See more on stop6losses in our Module I
4astly, as usual, nothing in trading is a certainty and not all engulfing candlestick patterns will lead
to a reversal. Testing a system with proper risk management is essential prior to trading
;eally only useful if found in a downtrend. We can see the pattern on the left above where the
hollow candle body completely engulfs the filled candle body. This pattern doesnMt indicate
indecision, but that buyers are bac7 in t$e mar7et 9 The short bear candle is running out of steam
and being engulfed by a strong long bull candle. The longer the white 0hollow1 candle against the
black 0filled1 candle the greater the chance of reversal and if there is increased volume weMll also
increase our chances of a reversal. The black candle shouldnMt really be a do8i as itMs fairly easy to
engulf. If the shadow is engulfed, then this is better, but not necessary and finally the shadows on
both candles should be small or non9existent. 'gain, further confirmation is needed for reversal.
This pattern can also confirm a continuation of trend and continued buying pressure. If seen
passing through a resistance level then this may confirm a break of resistance. This pattern is valid
as long as the body is engulfed.
T$e Hearis$ Engulfing Pattern
Inly useful in an up trend and is the exact opposite to the bullish engulfing pattern N it is the <nd
diagram on the left above. The same rules apply here as they did above and we should always look
for other confirmation in the form of further price action to the downside 0like the three black
crows, below1 and increased downside volume.
T$e Piercing and Dar7 #loud #o!er Patterns
These two blends work in the same ways as the previous two. The )iercing pattern is a bullish
pattern where the hollow <nd candle drives up from below the previous filled candle to above half
way of the previous filled candle. :oth candles should be fairly large bodied with small shadows. If
the white candle doesnMt finish above the black candles middle then this isnMt considered bullish.
This is the third diagram above. 'gain, confirmation is re.uired for reversal. !ark Aloud Aover is
the mirror image of The )iercing )attern.
T$ree C$ite Soldiers and T$ree Hlac7 #rows Fe!ersal
Solid Aonfirmation is found if reversed momentum is followed up with strong corroboration N the
most famous of these are the three white soldiers and the three black crows. The = white soldiers
e.ual & long white 0hollow1 candle and the = black crows e.ual a long black6red 0filled1 candle.
Hot$ t$ese blends can be seen in re!ersal patterns and are used to confirm t$at t$e re!ersal
$as ta7en place.
These two formations will be more prevalent after a long trend that is going through a reversal.
Ideally the = candles should start within the last candle and close near the high 0in the case of the =
white soldiers1 or the low 0in the case of the three black crows1. In the = white soldiers chart below
the soldiers are the reversal and in the = black crows chart the black crows confirm a spinning top
candlestick showing indecision.
Three White Soldiers / three :lack Arows ;eversal
T$e Dse of It$er Tec$nical ;nalysis is Heneficial
Aandlesticks provide an excellent means to identify short9term reversals, but should not be used
alone. 7ther aspects of technical analysis can and should be incorporated to increase reversal
robustness. 2or instance support and resistance, 2ibonacci retracement and overbought and
oversold oscillators can play an important part in any price action trading strategy. 4ook how
support coincides with a bullish engulfing candlestick pattern and how The Stochastic crosses the
bullish #$ line below helping to confirm the reversal.
"xample of )rice 'ction Aombined with other Technical 'nalysis
How to Trade #andlestic7 Fe!ersal Patterns
's we*ve discussed in all of our Aandlestick ;eversal )atterns, traders must wait for confirmation
prior to trading. This means that they*re supposed to wait until t$e following day?s close to see if
t$e stoc7 re!erses. This is the trade entry point. Aombining candlestick confirmation with other
technical analysis, i.e, oscillators, moving averages gain further confirmation may also be
prudent as we*ve seen above. 5owever If a stock pulls back to an area of demand 0support1 and
there*s a candlestick pattern telling us that buyers are taking control of the stock, then that is all the
confirmation some traders need. The choice is yours and all depends on your threshold for risk.
4et*s look at an example trade using the engulfing candlestick pattern. This is a simple day trading
system for example only, using the '!6S! forex pair, so you may want to research other price
action6indicator systems. Hou also need to back tested all trading systems yourself, to make sure
your comfortable with the risks. :ut I hope you can see how this system can transfer to other
candlestick patterns and time9frames-
"xample :ullish "ngulfing6Moving 'verage Trading System
7ur set up 9 a & hour chart with a #$9period simple moving average
7ur system rules 9 If price is above #$ SM' we*re in an up trend so we buy. In an up trend we*re on
the look9out for bullish engulfing candlesticks. In a down trend 0price below #$ SM'1 we look for
a bearish engulfing pattern and we sell.
"ntry 9 & pip above the high of the bullish engulfing or & pip below the bearish engulfing on the
next candle
;isk Management 9 Stop64oss placed & pip below the bullish engulfing in an up trend, or & pip
above the bearish engulfing in a down trend
Take )rofit 9 We*re looking for a reward to risk ratio of &+&.
So, )rice is above #$ SM', so we need to be looking to go long. I*ve highlighted the bullish
engulfing candle in the yellow oval on our & hour chart. We enter long & pip above the bullish
engulfing candle on the next candle at &.$#=$ 0=am, &Lth Mar1 and place a stop6loss at &.$#$F. If
our Target take profits ratio is &+& then our target price is &.$##< 0i.e the e.uivalent distance from
entry to our risk 9 &+&1. We reach this at &pm on the &Lth 9 &$ hours later.
Well, I hope you get the 8ust of how to trade candlestick patterns and begin to see how you can
develop your own system- 7f course many trades will go against youZ ;emember this is a simple
system. Hours may incorporate different reward to risk factors and support and resistance etc... See
the Trading 2lowchart for more ideas. :ut you may want to keep it simple 9 Simple systems do
make money. Oisit some blogs and sites to view some other systems.
Technical analysis is not an exact science and although these ideas can increase the probability of
making the correct trade, many will go against you and large losses can be incurred. Hour own
trading strategy needs to be formed and hopefully you*ll be on your way to achieving this on
completion of this course.
Daps in charts are empty spaces between one trading period and another. They usually form
because some information 0exceptional earning report, profit warnings, mergers etcS1 has come to
light. :asically the opening price of the <nd period moves substantially away from the &st periodMs
closing price in post and pre9trading. 6t8s often said t$at Egaps will always fillG@ meaning t$e
price will mo!e to co!er t$e gap sooner rat$er t$an later. This doesnMt always happen, or may
take some time to happen. These fills are .uite common and occur because of the following.
"xuberance+ The initial spike may have been overly optimistic or pessimistic, therefore
inviting a correction.
Technical ;esistance+ When a price moves up or down sharply, it doesn*t leave behind any
support or resistance
)rice )attern+ )rice patterns are used to classify gaps, and can tell you if a gap will be filled
or not. We explore these gap types below. "xhaustion gaps are typically the most likely to
be filled because they signal the end of a price trend, while continuation and breakaway gaps
are significantly less likely to be filled, since they are used to confirm the direction of the
current trend.
'ap Types
There are > gap types as highlighted in the following chart. Ahartists will look at trend, volume and
location of the gap when forming their trading decisions. The bullet points below the charts
highlight the important aspects of the period gaps.
5ere are the key things you will want to remember when trading gaps+
7nce a stock has started to fill the gap, it will rarely stop, because there is often no
immediate support or resistance.
"xhaustion gaps and continuation gaps predict the price moving in two different directions 9
be sure that you correctly classify the gap you are going to play.
Make sure to wait for the price to start to break before taking a position.
:e sure to watch the volume. 5igh volume should be present in breakaway gaps, while low
volume should occur in exhaustion gaps.
T$e 6sland Fe!ersal
The above Dap types can be found in specific Dap ;eversal )atterns. 7ne of the most well known
gap formations is the Island ;eversal. This reversal pattern is formed by a gap followed by flat
trading period, then confirmed by another gap in the opposite direction. This can be found in an up
trend or down trend and can be seen in the below chart.
The Island ;eversal )attern
The above Island ;eversal is formed after an up trend. 'n exhaustion gap appears, followed by a
consolidation, then a breakaway gap down. T$e quality of t$e re!ersal signal and t$e strengt$ of
t$e subsequent re!ersal are more robust if it comes at t$e end of a long trend. 3otice volume
too. T$ere8s large !olume going into t$e ex$austion gap and large !olume going into t$e
brea7away gap.
Trading 'aps - ; Day Traders Perspecti!e
P2adingP occurs when gaps are filled within the same trading day. 2or example, a company reports
good earning, and price gaps up on daily open 0meaning it opened significantly higher than its
previous close1. 's the day progresses, traders realise that some not so good news is hidden within
the depths of the report, so they start selling. "ventually, the price hits yesterday*s close, and the gap
is filled. Many day traders use this strategy during earnings season or at other times when irrational
exuberance is at a high.
:ore on Trading 'aps - Some Popular Systems
There are many ways to take advantage of these gaps, with a few more popular systems highlighted
Some traders will buy when technical*s favour a gap on the next trading day. 2or example,
they*ll buy a stock after9hours when a positive earnings report is released, hoping for a gap
up on the following trading day.
Traders might also buy or sell into highly li.uid or illi.uid positions at the beginning of a
price movement, hoping for a good fill and a continued trend. 2or example, they may buy a
currency when it is gaping up very .uickly on low li.uidity and there is no significant
resistance overhead.
Some traders will fade gaps in the opposite direction once a high or low point has been
determined. 2or example, if a stock gaps up on some speculative report, experienced traders
may fade the gap by shorting the stock.
4astly, traders might buy when the price level reaches the prior support after the gap has
been filled.
To Sum Dp
Femember@ gaps are ris7y 0due to low li.uidity and high volatility1. Those who study the
underlying factors behind a gap and correctly identify its type, can often trade with a high
probability of success. 5owever, there is always a risk that a trade can go bad. Make sure you gain
further confirmation through technical analysis prior to trading, i.e studying volume. If you see
high9volume resistance preventing a gap from being filled, then double check the premise of your
trade and consider not trading it if you are not completely certain that it is correct.
WeMve looked at some reversal patterns involving a series of candlesticks. Some like do8i and long
shadow candlesticks need prior and preceding confirmation to confirm the reversal and some like
the engulfing pattern, three white soldiers and 5arami are patterns in there own right. ;ll of t$ese
patterns@ doBi and long legged candlestic7s are also significant support and resistance
le!el mar7ers.
#andlestic7s #onfirming Fesistance
The same buying and selling pressures apply here as they did in our sections QAandlesticks N The
:asicsR and QAandlesticks and the ;eversalR. The engulfing, 5arami, three black crows, dark cloud
cover, evening star, shooting star, do8i, long9legged, Marubo(u and long filled candles can all mark
resistance levels.
I*ve included a couple of charts below to show some of these candlesticks and patterns forming
good resistance. 's we can see there are :earish "ngulfing, :earish 5arami, Shooting Stars, !o8i,
Spinning Tops, Inverted 5ammer and various long9shadow candlesticks all helping to confirm
resistance. ItMs worthwhile familiarising yourself with these patterns in our glossary. 2otice in our
first chart that a bearish engulfing can also be a shooting star.
Aandlesticks and Aandle )atterns Aonfirming ;esistance 0&1
Aandlesticks and Aandle )atterns Aonfirming ;esistance 0<1
#andlestic7s #onfirming Support
The bullish engulfing, bullish piercing, 5arami, hammer, inverted hammer, morning star, do8i,
long9legged, Marubo(u and long white candles can all mark support levels. IMve highlighted some
of these in the charts below. 3otice in the second chart that the middle section of the chart bounces
along support. We have many do8i and small bodied candles here signifying a neutral stance and
indecision. Aonfirming support can be seen in trends as well as in ranging markets
Aandlesticks and Aandle )atterns Aonfirming Support 0&1
Aandlesticks and Aandle )atterns Aonfirming Support 0<1
To Sum Dp
I hope you can see why the above support and resistance confirmations can be useful. In any
trading strategy it*s important to understand these levels as they can act as important psychological
barriers to price action and offer good entry, stop6loss and exit positions. Why not go over the
importance of support and resistance again-
In the &GF$Ms Kohn :ollinger developed his bollinger band theory around moving averages.
:ollinger :ands allow us to determine volatility in the market as well as measuring how high6low
prices are relative to their historical price action. :ollinger bands comprise of an upper, lower and
centre band. The centre line in the band is a simple moving average 0SM'1 usually set at <$ periods
and the upper6lower bands represent chart points that are < standard deviations away from the
average. )rice should normally fall within the upper and lower bands. When the bands widen,
volatility increases and when they narrow volatility decreases.
Trend reversals usually take place close to the upper and lower bands and the centre line will
sometimes act as support and resistance 0;em+ ItMs a <$9day SM'1. Many traders use these
bollinger bands to determine o!erboug$t and o!ersold le!elsJ especially in range bound
mar7ets that are said to take place F$% of the time. Price tends to rebound between t$e upper
and lower bands like a drunk bouncing along two alley walls. Hollinger bands don8t produce
signals in t$emsel!es@ but can act as confirmation t$at re!ersal is ta7ing place. 's weMll
discover below in QTrading overbought and oversoldR very often price will QwalkR the band,
especially in trending markets. Traders use :ollinger bands in a few ways+
Identify overbought and oversold
:ollinger :and Aontraction
:ollinger :and Q:andsR
Aombining :ollinger bands and time frame analysis
Trading I!erboug$t and I!ersold e!els
Traders use :ollinger bands to identify overbought and oversold levels. When the price of t$e
mar7et touc$es t$e upper or lower band t$e mar7et may be o!ersold or o!erboug$t/ 6f t$e
price crosses t$e outer Hollinger t$en t$is represents significant o!erboug$t and o!ersold.
These QtagsR and bollinger band crosses are not signals, merely gauges. )rices tend to hug the outer
:ollinger for long periods of time, especially in a trend, so ot$er indicators must be used w$en
using t$em in trading strategies N This is especially true with :ollinger bands over other
Trading oversold and overbought levels with :ollinger bands is a good strategy in range bound
mar7ets, while using other indicators and chat patterns as confirmation 0e.g. may be a head and
shoulders touching the bollinger1. To illustrate this weMve drawn a chart of S/) #$$ that has a range
on the right from Mar <$&& and an upward trend on the left. Hou can see that in t$e range bound
mar7et we $a!e multiple touc$es of t$e outer bands and in t$e up trend t$e price $ugs t$e
upper band for much of the time. Aombining the bollinger with another indicator like the ;SI
helps us with our trading strategy N utilising ;SI overbought and oversold signals, ;SI trend I!,
;SI !ivergence6Aonvergence, Aentre 4ine crossover or ;SI failure swings.
,st Fange Trade
In the chart below we have many overbought and oversold levels. Many of them in con8unction
with :ollinger would have been profitable. We have an ;SI !ivergence at 0&1, which we can look
to for possible reversal. 7ur short6sell signal occurs when the diverged ;SI crosses back over the
I$9signal line on the >th May and our exit signal could be when the price hits the opposite bollinger
on the &Ith May. In range bound markets traders may anticipate that the price will move from one
outer band to the other.
)nd Fange Trade
Aombing the :ollinger*s upper touch with a simple ;SI overbought signal at 0<1 could have been a
short trade position. 's the ;SI crosses I$ it signals a sell6short trade. 7ur profit target was the
lower :ollinger band, but we can*t see if it was reached. 5owever, other profit targets can be set.
2or instance, a trailing stop order could have worked here 0trailing price down, until price turns1, or
our target could have been the oversold ;SI =$9level. There are many money management
strategies employed by traders, we*ll talk about these in future modules. ' Stop64oss order here
would have also been extremely useful, as they limit our losses. When dealing with bollinger bands
stop6losses you may want to look at Q:ollinger :and Q:andsRR below.
S%) #$$ 9 :ollinger :and 7verbought and 7versold
7f course there are many trading signals that can be utilised. 'fter the ;SI overbought signals
above traders may wait until a <$9day SM' has been crossed before confirming a trade, or a #$9line
;SI cross may be needed for confirmation. It*s up to you to decide how much confirmation you
need prior to trading. More confirmation means less false signals, but also means less profits if the
trade goes your way.
3otice the strong trend on the left hand side of the S/) chart above. In a strong trend the price
generally fluctuates between the <$9day SM' and an outer band, so a cross of this <$9day SM'
may represent a price reversal. This looks to have happened on the <<nd 2eb above. ' shock has
broken <$9period SM', breaking the trend.
Trading T$e Hollinger Hand #ontraction@ or ESquee<eG
Denerally, after periods of low volatility in the market the market tends to rally significantly. 's
weMve learned in chart patterns, when the bulls and bears cancel each other out volume and interest
begins to wane. When a break does come, it comes significantly. ; contracting bollinger band
Et$e squee<eG@ represents low !olatility and $ig$ !olatility widens t$e bands.
4IM" 9 :ollinger :and Oolatility with :andwidth Indicator
In the above chart we have a contraction in the bollinger band up to I Kan && then a bullish break,
from >.<# resistance, meaning the buyers have won in this situation. We can see the contraction
more easily by adding the :ollinger :andwidth indicator to the bottom of the chart setting it up to
<$ periods and < S! like the bollinger. To determine the direction of break we need to employ other
indicators, like ;SI, Stochastics and volume indicators N where we may be looking for divergences.
5owever, this is a challenging play to makeS
Hollinger Hand KHandsK
:ollinger bands QbandsR were created to form buy and sell signals within the bollinger band
indicator. :asically the bollinger band QbandR measures < bollinger bands N The first with a <
standard deviation 0as normal1 and the second with a & S!, which sits within the <S! :ollinger
band. IMve illustrated this on the below ";6S! chart. :asically the chart shows ";6S! in an
up trend until May &&, then in a range 9 notice the hugging in the up trend. To amend the bollinger
band QbandR you must edit it in your charting software, by changing the standard deviation to & N
this creates the inner band. :y doing this weMve created buy / sell and neutral (one.
";6S! 9 :ollinger :and P:andsP
The :ollinger :and Q:andsR can be utilised by traders who trade the trend and those who range
trade. Trend traders who can enter on oversold oscillator signals like ;SI, Williams %; etc can use
the buy6sell (one to establish exit points. 'n up trend trader*s exit point could be as the price crosses
back below the <$9period SM' centre line, or when price crosses from the buy6sell (one into the &
S! :ollinger band. The red circles in the above chart highlight some exit positions. HouMll see that
there are many of these exit points in a trend, so traders need to use other indicators to form their
exit strategy.
:ollinger :and Q:andsR can be used in range trading too. In our ";6S! chart weMve highlighted
two possible short entry positions with a green circle on the #th May, confirmed with an oversold
;SI I$ crossover 0also circled1. ' cross from the buy6sell (one through the & S! :ollinger signals a
buy or short trade 9 in this case a short. This is perhaps not the best example, as initially the trade is
against the trend and ideally traders need to confirm the trend has ended 0i.e support broken1.
5owever, it does show a trade at work. 'n exit for this trade can be played as in the above
paragraph 9 exiting as the price crosses from the bottom buy6sell (one back across to the neutral
(one. I*ve yellow circled this range exit position.
:ollinger bands can be utilised to form stop6loss decisions. Hou can either have your stop loss
placed 8ust outside the :ollinger band as per position & on our chart, or by measuring the bollinger
&st Standard !eviation band height and measuring the same distance up from the top of the < S!
band 0position < on our chart above1. This prevents us from getting stopped out on market noise.
This may be too risky for some though and it all depends on your own trading strategy. WeMll talk
about stop6loss and money management in Module I.
#ombining Hollinger Hands and ;dBusting T$em
:ollinger recommended making small incremental ad8ustments to Standard deviation multiplier if
you are looking at different timeframes and sensitivities. If we are looking more long term we may
use a #$9day SM' bollinger with standard deviation of <.&J or short term &$9day SM' with &.G
S!. 5e also advocates using :ollinger bands over differing time frames, finding correlation and
trading on these correlation signals.
The Felati!e Strengt$ 6ndex =FS6> created by Welles Wilder in &GIF measures momentum in a
financial instrument indicating o!erboug$t positions on t$e upside and o!ersold positions on
t$e downside. The ;SI measures this by comparing the si(e of its recent gains to the si(e of its
recent losses as is shown in the formula below. This results in an index number between (ero and
&$$ with centre line at #$. This indicator is then usually placed in a box 8ust below the price chart
and is calculated automatically in any good charting software or online package. ' number above or
below the 0. or 1. respecti!ely is considered o!erboug$t or o!ersold, indicating a possible
momentum change. FS6 in best used in Fange Hound :ar7ets@ but we?ll also see $ow it can be
used in trending mar7ets/
;SI T &$$ minus &$$ 6 0&E;S1
Where ;S T 'verage Dain 6 'verage loss
In charting software you may be confronted with a couple of ;SI options, eg Wilder ;SI. Select the
;SI option and generally the default value is set at &> for longer period time frames 0daily chart and
above1. "ven though Wilder invented Q;SIR the QWilder ;SIR is different as it*s smoothing which is
a different exponential average. :oth can be used and serve the same purpose, but here weMll talk
about ;SI. We wonMt go into the ;SI calculation in any great detail except to say that The ;SI is
based on closing prices and the ;S 0;elative Strength1 part of the calculation is measured over the
last &> periods and is smoothed by exponential e.uations.
Some traders will ad8ust the period as part of their trading strategy N eg if theyMre looking at longer
or shorter timeframes. 4owering the period will increase sensitivity and increasing it will decrease
sensitivity 9 ,. day FS6 will reac$ o!erweig$t positions more easily t$an ).-day FS6. To add
more complexity some stocks will reach =$ and I$ more easily than others. ".g. a tech stock may be
more volatile than a tility. To reduce t$e amount of false o!erboug$t and o!ersold signals@
some traders will increase t$e o!ersold and o!erboug$t parameters to ). and 5./ In fact some
day traders will use <$, F$ and use a < period ;SI to form signals and Swing Traders 0Aapturing
gains in securities within a & to # day window1 may look at an ;SI # to form their signals. WeMll
stick to &> for now until we become accustomed to the ;SI.
How it Cor7s and Trading T$e FS6 wit$in a Fange
's with many oscillators the FS6 wor7s best in a range. This chart happens to be a hori(ontal
range, but ;SI also wor7s well in trending c$annel creating consolidation points before the trend
continues again. 6n strong trending mar7ets t$e FS6 tends to fluctuate at $ig$er le!els@ li7e 2.
to -.. We discuss The ;SI indicator in trending markets in the below section.
's weMve mentioned when the ;SI is below =$ or above I$ the market is oversold or overbought
and traders are going to look for a price reversal at some point. In our below chart weMve plotted the
;SI against a daily chart of The 3asda.. The period weMre looking at is from Mar <$&& to Kul <$&&
and you can see weMre trading in a hori(ontal range with good support and resistance levels. To the
far left 0&1 we have an overbought indicator where The ;SI almost hit G$, then a bearish
retracement. I*ve highlighted several overbought and oversold positions, most signal a retracement
within the channel, but some were false signals, like 0<1 circled in Kune. !espite this oversold
indicator the index continued itMs bearish trend until it hit support at <L$$, when it turned N reversal
and retracement can be a process taking a few signals to happen.
I hope you can see how a trader can use the ;SI in a ranging market- 7ur example is a large =$$
point range, so buying at the bottom of the range and selling at the top of the range looks very
profitable when buying on these oversold signals and selling on overbought signals. When looking
for overbought and oversold stocks traders should first see how the overall market is doing. I.e. if
2TS" is thought to be overbought then drill down into individual stocks with high ;SI readings to
3asda. 9 ;SI overbought and oversold signals
;SI ;ange Trade 0simple strategy1+
Deneral )arameters set at ;SI 0&>1 on a daily chart
:uy trigger 9 "nter the trade long 0buy1 when ;SI crosses above =$
Sell Trigger 9 Sell when ;SI crosses above I$
Short Trigger 9 "nter the trade short when ;SI crosses below I$
Sell the Short Trigger 9 Sell when ;SI crosses below =$
7ur stop6loss is placed 8ust below support or resistance highlighted by trend lines
;isk ;eward ;atio+ 3enerally traders loo% for 456 or 756. (e'll loo% at ris% reward in later
's always other indicators 0like moving averages1, volume and economic news will help with our
trading strategy. If using an ;SI some traders find it useful to make their trading decisions along
with other indicators like the moving average crossover. ' &$9day and <#9day M' crossover may
be useful when using the ;SI 0&>1. I.e. when the &$9day M' crosses below the <#9day M' and the
;SI indicates overbought this may be a good short signal.
Trading T$e FS6 in a Trend
The ;SI tends to work in a very predictable way in a strong bull or bear market. 6n a strong up
trend t$e FS6 tends to fluctuate between 2. and -. wit$ t$e 2. to 3. FS6 E<oneG acting as
support. These ranges are based on the ;SI &> and will change depending on the ;SI period, the
strength of the trend and the securities volatility.
In our below chart of The S/) #$$ we are showing an upward trending market with consolidation
periods along support. HouMll notice that the ;SI surges above I$ on # occasions and holds itMs >$
to #$9(one .uite consistently. 5owever it did hit =>.>L in 3ov $G. 3evertheless the >$9#$ support
level held for # [ months. This support (one provides Qlower riskR entry points to the market when
itMs in a strong up trend. 3otice how the ;SI dips below the support (one and through =$, once the
market breaks support.
S/) #$$ 9 5ow the ;SI works in an p Trend
;SI Trend Trade 9 always go wit$ trend 0simple strategy1+
Deneral )arameters set at ;SI 0&>1 on a daily chart
p trend :uy trigger 9 "nter the trade long 0buy1 when ;SI crosses above >$ or #$
p trend Sell Trigger 9 Sell when ;SI crosses above F$ or G$
!own trend Short Trigger 9 "nter the trade short when ;SI crosses below #$ to L$
!own trend Sell the Short Trigger 9 Sell when ;SI crosses below &$ and <$
7; , don*t sell and keep long6short position until an ;SI divergence precedes the above sell
Set a trailing stop <% behind the trade to lock in profits. We*ll talk trailing stops in later
7ur stop6loss is placed 8ust below support highlighted by trend lines
;isk ;eward ;atio+ 3enerally traders loo% for 456 or 756. (e'll loo% at ris% reward in later
6n a down trend FS6 tends to fluctuate between ,. and 4. wit$ resistance le!els between 3.
and 4./ 'gain, these ranges will change depending on timeframe, ;SI period and the strength of
the downtrend. IMve charted the S!6A52 below showing the resistance level providing entry9level
points of which there are > plus two touching #$. To Trade t$is down trend traders will always
follow t$e trend. Instead of entering at the =$ or I$ signal as they would in a range, t$e entry
point will be as t$e FS6 dips below 4. or 3./ This really depends on how strong the trend is and
what your trading strategy will be. It also depends on your ;SI settings, i.e. an ;SI # will be more
sensitive than an ;SI <$, so the entry trigger will be higher. In the below case I*ve highlighted short
positions as the market dips below #$.
S!6A52 9 5ow the ;SI works in a !own Trend
FS6 6ndicator Di!ergence & #on!ergence
The ;SI divergence / convergence has similar trading properties to The M'A! divergence /
convergence, i.e. if theFS6 is trending in t$e opposite direction to t$e price t$en t$is is an
indication t$at t$ere may be a price momentum re!ersal imminent. 6t?s a trend re!ersal early
warning system. ' Aonvergence is in many cases the forerunner to a bullish price momentum
reversal, while a divergence is thought to be the forerunner to a bearish price momentum reversal.
These moves tend to be more robust w$en t$ey cross t$e o!erboug$t and sold line.
:elow in our FS6 di!ergence chart of S/) #$$ we have shown an example of a bearish
divergence, where the price mechanism shows higher highs and ;SI records lower peaks. These
lower peaks in the ;SI hints that weakening momentum in the upward price push is unfolding and
that price may reverse. We can see this unfold below. 's this divergence is an early warning
0leading indicator1 a good entry point will be the next I$ line crossover after the divergence 9
5ighlighted below.
S/) #$$ 9 ;SI 3egative 0bearish1 !ivergence
FS6 di!ergence indicators wor7 best in ranging mar7ets and can be traded as the P;SI ;ange
TradeP in the P5ow it Works and Trading The ;SI within a ;angeP section. 5owever they can be
used in trending markets. ;emember, always trade with the trend, so in an up trend many ;SI
divergences will signal a retracement 0secondary trend1, where traders can sell long positions 0if this
is part of their strategy1. 5owever, a full blown reversal may result after a divergence starting a new
trend. Trade it as per P 8SI $rend $rade9 in the section PTrading The ;SI in a TrendP . :e careful
though. The divergence doesn*t always show a retracement or reversal. In a strong up trend the
price momentum may still go up.
' bullis$ con!ergence $appens w$en t$e FS6 forms $ig$er troug$s w$ile t$e price forms
lower troug$s/'gain, this convergence is more robust when crossing the oversold indicator at =$.
This convergence suggests that downward price momentum is waning and a change in trend to the
upside is possible. 7ther indicators such as volume decreases, moving average convergence and
support and resistance levels will also be useful in determining momentum shifts.
Trading t$e FS6 - S$ort-term Scenario
!ay traders 0Intra9day traders1 and Swing traders 0& to # day hori(on1 can amend the ;SI from &>
down to <, =, >, # etc... When looking at ;SI 0<1 overbought and oversold positions may only stay
for up to an hour or a day, so itMs really only used for these short9term trades of & to # days. Since
shorter period ;SIMs are more volatile than longer period ;SI*s the overbought and oversold
parameters must be changed away from =$ and I$. 2or instance they may be moved to #9&$ for
oversold and G$9G# for overbought. "ach market and situation will have to tweak these parameters
and some historical profiling will help set them as part of a trading strategy.
:elow is how a Swing Trader may use the ;SI
'nalyse the longer trend using Moving averages, )eak trough analysis, support and
resistance etc...
Deneral rule 9 Trade with the trend
!rill into the market with a &# minute chart
se scanning packages to see where ;SI is crossing signals
Set at ;SI 0#1 on the chart. ;emember the ;SI # is more sensitive than ;SI &>
:uy trigger 9 "nter the trade long 0buy1 when ;SI crosses above =$ or >$
Sell Trigger 9 Sell when ;SI crosses above I$ or F$.
7r buy, sell vice9versa if in a down trend
If there*s ma8or resistance prior to this trigger, then sell
' stop6loss is placed 8ust below support or resistance highlighted by trend lines. This could
be no more than a <% loss.
;isk ;eward ;atio+ 3enerally traders loo% for 456 or 756. (e'll loo% at ris% reward in later
This se.uence will be a part of their over all trading set9up and strategy.
To Sum Dp
The ;SI is a standard component on any basic technical chart. The relative strength indicator
focuses on t$e momentum underlying t$e security and is a great secondary measure to be used
by traders. It is important to note that the ;SI is often not used as the sole generation of buy9and9
sell signals but used in con8unction with other indicators and chart patterns.
's we*ve seen, we can set the indicators price action sensitivity. The sensitivity of the indicator
determines how .uickly the trader enters the move and how accurate these trading signals are. If the
indicator is set to low sensitivity then you generate less false signals, but you may see the move too
late, or not see it at all. With high sensitivity you are more likely to catch the move into the trade,
but you may generate false trading signals. 2or instance a swing trader 0trading with a hori(on of >
to # days1 may set the ;SI to =or # once they*ve drill down to an hourly chart from a daily chart.
Dood charting software will allow the parameters to be changed.
osted on May <F, <$$G at &G+>< in Trading !esk by ;yan 7*VeefeAomments 7ff
S!6A52 has been testing U&.$F$ all week and printing an inverted megaphone pattern on the four
hour chart. TodayMs daily candle printed what could almost be considered a bearish engulfing range
but itMs not text book. I reali(e the candle patterns are usually used to time reversals in an uptrend
but it can also have merit as a trend continuation indicator also. IMm wondering if U&.$F$ is going to
give way tomorrow morning with the Swiss V72 data followed by the .S. D!) numbers on the
docket. I went looking on a longer term chart to see what might be holding up S!6A52 at U&.$F$
and this is what I found.
I have an idea how to play this but I need to wait a bit longer before I make any moves. Stay tuned
and best of luck.
Swing and a Miss
)osted on May <F, <$$G at I+># in Trading !esk by ;yan 7*Veefe> Aomments \
4ooking back on my S!6K)H thoughts I underestimated the strength !ollar would en8oy. It seems
the risk appetite eased enough to send this pair much higher than I thought it would overnight. I was
stopped out on my small sell position but that is fine. Sometimes you swing and you miss, itMs the
nature of the business.
:ack later tonight with my regular long term analysis. I hope your having a great trading weekZ
Kapan Sees Aontinued Improvement
)osted on May <I, <$$G at <$+>L in Trading !esk by ;yan 7*Veefe& Aomment \
!ollar sentiment seems to be improving tonight against the Hen with a rally up to UGL. The !ollar
is challenging the lower boundaries of &GthMs !o8i. ;etail sales data out of Kapan tonight post a
better than expected 9<.G% loss versus the anticipated 9=.<% loss.UGL.$G marks a =F.<% pull back
from the down trend which broke the head and shoulders pattern on this pair. 4ooking at the daily
and weekly time frames I still think UGL is a decent pivot back to the downside on this pair. IMm
testing the waters with a small short at UG#.G$. I suspect if IMm wrong IMll get stopped out by the end
of 3ew Hork tomorrow, guess we will see. ;egardless of potential support at UG> the plan for now
is still the same, targeting UG<.I$ or lower.
Stay tunedS
IM)7;T'3T 37TIA"+ These comments are for information purposes only. My opinions or other
information contained in this post do not constitute investment advice. It should not be understood
as a direct recommendation to buy or sell any currency contract or other investment vehicle. 2orex
trading involves substantial risk of loss and is not suitable for all investors.
Missed it by an InchS
)osted on May <I, <$$G at I+#> in Trading !esk by ;yan 7*Veefe< Aomments \
5aving missed my short orders by 8ust a few pips overnight IMve decided to pull the orders off the
desk. S!6K)H has support on the !aily chart around UG> 6 UG=.#$ which I failed to notice last
night. IMm thinking this pair may be headed a tad higher after all, perhaps the sell is closer to UGL.
"ither way since IMm not L$ pips in the money this morning IMve decided to sit this out for now.
Stay tunedS
Selling )ivot for S!6K)H-
)osted on May <L, <$$G at &F+>F in Trading !esk by ;yan 7*VeefeAomments 7ff
5owdy folksZ
So e.uities rally, !ollar gets beat up and S!6K)H is boring to watch as usual but it looks like the
short idea I talked about yesterday may be getting closer. Tonight IMm watching the support pivot at
UG#.L$ which gave way last week. This has been a decisive area of support on the daily chart over
the last few months and now we are going to test it from below.
3ow comparing that to what I see on the four hour chart, I like the idea of selling around UG#.L$.
Ideally I can 8oin the daily chart head and shoulder breakout at a bargain price on itMs way to a lower
support level.
IMm planning a short at UG#.L$ but if things go horribly wrong IMll be stopped out around UGL.L$.
See the daily chart below for my longer term target on this trade. IMd like to see the pair fall back to
support and a L&.F% pull back around UG<.I$. ;isk to reward is 8ust shy of &+=.
Stay tunedS.
IM)7;T'3T 37TIA"+ These comments are for information purposes only. My opinions or other
information contained in this post do not constitute investment advice. It should not be understood
as a direct recommendation to buy or sell any currency contract or other investment vehicle. 2orex
trading involves substantial risk of loss and is not suitable for all investors.
Memorial !ay :reak
)osted on May <#, <$$G at &=+>I in Trading !esk by ;yan 7*VeefeAomments 7ff
5owdy 2olksZ
ItMs a beautiful day on the lake todayZ Alear skies, I$ degrees and a holiday weekend in the Seattle
area, you canMt ask for much betterZ I hope your having a great day in your corner of the globeZ
The holiday weekend in the nited States has obviously dried up the market activity so today IMm
8ust doing some week ahead planning on the ma8ors.
2iberMs assault against the !ollar was unforgiving last week as "uro posted five straight days of
gains. 2rom a technical view the pair has moved into a weekly (one of rather messy supply and
demand levels and it will be interesting to see if the rally can continue unabated this week. AAI on
weekly and daily time frames are oversold but that doesnMt mean the trend is done. 2or now IMm
sticking with the trend and planing to buy on a pullback if the right opportunity comes around this
week. I think U&.>< is in the 2iberMs sights but IMd like to see a pull back and 8oin up with some
bargain hunters.
!ollar sold off .uite smartly following the pullback day we talked about last week. There is a lot of
fundamental data on tap for Kapan this week including 8obless data, retail sales, consumer prices and
their trade balance. If the numbers continue to suggest continued stabili(ation and the potential for
expected growth the Hen could continue itMs assault against the !ollar. It also appears talk of
intervention was a false fear last week as well. 's usual, IMm interested in selling with bargain
hunters around the UG#.L$ level if the right opportunity comes along this week.
ThatMs enough shop talk for today, it is time to have some fun on the lakeZ
S!6K)H 2inishes a )ull :ack
)osted on May &G, <$$G at &F+>I in Trading !esk by ;yan 7*VeefeAomments 7ff
!ollar 6 Hen appears to have completed a pull back move on the consolidation that broke out last
week. TodayMs demand level ended up between UGL.#$ and UGL.LG which may offer a nice level to
short through a test of yesterdayMs high. ' short would have to be protected above UGL.F$ as the
pattern breaks down with a close back inside the triangle. UGL.$$ seems to be holding as a pivot
level for now.
!ollar Selling Aontinues 'gainst the Hen
)osted on May &#, <$$G at &$+#$ in Trading !esk by ;yan 7*Veefe< Aomments \
So yesterdayMs guess !ollar 6 Hen would continue to fall was correct. The sell off unfortunately
happened early leaving my orders in the dust. I was looking for a test of WednesdayMs demand level
high before a fall, oh well.
ThatMs all for this week, IMll be back on Sunday looking for some gap opportunities to tradeZ
:est of luck,
S!6K)H :reaks 4oose, 4ooking to Sell
)osted on May &>, <$$G at &I+=I in Trading !esk by ;yan 7*VeefeAomments 7ff
!ollar 6 Hen finally broke through daily chart consolidation with some gusto yesterday which
brings into play previous support between UGL and UGL.#$. If these previous support (ones provide
resistance the pair may give us some selling opportunities into our new found daily chart down
sing some simple 2ibonacci it appears the next support targets with price action confirmation
could be UG>.<I 0#$%1 followed by UG<.#$ 0L&.F%1.
:est of luck,
5ow 2ar Will S!6A'! )ull :ack-
)osted on May &&, <$$G at &I+=G in Trading !esk by ;yan 7*VeefeAomments 7ff
Kust a few posts ago I wondered whether or not S!6A'! would make it down to U&.&# and low
and behold, the pair turned right around on the U&.&# mark.
QIs S!6A'! 5eaded 2or U&.&#-R
3ow IMm pondering how far the pair may pull back before this daily chart trend continues. Thinking
out loud for a moment IMm going to keep my eye on the U&.<$ handle which is right above a L&.F%
pull back and corresponds with broken support back on >6=$.
I think itMd be slick to get a bearish reversal day somewhere in that (one.
What do you think about this pair-
Trading Sunday 'aps
'fter 2ridayMs huge !ollar fire sale I went looking for some gap trade opportunities Sunday night.
Trading gaps on Sunday can be a great strategy for folks who work a day 8ob. They seem to appear
fre.uently now with the marketMs added volitilty, that may not last but it is fun for now. This wasnMt
the cleanest trade IMve ever done but I managed to book a few points off S!6A52.
If you havenMt seen Sam SeidenMs presentation on gap trading IMd recommend taking a look, he has
some great points.
Strong ;etail Sales !ata 2or '!
)osted on May #, <$$G at <&+=I in Trading !esk by ;yan 7*VeefeAomments 7ff
'bout an hour ago the 'ustralian ;etail Sales data posted a <.<% increase versus an expected .#%
increase and the result was a sell off smack into a demand level at U$.I==#. I havenMt dived into the
report detail yet but the number itself is very promising. Trade balance data was better than
expected as well. If you want my opinion I think the initial sell off appears to be technical rather
than a reaction to the data because round number U$.I>$$ was drilled 8ust prior to the sell off. I
suspect some protective stops on any shorts left over from today were tripped above the Q$$] level.
'!6S! has nearly recouped the losses as I write this. 7verall '!6S! had a decent pull back
day within the uptrend yesterday and IMm personally looking for the marked demand level from a
couple days ago to hold up with more than 8ust a touch before I 8oin the trend again.
:est of luck,
IM)7;T'3T 37TIA"+ These comments are for information purposes only. My opinions or other
information contained in this post do not constitute investment advice. It should not be understood
as a direct recommendation to buy or sell any currency contract or other investment vehicle. 2orex
trading involves substantial risk of loss and is not suitable for all investors.
;ally !ay Within p Trends, 4ooking 2or )ullbacksS
)osted on May >, <$$G at <$+=> in Trading !esk by ;yan 7*VeefeAomments 7ff
5owdy 2olks,
Today was a rally day among most of the daily chart up trends IMve been watching. 2rom reading
this blog you know I prefer to buy into dips during an up trend. Since most of the pairs I watch
made new highs within their up trends, IMm looking for a decent dip day.
There was one exception, S!6K)H had been on a decent rally for the last few daily bars but today
it posted a sell off and lower close. I really looked for an interesting demand level to buy on but I
8ust canMt find anything satisfying about buying S!6K)H until it gets lower. "ven then the rally
may 8ust be a pull back within a larger decline so I reserve the right to be wishy9washy until a
clearer signal appears.
D:)6S! posted about a #$ point bump above U&.#$ today. The .uestion is will U&.#$ hold straight
away headed into 4ondon or will this pair need a deeper pull back before the buyers return-
4ooking over D:)6S! price action I see a couple of areas which may be interesting to watch over
the next trading day. I like the U.&>FL& level better than the U&.>GL$ level but as I mentioned in the
beginning of the post yesterday was an up day in an up trend and IMd prefer a deeper pull back,
perhaps down to U&.>F$$.
D:)6S! is up against some resistance as well so watch out around U&.#$LF which was the high
mark before last monthMs L$$ plus point sell off.
;DD*DSD Nears #$annel Houndaries
We are awaiting the ;oyal :ank of 'ustralia to release their Interest ;ate decision in about two and
a half hours from the time IMm writing this. The ;:' is expected to leave rates unchanged at
=.$$%. This pair has traded inside a channel we have monitored since I started writing this blogZ It
will be interesting to see if the pair is moved lower into demand levels before it can move higher
after the rate statement. I personally donMt think the upper boundaries of the channel will stymie the
pair but you never know. ' break higher may put U.IL$$ and U.IF$$ into play, a reversal and we
look to move back to the lower boundaries of the channel over the medium term.
Finding Fibonacci in various markets
Ni77ei !ersus Dow
The 3ikkei is a widely traded index of ma8or Kapanese shares. It is considered the !ow Kones
Industrial Index of Kapan. Hou would think that since the worldMs ma8or economies are globalised
and inter9connected that the worldMs stock markets would move more or less in synch. 'fter all, a
slowdown in the S' and "urope should result in a similar move in Kapan and Ahina as these
countries are export9driven.
:ut compare the 3ikkei with the !ow on these daily charts going back to the pre9credit crunch
0#lic% on the chart for a larger version1
0#lic% on the chart for a larger version1
2ollowing the <$$I9<$$G collapse, the 3ikkei managed to rally to the exact =F% 2ibonacci level
0blue bar1 N and had declined ever since. That was a great place to short the 3ikkei.
In the !ow, we saw a similar collapse, but the !ow rallied to a deeper L<% 2ibonacci retrace before
hitting resistance. That was also a great place for a short trade. :ut here, the !ow has rallied, unlike
the 3ikkei. Maybe markets are not so inter9connected after all.
4etMs take a look at recent action in the 3ikkei+
0#lic% on the chart for a larger version1
The decline off the 'pril peak is a clear five9wave affair N complete with a positive momentum
divergence at the wave # low. That is pure textbook and indicates the main trend is down.
:ut when you see this pattern, you know a rally lies ahead and it becomes a good idea to cover
The first rally carried to the 2ibonacci =F% retrace 0blue arrow1 and after a series of overlapping
waves 0indicating a likely pause in the bear market1, the market made two stabs at the 2ibonacci
#$% level 0blue bars1 and is currently challenging recent market lows.
The rallies to the #$% level were ideal places to enter short trades, of course.
I find that the shallow =F% retraces normally indicate a prompt resumption in the downtrend, while
the #$% and deeper retraces normally indicate more work before the bear market can get back on
EDF !ersus DSD
The euro has been in a bear market for some time, but with a recent large correction.
0#lic% on the chart for a larger version1
2ollowing MondayMs &.<F low N a new low for the move 9 the market this week has rallied in a clear
'9:9A form 0indicating a correction1, and the market made it back to the 2ibonacci L<% retrace
with a slight overshoot 0purple bar1.
These ^pigtailsM are .uite common and usually mark the end of the move.
'gain, a short trade at the L<% area was indicated.
'nd finallyS
'HP !ersus DSD
This market has been swinging wildly recently with no clear direction, and here is the action over
the past few days+
0#lic% on the chart for a larger version1
2rom 2ridayMs high, the decline occurred in five waves+ with a nice positive momentum divergence
at wave #J then a rally to the =L% 2ibonacci levelJ then a dipJ and then a run up to the #$%
level. This last run completed a nice '9:9A 0purple lines1 corrective pattern.
The odds favour a declining market, which would be confirmed by a move below MondayMs low N
and in fact as I write, this move has 8ust occurred in the past minuteZ
In these posts, what I write can very .uickly become out of dateZ
Hou are here+ 5ome 6 2oundations of )rice 'ction Trading 6 Identifying S! _ones N !ecisions and
Multi T2 'nalysis
Identifying SD Zones Decisions and Mu!ti "F #na!ysis
September <, <$&< :y love8oyF$ & Aomment

So far we have learnt+
The concept of supply and demand and how it is the driver of price movements.
The four different types of supply and demand (ones.
What is meant by support, resistance and the familiarities and differences to supply and
5ow to find supply and demand (ones within an S; (one.
5ow being able to identify S! (ones and key decision levels, can have a significant positive
impact when trading at S; (ones 0in determining entries and stops1.
5ow an untested fresh S! (one has a high chance of re8ection price on the first return.
The more times an S! (one is tested the weaker it becomes as with each re8ection price is
^consumingM supply 6 demand.
The final step in order to understand the basics of price action is to be able to mark up supply and
demand (ones on a chart and determine where price should react within the (one.
The video below discusses examples of marking up supply and demand (ones on the higher time9
frames and then (ooming in to determine where price is ^likelyM to react i.e. where the supply 6
demand 0big money orders1 are situated.
Identifying !emand and Supply _ones by thethetradersguild
' brief summary of the key points to note from the video are+
To identify S! (ones on a chart we look for the types of (ones outlined in this post.
We should use a top down analysis N start from higher T2Ms working our way down.
What I commonly do is identify a 5&,5>, !aily T2 S! (one and (oom down each T2 to
identify the key decision levels within the (one.
These decision levels consist of a1 clear areas that had to be broken in forming the S! (one
b1 source of the initial move c1 clear untested supply 6 demand N remember we can tell
supply and demand by looking for signs of re8ection from a specific level.
The above can be used to poinpoint with high accuracy where the large orders 0professional
money1 is situated N remember price action trading is all about identifying the large
institutional orders and following them.
The last example in my video was off a trade taken recently on D3_! based on a daily T2 S; N the
chart below highlights where my entry and S4 were placed 0#min T21. The second chart explains
the reasoning behind my entry and S4 levels 0&min T21.

This trade demonstrates how we can pinpoint with high accuracy where price should meet supply
and demand and how we can use this to pinpoint entries and tight S4Ms when trading a re8ection
from an S;. Aompare this to conventional teachings which may tell you+
That touch trading is aggressive and itMs better to wait for confirmation in the form of a bar
or price pattern on a higher T2.
"ntries on touch trades are based on finding the average price between wick extremes within
the S; 0yes people do actually teach this rubbishZ1.
S4Ms should be placed under significant swing high 6 lows below the S; or the S4 should be
placed below the breakout bar low N both of which of course having nothing to do with
where price should react and why.
This of course leads to low trade fre.uency 0always waiting for a pattern to form before taking a
trade from an S;1, missed entries 0because of an entry techni.ue not based on supply and demand1
and wide stops leading to poor risk6reward. ItMs not hard to see why people struggle to good
consistent returns trading through conventional price action teachingsZ
Tired of Heing Too Early or ateO
;ick Wright
So youMve analy(ed the charts and have decided that your currency pair is trading at the right
location for a possible reversal N a clear level of supply or demand. The .uestions in the back of
most tradersM minds are, PWill this level hold- 'm I too early-P This is where multiple time frame
analysis can help a trader decide W5"3 to trade. The way I look at the charts is+ My larger time
frame tells me W5";" to enter, and my smaller time frame tells me W5"3 to enter.
' very common problem with new traders is buying or selling too late, or waiting for too much
confirmation. :y the time the moving average has turned, for example, and the trader buys, the
move has already started and your stop loss may be do(ens of pips further out than it had to beZ The
opposite side of buying or selling too late is trading too early. Oery often traders will try to pick
bottoms or tops, yet the price continues and stops them out. ' relatively simple way to fix both
problems is multiple time frame analysis.
2igure &
7n this > hour ";S! chart, the blue arrow indicates the lowest risk, highest reward entry on the
long side. 5owever, many newer traders will be unwilling to take that long trade as the market has
been trending down for the past several days. The fear in this traderMs mind is keeping him from
buying, because of the simple fact that the trend may continue down and hit his stop loss. Waiting
to buy on a close above the upward trending moving average will get him in, but not until &.=FI#.
The experienced trader is looking to the left on the chart and defining his demand (one 0which was
also a supply (one previouslyZ1 from the two dramatic moves to the upside from the &.=IL& level.
This trader will get in, but approximately &$$ pips cheaperZ
3ow the .uestion remains+ 5ow can I get a better entry yet still have confidence that IMm not too
2igure <
sing our multiple time frame analysis, we can see on the &# minute chart that the price action
came down into our demand (one TWIA" within the four hour candle. This even shows us a double
bottom pattern, a very common reversal pattern. So now, waiting for the blue arrow, the trader has a
higher degree of probability in their long trade. Still not enough confidence- 5ow about the do8i
candle with the longer tail, giving a potential bullish reversal- I hope that three reasons to go long at
the blue arrow are enough for youZ If not, then try throwing in a moving average on this smaller
time frame. Waiting for the trend to start will give you more winning trades N albeit with larger
stops and smaller winners. If you waited for the close above the moving average on this chart, you
would still be getting in around the &.=IG$ level N =$ pips higher than the best entry, but about F#
pips better than if you only watched the > hour chartZ
In class, we call this Ptiming our entry.P :uying in high .uality demand (ones and selling in high
.uality supply (ones has been covered numerous times in previous 4essons from the )ros
newsletters. The only potential pitfall in this techni.ue is getting in too early. 5owever, with lots of
screen time, you will begin to trust the levels you have identified. sing the smaller time frame
chart to confirm your entry within your longer time frame supply and demand (ones will lead to a
higher percentage of winners, and give you more confidence in trusting your levels.
7ne simple way to watch these charts is to set up two time frames for the currency pair0s1 you will
be trading.
2igure =
If you are looking at only one chart and switching back and forth between your long9term and short9
term time frame charts, you will certainly miss a trade once in a while. So I do recommend having
two charts of the same pair next to each other on your screen. )rovided your trading computer has
the necessary screen space, why not have these two charts for every pair you trade up at the same
time- Trading from a laptop would make this a bit difficult to see the price action, but if you have a
larger monitor or three, this would be a very efficient techni.ue.
4onger term position traders will often use daily and one hour charts, swing traders may use > hour
and &# minutes, and shorter term may even be using & hour and # minute charts. 'lways keep in
mind that larger time frame supply and demand (ones are more important than smaller time frames,
and this techni.ue should help.
2eb <>, <$&<+ F+&< 'M AST
Though itMs been mentioned fre.uently on the news, the recent crude oil price breakthrough has
been impressive on the charts as well.
4etMs take a look at the current structure of Arude 7il and pay special attention to the breakout from
consolidation6resistance, as well as the current Q7pen 'irR pocket to watch.
Here8s t$e Daily #$art Structure&
I wanted to highlight the main points of the chart, including two trades that developed for
aggressive traders.
2irst, 7il struggled against the U&$= overhead resistance level and formed a clear sideways trading
range 0;ectangle )rice )attern1 between UG#.$$ and U&$<.#$ as labeled above.
This allowed an opportunity to play a QSupport :ounceR 0including the <$$d SM'1 from UG#.$$ as
2ebruary began.
The initial target for a Q;ange )lay off SupportR is always the top of the range or resistance N in this
case near U&$<.#$.
When price broke firmly above the U&$<.#$ line and began trading even higher than that this week
N particularly on the break and close bar on 2ebruary &Ith N it triggered a :reakout trade.
That breakout trade is still in motion, though thereMs no clean6easy entry after the initial breakout
0per breakout trading logic1.
Here8s t$e Pure Price #$art to $ig$lig$t t$e current EIpen ;ir Poc7et&G
The U&$<.#$6U&$=.$$ area was important as it provided prior areas of resistance from mid9<$&& to
present N particularly from May6Kune.
The firm breakout and continuation move higher this week officially enters the Q)ocketR of 7pen
'ir between U&$# and U&&# N thereMs no obvious price resistance between those (ones given the
sharp drop in May.
While price may not continue straight up6directly higher without some sort of retracement, price
may ultimately continue its higher movement towards the prior reversal high at U&&#.
This is the logic of Q7pen 'irR N looking backwards on a chart to see any obvious price targets or
levels. 'n absence of these barriers suggests continued movement through the Q'ir )ocket.R
"or t$ose wis$ing to loo7 inside t$e Daily #$art@ $ere is t$e Hourly #$art Structure&
I wanted to make a .uick note from an educational standpoint, particularly with regard to higher
3ote the UG# confluence support area on the !aily Ahart and now view the structure as it appeared
at the beginning of 2ebruary.
The 5ourly Ahart showed a downtrend developing multiple positive momentum divergences into
the !aily AhartMs confluence support at UG#.$$.
This helped confirm the bigger picture Q;etracementR or Q;ange :ounceR play mentioned above.
"ventually, price broke through the falling 5ourly trendline and developed a QVick97ffR surge in
Momentum N an early chart signal of potential trend reversal.
T$is pro!ides a good example of one of my fa!orite Pcomplex8 trades&
5igher Timeframe Support E 4ower Timeframe )ositive !ivergences6Vick97ff Signal
"ventually, the :reakout Trade developed from this weekMs breakthrough beyond U&$>.$$ and
U&$#.$$, placing us in the current Q7pen 'irR _one.
2or now, letMs watch price in the context of the !aily AhartMs support level near U&$= 0if youMre
bullish, you donMt want to see price return back under U&$= anytime soon1 and the current
impulse6trend move making its way through Q7pen 'irR perhaps all the way back to U&&#.$$ as a
potential target.
#$arting t$e Hrea7down and Ley e!el in t$e #FH 6ndex
7ct >, <$&&+ &+<# )M AST
Aommodities N along with e.uities N have fallen sharply since their respective May <$&& market
4etMs take a look at the breakdown in the A;: 0Aommodity1 Index and note the critical confluence
reference support level upon which the index sits currently.
2irst, letMs start with the May peak of =I$. I showed previously that there was a QThree )ushR price
pattern accompanied by a corresponding negative momentum divergence, which was a ma8or
caution sign for the index.
)rice then broke both the <$ and #$ day rising "M's, resulting in a new price and momentum low
0a QVick9offR "arly ;eversal Signal1.
)rice stagnated between ==$ and =#$ for the next few months, though price structure took on a
bearish pattern which confirmed an official trend reversal on the break under =<$ in 'ugust.
The 'ugust breakdown also triggered a close under the rising <$$ day SM', often a Q4ine in the
SandR marker between bull and bear markets 0at least in simplest terms1.
In late September, Aommodities in general collapsed towards the current =$$ target after triggering
a Q:ear 2lagR or breakdown reversal set9up into =>$ 0the underside of the <$$d SM' reference
2or reference, this is a good example of how a chart9based Trend ;eversal develops and is
confirmed by non9correlated indicators 0QThree )ushR price pattern, negative momentum
divergences, "M' breakdowns along with bearish cross9overs, new momentum low QVick9offR
signal, break under <$$d SM', etc1.
68ll be discussing Trend Fe!ersals in muc$ more detail during two upcoming presentations&
Q!esigned by Traders+ Trading Trend ;eversals Q Ictober ,)@ 1&1. #ST
5ow to Spot and Trade Trend !ays N0when to expect them, how to adapt your tactics6trades to
them1 N at the upcoming 4as Oegas Traders "xpo in 3ovember.
't present, the index trades at the same level as when the 2ederal ;eserve initiated its QInflation9
AreationR program known as ,"< 0,uantitative "asing1.
T$at8s important to 7now as we turn now to t$e wee7ly c$art to see w$y t$e 1.. le!el is a !ery
important index reference le!el&
While you can spot other lessons in the chart above 0the interesting correlation between ,"& and
,"< on the A;: Index, negative divergences and reversals into Kanuary <$&$ and May <$&&1, letMs
focus our attention simply on the two 2ibonacci ;etracement grids overlapping at the =$$ level.
The FED "ibonacci 'rid is the Q:ear MarketR retracement up, starting with the <$$G low and
moving back to the <$$F peak.
The 'FEEN "ibonacci 'rid is the Q:ull MarketR retracement down, starting with the <$&& high
and moving back to the <$$G low.
Hou can also see that the <$&& high into =I$ 0and the negative daily divergences1 developed into
the L&.F% 2ibonacci ;etracement of the :ear Market N very interesting.
C$at8s most important rig$t now is t$e double-confluence Bust abo!e 1..&
The =F.<% Q:ull MarketR retracement at =$L and also ironically the =F.<% Q:ear MarketR
retracement at =$>.
To throw another classic indicator into the mix, the flat <$$ week SM' resides at =$L.#$.
's you can see above, price is nipping under this higher timeframe confluence area which isnMt a
good sign for buyers.
In the meantime, watch the reference support from the 3ovember <$&$ Q,"<] low near <G# along
with the weekly confluence above =$$.
Kust like in stocks, a failure to hold their critical current support reference levels 0see prior posts on
the levels to watch in all stock market indexes1, a breakdown here suggests lower prices will be
seen in both stocks and commodities, so keep all these important levels in mind as you trade this
0and next1 week.
Aorey ;osenbloom, AMT
'fraid to
2ollow Aorey on Twitter+ http+66twitter.com6afraidtotrade
AoreyMs new book $he #omplete $rading #ourse 0Wiley 2inance1 is now availableZ
Aontinue ;eadingS
= Aomments and > ;eactions

esson from an 6ntraday #reeper Trend Fe!ersal on

Sep <G, <$&&+ &$+## 'M AST
)reviously, I explained what a QAreeper TrendR is, how it develops, and N if youMre willing to feel
uncomfortable N how to trade it 0itMs not your typical trade set9up1.
I wanted to follow9up that lesson with a great example of a QAreeper TrendR formation 0trade
entry1, Trend ;eversal 0with excellent positive momentum divergence example1, and re9formation
of a Areeper Trend in the 7))7SIT" direction.
While this is your standard QTrend ;eversalR example, I wanted to take it a step further and explain
it in terms of Q2eedback 4oopsR and QAreeper TrendsR which are important but often misunderstood
et8s start wit$ t$e 3-min Ebigger pictureG structure of #rude Iil at t$e end of September
"or simplicity@ we8ll focus on two main lessons&
&. The Areeper Trend Move 0see Q4essons on Areeper TrendR for detailed explanation1
<. The ;eversal of the Areeper Trend on Alear 04engthy1 )ositive Momentum !ivergences
The goal is to empower you to spot 0and understand1 a Areeper Trend in real time and then trade in
the direction of the Areeper trend 3TI4 a clear reversal signal develops 0and what that signal is1.
Starting at the top left of the chart, price formed negative momentum divergences, broke under a
rising trendline along with the <$ and #$ "M's, and then formed a Qsupport shelfR above UF=.$$
per barrel.
7ur conversation begins when price triggers a QSell ShortR signal at &&+$$am AST with the break
under the UF=.$$ support shelf.
What resulted was a bar9over9bar )ositive 2eedback 4oop that evolved into an infamous
QAreeper67o(ingR Trend that didnMt really give traders good entries, exits, or risk9management
ThatMs what a Areeper Trend does N it confuses many traders and leaves them sidelined, never .uite
getting that perfect retracement entry.
4etMs focus our attention on the overnight reversal off of lengthy 0persistent1 )ositive Momentum
!ivergences 0=6&$ 7scillator1 at the UF$.$$ per barrel level.
In a Trending Move N including intraday Areeper Trends N we look mainly to "M's 0exponential
moving averages1 to provide structure and trade entries on retracements.
(e also loo% to these :-)s ; I prefer the 4< and =< periods ; for reversal signals when price
>8:)?S $&8/,3& these averages.
We confirm the move by assessing the picture from Momentum N namely we want to see lengthy
positive divergences '5"'! of a breakthrough.
We also want to see if the oscillator thrusts to a new relative high which accompanies the "M' 0or
trendline1 breakthrough. If so, this is a hidden signal of strength N hidden because traders who are
not assessing momentum do not see the QburstR or Qkick9offR signal in the oscillator.
; :omentum Lic7-off occurs when an oscillator thrusts to a new relative high 0preferably off
divergences1 when price is clearly 37T making a new relative high.
Traders should not remain short after a kick9off signal that accompanies a price breakthrough of a
trendline or "M' structure N in fact, this is an aggressive :H signal to play the potential Trend
;eversal in !evelopment.
Traders place stops under the swing low when entering on the Trendline6"M' breakthrough N in
this case at UF$.#$.
'n opposing or bullish 2eedback 4oop 0QAreeper TrendR1 developed to the upside, resulting in a
similar bar9over9bar creeper6oo(ing price action until price developed a sideways support shelf
around L+$$am.
nlike the prior session, price actually 5"4! this support shelf, resulting in a breakout Q:ull 2lagR
buy signalS but thatMs another story for another day.
"or additional reference@ $ere are t$e ,-min c$arts t$at step-us inside bot$ t$e down-mo!e
and t$e up-mo!e&
#rude Iil8s Fe!ersal Signal and subsequent bullis$ E#reeper TrendG de!elopment&
4ower timeframe charts provide a clearer picture of what weMre seeing on higher frames, allowing
us to Qstep9insideR the price action seen on a higher frame.
The important thing to learn from this reference post is the development6ignition of a Areeper
Trend, the ;eversal Signal via positive divergences, and the official Trend ;eversal that created N
surprise N another Areeper Trend situation.
Take time to learn the lessons from clean examples like these so youMll be better prepared to
recogni(e then trade these situations when they develop in real time in the future 0across all markets
and timeframes1.
68ll be discussing similar situations*examples as t$ese in my upcoming webinar presentation&
Q!esigned by Traders+ Trading Trend ;eversals Q 7ctober &<, =+=$ AST
'dditionally, IMll be speaking specifically on Trend !ays N how to spot them in real time, how to
trade them, when to expect them, how to adapt your tactics6trades to them N at the upcoming 4as
Oegas Traders "xpo in 3ovember.
Aorey ;osenbloom, AMT
'fraid to
2ollow Aorey on Twitter+ http+66twitter.com6afraidtotrade
AoreyMs new book $he #omplete $rading #ourse 0Wiley 2inance1 is now availableZ Aontinue
& Aomment and # ;eactions

#$arting t$e :ulti-Timeframe :a7e or Hrea7 Support at

Dow ,)...
'ug &, <$&&+ <+#G )M AST
Well, here we are at the well9known Make or :reak chart support at !ow &<,$$$.
This is what I mean when I say refer to critical chart reference levels to make ob8ective sense of all
the good and bad N often confusing N economic6political headlines affecting the market at the
ItMs really as simple as QThe market is holding critical support so thatMs ob8ectively bullish, or itMs
firmly breaking strongly under critical support which is ob8ectively bearish.R
If youMre finding yourself confused as to which way is up or down in the S ".uity Markets, take a
moment to look at the following reference charts+
If you prefer the S/) #$$, check out my prior reference post on the S/) #$$+
QMaking Sense of the Aurrent S)#$$ Market ;angeR
QS)#$$ Aritical Support on Weekly Trendline AonfluenceR
68m a fan of 7eeping c$arts =tec$nical analysis> as simple as possible and $ere it is&
"ither the market supports and holds bullishly at &<,$$$, returning higher as it did recently in <$&&
or it doesnMt, which opens up the door to expect &&,#$$ or even lower for a full trend reversal.
What weMre seeing presently in <$&& is very similar to that of mid9<$&$ where &$,$$$ became the
ma8or market QMake or :reakR :ull6:ear 4ine in the Sand.
ItMs not magic and price didnMt respect &$,$$$ perfectly, as seen with the <$&$ low of G,L$$ in Kune.
We could still see a similar QnipR or trap here at the &<,$$$ level so donMt expect &$$% perfection of
chart magic.
Vey levels reflect true battle points between :uyers and Sellers 0Supply and !emand1. ' key level
that breaks thus forces action from those trapped by failed expectations.
Subse.uent moves create Q2eedback 4oopsR that send the market moving off the inflection point in
a sustained move. Traders look to take advantage of these low9risk points.
4etMs step inside the !aily Ahart to see another reason why &<,$$$ is so important on the chart+
Similar to &,<F$ on the S/) #$$, the <$$ day Simple Moving 'verage rests almost exactly at
&<,$$$ which 8oins both the short9term trendline from the March <$&& low and the intermediate
trendline as seen on the weekly chart.
:uyers have placed simple stop9losses under &<,$$$ and &&,G$$ 0Kune low1 which will be triggered
should sellers push the index under &<,$$$ then &&,G$$. ThatMs something a trader can expect.
' breakdown under &&,G$$ returns the market to &&,L$$ where it will be a ma8or battle of buyers
and sellers. Should buyers6bulls lose the Supply6!emand battle at &&,L$$, then this could be
deemed as an intermediate term sell9signal which would suggest 0or confirm1 a trend reversal down
on the higher timeframe.
Vey levels like this arenMt magic N however, they often trigger self9fulfilling prophecies that result
in perpetual moves called Q2eedback 4oopsR where traders can take advantage 0or limit losses if
caught on the wrong side of a feedback loop1.
Speaking of Traders, aggressive short9term traders can easily take advantage of a price movement
into a ma8or6key price level+
4etMs assume you are an intraday or swing trader looking to buy into the expected support at !ow
&<,$$$ 0whether using futures or the !I' "T2 or corresponding stock or "T21.
's the !ow tested the critical &<,$$$ level from &$+=$ to &&+=$am 0AST1, we observed reversal
candles that were accompanied by both a positive momentum and TIAV 0market internal1
The combination of reversal signals and positive divergences off a critical make9or9break support
level suggested odds favored an upward reversal in price.
If the upward reversal thesis failed, then thatMs ok because this situation allowed for a tight stop
under the &<,$$$ level 0&&,GG$, &&,GF$, and so on depending on your risk tolerance1.
Veep in mind that price has a tendency to nip a few points under a critical level before reversing N
we call this a Q2inger,R QTrap,R or Q;inse6WashR Situation. It happens.
'ggressive traders like to buy I3T7 a support level while conservative traders like to buy '2T";
support held and price then breaks a falling trendline or moving average.
)rice broke above &<,$#$ at noon, then broke above &<,$I# at &+>#pm.
It can be a little less stressful to buy on a breakout than buying into support, at least if you want
greater odds that a support level is holding.
't &<+=$pm, the TIAV 0internal1 gave a QVick9offR ;eversal signal which further confirmed that the
odds shifted to favor a positive6bullish reversal.
's of this writing, price rallied higher from &<,$$$ to the &<,&<# level.
'nyway N thatMs a discussion of a short9term intraday set9up, the kind of which I describe each day
in the Ideali(ed Trades reports 0with more detail, explanation, and trade logic for reference1.
The main idea is this:
ThereMs a lot of economic and political news affecting the market at the moment N more than usual.
't times of increased noise and volatility, itMs important to pull the perspective back and look at the
big picture to focus on critical price levels in key markets.
2or now, &<,$$$ is the critical reference level to watch in the !ow Kones, 8ust as the &,<F$ and
&,<L$ level is critical to watch in the S/) #$$.
se these levels as references to guide your game9plan and trading decisions accordingly N
otherwise you may feel very bullish one day and then tremendously bearish the next.
Dround yourself with ob8ective price reference levels and observe how price is behaving at these
Aorey ;osenbloom, AMT
'fraid to
2ollow Aorey on Twitter+ http+66twitter.com6afraidtotrade
AoreyMs new book $he #omplete $rading #ourse 0Wiley 2inance1 is now availableZ Aontinue
& Aomment and # ;eactions

; %uic7 6ntraday Pee7 6nside t$e SP3.. at t$e ,1.. e!el

Kul &F, <$&&+ &<+>= )M AST
To follow9up with my prior morning post on the QMonday Morning Stock Index pdate at
Midpoint Oalue 'reas,R I thought it would be helpful to show the current structure of the &9min
chart during lunchtime.
In other words, weMre all watching the QMake or :reakR &,=$$ region, but what is the market
et8s ta7e a pee7&
WeMre seeing the plain S)#$$ )rice Ahart with the =6&$ 7scillator and the 3HS" TIAV 0Internal1.
Whats the message
Doing down in to the &,=$$ level, the key indicators formed lengthy )ositive !ivergences into the
&,=$$ pivot 0actually on a slight ^nipM or potential ^trapM under it1.
Kust now, we received a bullish QVick9offR Signal in TIAV 0after the &&+$$am signal from
ThatMs a good sign if youMre a bull who is expecting a bounce off this level, and a caution sign if
youMre a bear who is expecting a big break.
's of lunchtime on Monday, we have 37T received an official breakdown sell signal. That may
change into the close, but for now, the ball is on the bullsM court and itMs their short9term game to
In other words, if there were new momentum and TIAV lows as the market fell intraday to &,=$$,
we would simply expect a firm breakdown N buyers could not stop the tide of selling.
5owever, what weMre seeing at this moment 0which admittedly may change1 is hidden strength from
the buyers6bulls and a willingness to defend the &,=$$ level at the moment.
4ook for further confirmation intraday buy signals on a break of prior swing highs from the
morning N &,=$< then &,=$> come to mind.
7therwise, continue watching your intraday charts to see inside this critical tug9of9war between
buyers and sellers at &,=$$ and be ready to trade accordingly.
If the bulls give up the advantages here 0from the divergences and support1, it would likely trigger a
feedback loop of selling pressure 0bears shorting and bulls selling to stop9losses1 on a firm
breakdown under &,=$$ and Qfailure testR of &,=$$Ms critical6obvious market support.
Aorey ;osenbloom, AMT
'fraid to
:omentum Lic7off from Dual Timeframe Support Example
in Harley HI'
Kul >, <$&&+ &&+<= 'M AST
' reader recently asked me if we had a QVick9offR Signal in 5arley !avidson 057D1 and indeed
we did N with powerful follow9through as anticipated.
The entire event gives us a great lesson in the Vick9off ;eversal Signal, with the special emphasis
on two9timeframe confluence support 0on a retracement1 where the Vick9off ;eversal Signal
formed on the intraday frame.
4etMs take it step9by9step and learn from this excellent reference.
"irst@ let8s build down from t$e $ig$er frames 9 T$e Cee7ly Structure&
Without getting too detailed, we note the QStructureR 0the se.uence of swing highs and lows1
reveals 57D to be in a persistent, long9term uptrend, triggered officially from 'ugust <$$G.
Through most of <$&&, the stock pulled back 0retraced1 to the critical confluence support level of
U=#.$$ per share. It was both the rising #$w "M' and the prior price swing high from 'pril <$&$.
To keep it simple, weMll 8ust refer to this as a QMake or :reakR support level in the context of a
multi9month retracement6pullback to support.
Now@ we see t$e Daily #$art for more detail&
'gain, keeping it simple, this QbearishR period on the daily chart 0from 'pril to Kune1 was 8ust a
stable6simple pullback on the Weekly 2rame.
The U=#.$$ level was our Weekly ;eference price, and we can see a confluence with the rising <$$
day SM' along with a prior tiny price high from !ecember <$&$.
3ow we see multi9timeframe 0Weekly and !aily1 expected support at U=#.$$ per share.
This example is a good follow9up to my recent QVick9off ;eversal SignalR webinar from Trader
Vingdom 0archive1.
Towards the end, I described a situation where a higher timeframe retracemet to support occurs and
then explained how a trader should then drop to lower timeframes 0intraday1 to see developing
structure and whether or not a QVick9offR reversal signal forms there.
This situation in 5arley !avidson is a great Qfollow9alongR accompaniment to the presentation.
The chart above is QcheatingR as we can see the favorable resolution of the retracement, but to
understand how this would have played out in real9time, envision yourself seeing this at the
beginning of Kune as price retraces into the U=#.$$ per share level.
There is a lengthy positive momentum divergence into this dual9timeframe support level as price
retraces to test U=#.$$.
Now@ let8s drop-down to t$e $ourly =intraday> c$art to assess w$at t$e structure re!ealed 9
including t$e Lic7-off Fe!ersal Signal&
2or fun, I labeled two Q!ownside Vick9offR signals in early 'pril 8ust for additional reference.
2or our purposes here, we have price pushing down into the U=#.$$ confluence support level as
visual positive momentum divergences form in the =6&$ 7scillator.
Then, on Kune Lth, 5arley simultaneously breaks a short9term falling trendline '3! forms a Vick9
off "arly ;eversal Signal.
To refresh, the QVick9offR Signal triggers when price is moving down into positive divergences and
then a price swing up results in a new momentum high 0new oscillator high1 in the indicator while
price is 37T making a corresponding new high.
This is based off the teachings of ;ichard Wyckoff as a Q5iddenR Sign of Strength via Momentum
that price does not yet reveal.
The trade generally is to buy the first retracement swing '2T"; a Vick9off Signal forms, or wait to
buy the actual price breakthrough above the QVick9offR )rice 5igh 0in this case, U=F.$$ per share1.
Immediately following the Vick9off Signal on Kune Lth, price swung down officially into the dual9
timeframe key QMake or :reakR support level at U=#.$$ per share and then ;e9broke above the
falling trendline on Kune &>th above U=L.$$ 0an aggressive buy signal1.
Shortly after, price then officially broke above the QVick9offR price high at U=F.$$, triggering a late
but safe entry.
!ue to the higher timeframe confluence support, the stop9loss for the bullish reversal play rested
under U=#.$$ 0U=>.#$ perhaps to give some ^wiggle roomM1.
2rom there, price continued its strong impulse higher and moved .uickly back to the U><.$$ per
share swing high, allowing for a .uick swing trade that was confirmed with multiple timeframes
and a Vick9off.
To recap 9
We had a primary uptrend and a simple pullbac7*retracement to t$e dual-timeframe price
confluence expected support at U=#.$$ per share.
While most traders find this to be enough information to put on a swing trade, other traders can
Qstep insideR the developing structure to assess whatMs developing on the intraday frame for clarity
and better execution.
In this case, we had a positi!e momentum di!ergence into a Lic7-off Early Fe!ersal Signal and
then a confirmation via a brea7t$roug$ of a falling trendline and then a break above the QVick9
offR swing high at U=F.$$ 0late entry1.
Hou donMt have to go to this level of detail when planning6executing a trade, but for those who want
to do so, this recent example in 5arley !avidson gives a great lesson in dual9timeframe confluence
support and integration of the intraday chart for a clearer perception of the opportunity, entry, stop9
loss price, and real9time trigger0s1 as the trade develops and confirms.
Aorey ;osenbloom, AMT
'fraid to
2ollow Aorey on Twitter+ http+66twitter.com6afraidtotrade
AoreyMs new book $he #omplete $rading #ourse 0Wiley 2inance1 is now availableZ
Aontinue ;eadingS
& Aomment and I ;eactions

Moin #orey for a Cebinar Cednesday Mune )- on t$e

:omentum Lic7off 9 Early Trend Fe!ersal Signal
Kun <G, <$&&+ &<+$> )M AST
I wanted to invite you to attend a Webinar 0Wednesday, Kune <Gth at =+=$pm AST1as part of the
Trader Vingdom QTechnical Trading &$&] educational series where I will be discussing an
important set9up6trade signal that often signals an early trend reversal.
QThe Momentum Vick9off N Identify and Trade Trend ;eversals 'head of the Arowd,R
I will be discussing how to identify this signal, the logic behind it, and how to trade properly
0position1 when this signal triggers intraday.
WeMll start be defining QMomentumR and how it has a tendency to lead turns in price, particularly in
terms of a Qkick9offR or sudden impulse in momentum 0as seen in oscillators and market internals N
specifically the TIAV1 at specific times in the intraday structure.
WeMll then move to defining how to recogni(e, enter, manage 0place stops1, and exit positions that
develop as a result of this concept.
While I will focus the ma8ority of the presentation on the intraday frame 0using examples from
multiple futures markets1, this concept can be applied as well on the higher frames 0to swing
traders1 and of course to stocks along with "T2s as well.
Here8s part of t$e official description of t$e e!ent&
QThe initial QMomentum Vick9offR signal is one of the clearest and most powerful early signals of
trend reversal, especially when it is preceded by clean momentum divergences.R
Q!rawing from examples in multiple markets and multiple timeframes, Aorey will broaden your
awareness of this time9tested concept that is based off the original work of ;ichard Wyckoff. 5e
will put the original principle in context of todayMs markets and indicators that complement the
reversal signal.R
This is a free webinar event and the presentation will be archived and available to those who
registered if you are unable to attend the webinar live.
Thank you to Trader Vingdom, IA" 2utures, and _en2ire for sponsoring this webinar opportunity
and I hope to see you thereZ
Aorey ;osenbloom, AMT
Aontinue ;eadingS
# Aomments and I ;eactions

; %uic7 esson on How to 6dentify Price Structure in Trends

Kun <$, <$&&+ &<+$L )M AST
!o you know how to .uantify price structure- ItMs not a difficult concept at all, yet many traders
miss the benefit of taking a moment to assess ob8ective price structure in the context of a
developing trend.
!oing so allows you to assess ob8ectively the next likely swing, and thus the most probable trading
strategy to take. 4etMs take a brief moment to review the basics of identifying price structure on
multiple timeframes.
et8s start wit$ a long-term wee7ly c$art of t$e P$iladelp$ia Housing 6ndex&
WeMve heard it &$$ times, but letMs refresh basic definitions of Trends+
;n DPTFEND is defined as a series of higher swing highs and higher swing lows.
; DICNTFEND is similarly defined as a series of lower swing highs and lower swing lows.
To reverse a structural uptrend, price structure must make :7T5 a lower low and a lower high.
The point at which price makes both a lower low, then a lower high, then breaks under the newly
established swing low is known as the QTrend Fe!ersal PriceR and is the most ob8ective point at
which to call 0or label1 an official trend reversal.
4ooking above at the 5ousing Index, we have a weekly structural uptrend from <$$= into <$$L as
marked with a se.uence of higher highs and lows.
5owever, )rice forms a lower high in early <$$L and then turns down to break under a long9term
rising uptrend as shown. ' break in a trendline strangely enough does 37T officially reverse a
trend in terms of price structure.
Shortly after, price continues its power swing to the downside and officially breaks and closes under
the two recently formed swing highs during Kune <$$L at the <=$ index level.
I circled this spot as the Trend ;eversal )rice N henceforth, the weekly trend was officially labeled
as down.
2rom there, the weekly structure continued to record lower swing highs and lower swing lows as
the downtrend continued.
The structure finally changed in mid9<$$G when we began to note minor new swing highs and lows,
thus reversing the intermediate trend to the upside in late <$$G.
2rom the May <$&$ peak, a power swing to the downside recently took out the previously
established swing low from late <$$G as a warning sign of potential future trend reversal back to the
downside N but thatMs beyond the scope of this educational post.
Take a look at how I labeled each successive swing in terms of higher highs and higher lows, both
on the primary 0larger1 trend landscape and in the smaller or intermediate landscape 0particularly
during <$$I1.
Hou can identify long9term structural trends on the weekly chart, but if youMre a shorter term trader
than that, you can use the same logic on smaller timeframe charts, including all intraday landscapes.
et8s see a recent $ourly structural trend progression in 'old&
Moving right the point, we see the hourly 0intraday1 structure forming a se.uence of higher swing
highs and higher swing lows from March to May <$&&.
"ven on the hourly chart, you can see smaller swings that build up the larger hourly swings in gold.
These create trading opportunities for traders on the lower frames, with the simplest strategies being
buying 0putting on new positions1 during pullbacks in lower timeframe structure in the context of
higher timeframe structure.
'lternately, traders can play breakout strategies on intraday breakthroughs of a prior higher
timeframe swing high N notice the continuity 0burst1 that tends to occur when price in a structural
uptrend breaks to a new chart high 0examples N 'pril Lth above U&,>>$J 'pril &# above U&,>F$J and
'pril <Ith above U&,#<$1.
Structure can also be helpful even on the smallest timeframes to guide decision9making 0trades1 as
structure develops.
The I)7 for 4inked9In 043V! received a great deal of attention 0bullishly1, but if traders took a
moment to look at developing structure in the days after the initial hype, they would have seen a
deterioration in structure and a reversal to an official intraday downtrend.
Here8s t$e 6PI and structural trend re!ersal on t$e ,.-min frame&
The hype was intense on the I)7 date and shortly after, but as we moved into Kune, intraday
structure officially reversed to the downside, allowing for short9sales on each retracement up or for
breakdown trades on each breakthrough of a prior swing low 0such as UI#L on Kune G and UI$ on
Kune &L1.
Hou can even see minor swings 0which you can label easier on the #9min and &9min chart1 that
comprise these ^largerM swings on the &$9min chart.
Intraday traders can do well by assessing structure as it develops.
It merely takes a moment to .uantify ob8ective price 0trend1 structure, and itMs often best to do so
.uickly on a clean chart of price only N no indicators are necessary.
7nce you assess the current 0developing1 structure, you can plan your trading strategies more
effectively, keeping in mind price levels that would serve as an early warning for potential trend
reversal, and of course the official price that would confirm a trend reversal.
I will be presenting a webinar with Trader Vingdom on Kune <Gth after market close to show how to
identify potential trend reversals '5"'! of the official price reversal point+
QThe Momentum Vick9off+ 5ow to Identify Trend ;eversals 'head of the Arowd.R
IMll start by discussing price structure and then explain how to get a head9start on a potential trend
reversal using a special insight from momentum.
Aorey ;osenbloom, AMT
'fraid to
2ollow Aorey on Twitter+ http+66twitter.com6afraidtotrade
AoreyMs new book $he #omplete $rading #ourse 0Wiley 2inance1 is now availableZ
Aontinue ;eadingS
< Aomments and = ;eactions

oo7 at t$ese ET" #$arts SQ AS Hefore #alling a Top in

'pr <&, <$&&+ &$+>$ 'M AST
're you trying to call a top in silver-
HouMre not alone N IMve been picking up on a lot of chatter in the blog 0and email1 world about
traders and analysts trying to call that proverbial QtopR in Silver Qany day now.R
:efore you canMt fight the temptation any longer, at least take a look at these four charts N Two
!aily and Two Weekly N of ma8or Silver "T2s S4O 0bullish1 and _S4 0ultra9bearish1.
et8s start wit$ SQ Cee7ly for our reference&
In this post, IMll specifically be focusing on a few key chart points+
&. :ernankeMs QKackson 5oleR Speech that introduced us to ,"< on 'ugust <I, <$&$
<. The QWeekly )ullbackR to the <$ "M' in Kanuary <$&&
=. Oolume and Momentum Insights
I need not remind you that :ernankeMs ,"< speech 0QWe will do anything to prevent a second
recessionR1 helped kick9off the inflationary commodity rally weMre seeing now N but thatMs
completely another story.
Second, the QWeekly )ullbackR in Kanuary was an interesting topic, as the daily chart 0as youMll see1
had plenty of warning signs of a potential QtopR and QreversalR that was shortable S but wound up
being nothing more than a clean and easy pullback 0retracement1 to the rising <$ week "M' N an
intermediate term :H signal.
In terms of momentum and volume, weMre seeing A732I;M'TI73S from both instead of
negative divergences on both the weekly and daily frame N that is a sign of likely price
Now let8s flip down to t$e daily c$art&
'gain, we can see the Q:last9offR in price at the end of 'ugust which coincided with Mr.
:ernankeMs ,"< announcement 0which would begin officially in 3ovember, though markets tend to
move ahead6in advance of actual events1.
The M'I3 I!"' with the daily chart is what happened in the run9up to Kanuary <$&&.
Denerally, if youMre going to call a top, itMs best to wait for confirming signals of potential trend
These include lengthy negative divergences in both volume and momentum 0which were present as
shown1 and then triggers from price in the form of breakdowns under rising price trendlines 0hand9
drawn1 or moving averages 0such as the <$ or #$ day "M's as shown above1.
So, if youMre going to call tops, itMs best to wait for triggers that form '2T"; divergences or some
other non9confirmation are present.
"ven with all that bearish wind at traders backs, S4O 0silver1 did not reverse, but instead 8ust pulled
back to the rising <$ week "M' 0higher timeframe support1 and launched up from there.
This is a key point in Multiple Timeframe 'nalysis N wherein the daily 0or short9term1 chart can
signal a clean reversalS which turns out to be nothing more than a standard pullback on the
Weekly 0higher1 frame.
'nyway, with Silver shaking off that potential reversal signal in Kanuary, the next :H signal came
on the breakout to new highs in 2ebruary above U=$ per share 0roughly U=.$$ per ounce1.
IMve posted many times that the two leading trading strategies in strongly up9trending markets are
retracements to rising "M's6Trendlines or price :reakouts to new chart highs.
What weMre seeing now is the remainder of the current rally which N again N is confirmed with
bullish surges in volume and momentum N these are things you do not use as bearish short9sell
' main point from the current chart is that, while there is not a corresponding buy signal 0as in, no
breakouts above pre9existing resistance and of course no pullback to support1, there is N as of this
moment N 37T a bearish short9sell signal 0given that price is rising and overextendedS but
overextension alone is not a reason to short1.
Now@ let8s flip t$e tables and mo!e away from t$e Hullis$ SQ c$art to t$e Dltra-S$ort ET" 9
:efore getting too deep into the chart, keep in mind )roShares announced a &$ to & ;everse Split
for _S4 on 'pril &>th, <$&$.
The long9term fate of leveraged inverse "T2s almost always means a tra8ectory headed to U$ per
share S which is why they will have to A73TI3" reverse9splitting most leveraged inverse "T2s
every few years 0particularly if there are strong rallies in the underlying market1 S but that too is
another story.
IMm really showing this chart for comparison purposes, and as a reminder that double or triple
leveraged inverse "T2s are for very short9term 0perhaps only intraday1 trading purposes N you
should not invest long9term in leveraged inverse "T2s.
The main point of this chart is the literal surge in volume in <$&& N which one would assume is a
rush of risky6aggressive traders seeking to profit from a potential top in silver.
So far@ t$at $as been a losing bet@ as seen from t$e daily c$art&
'gain, IMm 8ust going to focus on a few things.
2irst, when :ernanke announced the initial ,"< plans in 'ugust <$&$, _S4 sold for U&>$ per
share. Today, itMs at U&# per share. ThatMs a G$% decline and N mark my words N _S4 will 3"O";
see U&>$ per share again 0without a reverse split1.
4etMs assume silver fell from U>$ per ounce to U<$ per ounce N a #$% decline.
7ne would thus assume the _S4 N a double9leveraged inverse fund N would increase &$$% which is
an enviable gain.
U&# per share times two 0increased &$$%1 is U=$ per share.
7ops. While your position dollar value did double, U=$ per share is no where near U&$$ per share
seen in September. )rice will not make it back there.
'nyway N again this topic is a huge issue for another conversation, but it underscores the
importance of reading an "T2Ms prospectus 0and doing your research1 carefully before purchasing
an "T2.
Moving on N the surge in volume from March to present either indicates that more people are now
aware of the _S4 fundS or that more people are finding shares 8ust too irresistable to snatch up a
position that will rally a large percentage gain 0but 37T large share price gain N certainly 37T
back to U&>$ per share or even U&$$ per share1 in the event Silver does top soon.
3ow going back to the main point N our weekly pullback phase in Kanuary 0when it looked like
Silver had topped on the daily chart1 led to a _S4 move from U>$ to U#$ per ounce 0a <#% gain1 but
now price is I$% lower 0U#$ to U&#1 and still declining.
To make a long story short, any type of trend reversal strategy is inherently more risky than playing
for trend following strategies N given the foundation of technical analysis is built on the notion of
trend continuity.
:artin Pring !Technical "nalysis #$plained% defines Tec$nical ;nalysis as&
@$he )rt of identifying a trend at its earliest stages and riding that trend Atrading in the direction of
the trendB until the weight of the evidence proves that the trend has reversed.C
To me, Qweight of the evidenceR takes into account a variety of factors including sentiment,
momentum, volume, trendlines, moving averages, reversal candles, exhaustion gaps, and many
more concepts6indicators.
;ight now, weMre seeing Qprice overextendedR 0a vague term1 and high bullish sentiment. ThatMs
not the weight of the evidence.
WeMre 37T seeing divergences, trendline breakdowns, "M' breakdowns, etc. It would be much
safer to short silver if we started to see some of thoseS but even then we !I! see those in Kanuary
<$&& that was nothing more than a weekly chart pullback ahead of the recent rally from U=$ to U>#.
7ne of techniciansM favorite saying is the well9known+
@) mar%et can remain irrational longer than you 0your account1 can remain solventC along with
@$rends tend to go higher 0or lower1 than almost anyone thin%s they can go.C
So until we start seeing some material chart evidence of a reversal according to the Qweight of the
evidenceR model, itMs probably a good idea to resist the urge to be a hero and call a top in this
powerful metal until we see some ob8ective sort of sign of reversal other than QitMs really expensive
and overextended.R
nless youMre re.uired to trade Silver, thereMs probably better reward6risk opportunities elsewhere.
Aorey ;osenbloom, AMT
'fraid to
2ollow Aorey on Twitter+ http+66twitter.com6afraidtotrade
AoreyMs new book $he #omplete $rading #ourse 0Wiley 2inance1 is now availableZ
Aontinue ;eadingS
>& Aomments and &= ;eactions

esson in Di!ergences Plus Trendline Hrea7s in Dollar :arc$

Mar =&, <$&&+ #+#$ )M AST
It seems all traders seek to answer the same .uestion+ QWhen is this market likely to reverse-R
3ewer traders tend to love QreversalR style strategies, wanting to enter as close as possible to a trend
reversal in order to have the tightest stop and biggest target possible.
While no strategy can call a top or bottom all the time, one of the best ones IMve found is to look for
multi9swing divergences followed by a trendline break as a high probability, low9risk trigger for
entry into a potential ma8or shift in a market trend.
et8s ta7e a quic7 loo7 at t$is concept as played out in t$e DS Dollar 6ndex =really it could be
anyt$ing> t$roug$ :arc$&
Alick for full9si(e image.
's you probably know, I am a huge fan of trading divergences and have posted do(ens if not
hundreds of times on the topic of trading divergences in multiple markets.
5ere is a .uick sampling of some of the recent educational posts+
Q' 4esson in Trading !ual !ivergences on Two Timeframes in !ollar )R
Q' 4esson in )laying Intraday S)H ;eversals with !ual !ivergencesR
QWhen !ivergences ;eally Matter+ S)#$$ at &,=$$]
Q4essons from Arude 7il !ivergences and 5ead and ShouldersR
Q!ivergences and :reakout 4essons in Doldman Sachs in <$&$]
Q' ,uick 4esson in Intraday !ivergences in S)H !ecember &L <$&$]
Q4essons from Arude 7il in !ual !ivergences, Vick9offs, and :reakoutsR
Take a moment to look over some of those for background reading.
The main idea with the !ivergence plus Trendline :reak situation is that the !ivergence 0in
momentum using the =6&$ 7scillator1 is your first warning signal of potential trend reversal N and
the more QswingsR build up a divergence 0when price continues to push higher while the oscillator
continues to slip lower on each swing1 N then the greater the odds of a reversal.
Hou canMt necessarily trade :"A'S" there are divergences N you need a T;IDD";.
The best trigger6signal comes from price breaking through an opposing trendline that connects the
rising 0or falling1 trend.
So if you observe a multiple swing divergence then see price breakthrough a corresponding
trendline, T5"3 that is a much safer signal that odds are strongly likely to lead to a reversal in the
timeframe trend.
7f course, nothing guarantees a reversal so youMll need to place your stop beyond the absolute
swing high or low in the event the market trend pushes on beyond what you think it can N this
higher risk is inherent 0cannot be removed1 from aggressive9style reversal trading strategies.
In t$e c$art above% &e $ave t$ree suc$ trend reversa!s in structure 'series of
(rice $ig$s and !o&s) in t$e Do!!ar Inde*+
;> :arc$ ,,t$ gave us a multi9swing negative momentum divergence that was followed with a
signal via a trendline break at the UIL.F$ level.
In this case, price fell sharply from the high and broke an otherwise ^la(yM trendline that couldnMt
keep up with the recent swing high N leaving this trade to be a later entry than perhaps was
comfortable. It did produce a trend reversal as expected though.
H> T$is was a big one, and given the bearishness on the S !ollar index, it may have been a
difficult trade to take but it was effective.
The Trend Structure continued pressing lower 0lower lows and lower highs1 though the momentum
oscillator continued building a positive divergence situation which eventually gave9way on a
breakthrough of the falling 0tighter1 trendline on March <<nd at the UI>.#$ area N allowing for a
tighter stop under UI#.=$.
)rice continued its pulse higher and then recently slammed into a triple top formation N with its own
divergences N at the UIL.>$ levelS leading to the recent trendline breakdown and opportunity.
#> T$e triple-top served as a clean resistance area which had its own negative momentum
divergence and trendline breakdown on March =$th which sent the index moving lower into the
present session.
Without going into exhaustive detail, I wanted to highlight this lesson6concept N discussed in far
more detail in Ahapter < on QMomentumMs 4eading "dgeR in the new Aomplete Trading Aourse
The !ollar Index served well in describing this concept of !ivergence plus Trendline :reak e.uals
likely structural change N and the inherent trading opportunities that come from changes or reversals
in market structure.
Triple Timeframing t$e Hrea7out in #opper MM#
2eb &, <$&&+ &$+<F 'M AST
Many investors and traders look to copper prices to gauge the strength or weakness of the economy,
as copper is an industrial metal used in all sorts of construction pro8ects.
If that sentiment holds true, then copper 8ust sent a big Qeconomic recoveryR message this morning,
as it has been doing over the last few months.
4etMs Qtriple timeframeR Aopper prices and then finish by looking at the current tradeable KKA
Aopper "T2+
This is one of those things where, until you see it, itMs hard to imagine.
Aopper has already exceeded its <$$F peak 0stocks peaked in 7ctober <$$I1, meaning Aopper is not
8ust at new recovery highs, but at all9new highs, having exceeded the price at the start of the :ear
Market ;ecession.
The 3'S!', &$$ has also accomplished this feat 0though itMs not above its <$$$ high1 and the
broader 3'S!', index is nipping at exceeding its <$$I peak.
ThatMs really the main idea of the monthly chart N Aopper is beyond its <$$F pre9bear market peak,
and momentum is confirming the recent push up.
T$e wee7ly c$art s$ows a similar positi!e strengt$&
The U>$$ level in copper was key resistance, as it was both a Qround numberR and was the peak of
the market ahead of the <$$F recession6bear market.
There were three weeks of downward prices that ended at the rising <$ week "M' at U=I# and
copper broke powerfully through the U>$$ level, officially changing the game to the bulls N and
copper broke this morning to a new high above U>#$ which served as nominal price resistance.
's long as copper remains above U>#$, itMs a strong bullish vote of confidence in the economyS
and the inflation ^createdM by the ,"< li.uidity policies of the 2ederal ;eserve.
's a note, the momentum oscillator registered a new swing high 8ust ahead of the breakout which
contributes to the bullish chart picture.
"inally@ let8s drop to t$e daily frame to see lessons in trading power-mo!es li7e t$is&
StockAharts uses "nd9of9!ay data for their indexes, so thatMs why IMll show a chart of KKA 0"T21
Main idea+ 'fter bottoming in Kune, Aopper showed signs of strength, breaking its daily "M's,
forming a QVick9offR strength sign, then supporting in 'ugust on the #$ "M'.
2rom there, price broke through the little resistance line at U=#$ and continued supporting N
creeping N up the <$ "M'.
4ike stocks, 3ovemberMs pullback took price down to the rising #$ "M' and lower :ollinger as
price then broke the Q:ull 2lagR trendline, triggering another potential entry.
's IMve shown in prior examples N in 3etflix and 'pple particularly N the :"ST way for most
traders to play these breakaway moves is to put on positions at one or two specific points in time
during a seemingly ^non9stopM rally+
,/ Huy Pullbac7s to rising ). or 3. E:;@ trailing t$e stop Bust under t$ese le!els
)/ Huy Price Hrea7outs abo!e trendline*price resistance =after supporting on E:;>
!epending on your strategy, youMll graviate to one or the other, though most people feel more
comfortable with buying pullbacks than buying breakouts.
The pullback strategy offers a tighter and known stop9loss, while the breakout doesnMt do that
0unless you place the stop 8ust under the breakout trendline1.
'lso, breakouts feel like youMre ^chasingM the market and makes you worried that the moment you
enter, the price will reverse.
It might N but the only way to overcome this notion is to see multiple prior examples 0like this1 of
when the set9up worked and the outcome of the breakaway move.
3ot all breakouts lead to nice moves, so you must protect yourself with a stop9loss in the event any
breakout turns into a mean bull or bear trap.
et8s ta7e a final loo7 at t$e tradeable #opper ET"& MM#
We also get volume insights from KKA that we donMt get from the Aopper Index.
3otice that on the little breakouts, volume 0buying1 rose each time, including now N thatMs a good
sign for buyers.
While the index gives us end9of9day data only, the KKA shows up9to9date information N and that the
key level to watch here is UL$.
So as long as Aopper 0index1 remains above U>#$ and KKA remains above UL$, then we can expect
potentially higher prices as the economy recovers 0along with consumer confidence1 and the 2ed
maintains its inflationary goals6policies via ,"<.
' breakdown sharply under these levels N particularly the U#L area in KKA and U><$ in Aopper 9
would thus dis9confirm a bullish thesis.
Aorey ;osenbloom, AMT
'fraid to
2ollow Aorey on Twitter+ http+66twitter.com6afraidtotrade
7rder your copy of $he #omplete $rading #ourse 0Wiley 2inance1 now available.
Aontinue ;eadingS
& Aomment and L ;eactions

Hullis$ Di!ergences and De!eloping 6ntraday Structure in DS

Dollar DDP
Kan =$, <$&&+ #+<L )M AST
With multi9swing divergences happening in the S Stock Market, what is the similar picture like on
the inversely correlated S !ollar Index-
's it stands now, itMs bullish but in its earliest stages of potential life.
4etMs take a look and learn a .uick lesson in confirmation via a simple inter9market cross9check.
T$e DS Dollar& 4.-min
I posted Thursday on the clear divergences in the S/) #$$, and then followed up 2riday N after a <$
point move down N regarding QWhy !ivergences MatterR when the S)#$$ is at &,=$$.
While the S/) #$$ was deteriorating, the S !ollar Index N intraday as well N was clearly
This is what youMre supposed to see N at least in the current market environment N and taking the
extra step to cross9check the S !ollar Index was helpful in seeing if everythingMs playing out like
it is supposed to 0according to the charts1.
:efore we get to whatMs going on now, look back to early Kanuary when the S !ollar Index rallied
up in a mini9five wave fractal that showed a .uadruple9swing negative momentum divergence.
)rice rotated 0consolidated1 at the UF&.$$ index level 0known resistance1 and then broke sharply
lower which took us to the present UIF level where counter9divergences have now formed.
IMm a huge fan of #9wave fractals into clean divergences like this.
3ow, moving on to today, with the S/) #$$ having trouble so far overcoming &,=$$, and showing
many divergences, the !ollar is showing the opposite picture.
Hou canMt look at internals on the !ollar, but you can look at momentum. The =6&$ 7scillator
pushed to a low on Kanuary &<th and &=th, calling for 47W"; prices yet to come and they didS
and didS and did.
Moving under UIF, the index showed multiple positive divergences along the way which suggested
the downside pressure was weakening, suggesting the potential for a breakout and potential set9up
on the breakthrough of the falling trendline.
That happened 2riday and it was met with a Vick9off signal N a new momentum high as price is not
making a new high 0a power9signal in many cases1.
' caveat N a similar situation formed on the triple9swing divergences on Kanuary &Gth where the
!ollar :ulls were only able to swing the price up in an Q':AR corrective fashion N a retracement,
not a reversal.
ThatMs certainly possible again as we break a similar trendline with similar momentum divergences
N only the present divergences stretch further back than those on the &Gth.
'nyway N the .uick story is that for short9term oriented traders, as long as the !ollar stays above
the UIF level or even the UIG.#$ recent swing low level, we could see at a minimum another little
':A push up to UIG or 8ust shy of UIG.
If stocks really start to tumble 0breaking their daily support levels1, then we could see more of a
short9term intraday reversal up instead of a retracement.
ThereMs never a guarantee of any method working &$$%, but IMve grown to love intraday
divergences and the signal that comes from trendline breaks N if anything for the tight risk to
potential reward inherent in these sort of set9ups.
"ither way, the multi9swing divergences in the !ollar are something for traders to watch as we go
Aorey ;osenbloom, AMT
'fraid to
2ollow Aorey on Twitter+ http+66twitter.com6afraidtotrade
7rder your copy of $he #omplete $rading #ourse 0Wiley 2inance1 now available.
Aontinue ;eadingS
& Aomment and # ;eactions

esson in Playing 6ntraday SPY Fe!ersals wit$ Two

Timeframes and Di!ergences
Kan L, <$&&+ =+#G )M AST
I think itMs important to document interesting examples of trading concepts played out during the
day, as it serves both as an educational reference and deepens our knowledge about these concepts,
which helps us to trade better the next time a similar set9up or opportunity unfolds in real time.
' great educational example N and good followthrough N formed on Kanuary >th intraday reversal
play that was telegraphed W"44 in advance by various factors N some of which I wanted to show
you so you can use them as a reference.
They include+
5igher Timeframe !ual Support played out on the intraday frame, and then the intraday positive
dual divergences that formed that preceded the official QreversalR trade entry trigger for a great
intraday opportunity that actually carried into the next session.
Here 9 let8s ta7e it step-by-step and learn from t$is example&
I want to cut right to the heart of the lesson and call your attention to the !'4 S))7;T line at
the U&<L.<$ level in the S)H.
ThatMs because the level was a prior resistance point at the end of !ecember 0shown above1 N as old
resistance sometimes becomes 2T;" support as price tests this ^polarityM level again.
:eyond that, we have the L&.F% 2ibonacci ;etracement N drawn from !ecember =&Mst swing low
near U&<#.=$ to Kanuary &stMs U&<I.L$ level. The L&.F% grid level came in N surprise N at the same
level as the prior price high at U&<L.<$.
's price pulls back, thatMs a natural target to play for when shorting intraday, and a natural place
where the market MID5T turn9around and find support if the swing continues down to that level.
So N #IN#EPT ,& U&<L.<$ was a natural dual support target to play for short, and see if a reversal
formed intraday.
'nd on Kanuary >th N thatMs exactly what happened N price fell off the open down to the U&<L.<$
target level, so now the game changed to+
@(IDD support at E64F.4< holdGC
More importantly with that target in mind, you should be watching the intraday structure in real
time to see if there are any clues N such as divergences N that lead you to believe one way or the
other that support will holdS or break.
It turns out there was a powerful clue that then set9up a trade entry to )4'H for the reversal and
bounce up off support.
6t8s one of my fa!orite concepts& Dual 6ntraday Di!ergences&
0Alick for full9si(e image1
3ow letMs take this one step at a time N focusing specifically on the dual divergences at &&+>#am
AST at the U&<L.<$ level we referenced above from the #9min 0and really any higher1 timeframe.
I discuss this concept fre.uently, but itMs always fun to look at new examples and trade them.
's price fell through the morning session, U&<L.<$ was the higher timeframe dual price and
2ibonacci target. The market was an intraday short until then.
5owever, as price tested this level at &&+=$am, it became clear to those watching that a triple
positive TIAV divergence N along with a positive momentum divergence in the =6&$ oscillator N
formed at this key price level.
;emember, we watch price 2I;ST and then look to indicators to confirm or disconfirm whatMs
happening in price. !ivergences are non9confirmation signals of a move in progress, and suggest a
retracement or perhaps reversal is perhaps yet to form.
4ook closely at the vertical highlighted line to see the inner9workings of this !ual TIAV and
Momentum divergence.
't a minimum, thatMs a Qcover your shortR position and then see if a corresponding price breakout
signal forms for you to play a reversal6long here. It did.
'fter the initial bounce of U&<L.<$, price broke a rising trendline at U&<L.=$, then N perhaps more
importantly N it shattered through the <$ and #$ "M's on the &9min chart where I labeled it.
The official trigger happened at U&<L.>$ for the entry to play long for an intraday trend reversal N
which was made all the more better by the higher timeframe dual support at U&<L.<$.
Immediately after the breakthrough, and actually 8ust before it, the TIAV formed new intraday highs
in what I like to call a QVick9offR or QWyckoff Sign of StrengthR signal that further increases the
odds of a trend reversal.
ItMs important to know these concepts N divergences and TIAV Vick9offs N in advance 0study them1
so you can recogni(e them in real time and thus play them appropriately when they develop.
Ok so in summary (in chronological order):
&. Dual Price and "ibonacci Support at U&<L.<$
<. Test of U&<L.<$ intraday as clear DD; positi!e momentum and T6#L di!ergences form
=. )rice HFE;LTHFID'H of falling trendline and &9min "M's
>. ELic7-offG Signal in T6#L via new TIAV highs as price came ) off the low
Taken together, the ^weight of the evidenceM favors short9term reversal, allowing you to trade
confidently with the evidence from the charts.
2rom here, price went back up to form a new high at U&<I.F$, as of Kanuary Lth when IMm writing
this post.
2or reference for those of us who are futures traders, hereMs the same &9min chart above of the `"S
futures contract+
These are the kinds of lessons I document6teach each day in the Ideali(ed Trades reports for
members N archives go back to 'pril <$$G.
;emember, the more we learn from actual examples N and particular if we keep our own notes and
observations N the more confident and better prepared we will be to capitali(e on these
opportunities when they repeat N and they will N in the future.
esson& T$e "our Early Carning Signals 'i!en Hefore t$e
;fternoon Fe!ersal
'ug L, <$&$+ &&+<< )M AST
Were there chart signals the market gave ahead of the afternoon reversal and breakout into the close
after the morning Kobs ;eport drop-
'bsolutely N it turns out there were at least four early signs that odds had shifted away from the
bears and towards the bulls which was confirmed with the afternoon breakout.
I wanted to share a lesson I shared in tonightMs Ideali(ed Trades report N the four chart signals that
warned of a likely turnaround in the market. These are classic technical signs that can signal a
potential change in trend and itMs important to know them.
4etMs start with the #9min `"S 0S/) #$$ e9mini futures contract N similar to the S)H "T21 chart+
0click for full9si(e image1
What I do in the first section of each nightMs report for members is teach applicable trading lessons
from the current dayMs activity for use when these signals6trades appear in the future.
4etMs start with the four signals IMve identified that the market gave in advance of the afternoon
breakout N which could have given you ample warning to exit your intraday short9sales and6or get
long to play the breakout as it developed.
1. Failed Impulse Sell
Denerally, after a market makes a new price, momentum, and TIAV 0market internals1 low, we
would expect lower prices yet to come. ' good trade set9up N that I call the QImpulse SellR N occurs
when price rallies into resistance after a sharp downward thrust. We expect lower prices ahead.
5owever, when a high9probability trade set9up fails N as happened in this case when the market
traded lower but did not retest the session low N then that is an initial sign of hidden bullish strength
that the bulls ^thwartedM or busted a classic sell signal.
ThatMs not enough to expect a reversal, but it is the first clue that QThings may not be as bearish as
they seemR or Q:ulls may be stronger than the chart is revealing N as they 8ust busted a sell set9up.R
2. Rounded Reversal Formaion
In the reports, I define three types of intraday structures+ Trend !ay, ;ange !ay, and ;ounded
;eversal. ;ounded ;eversals are the ^enemyM of trend days.
Hou can also think of it as a QScallopR or Q'rcR pattern, but when price takes on the form of a
rounded arc, I call this a Q;ounded ;eversalR and it has bullish implications of a slow but
steady6stable reversal.
I drew a green arc under price to show the curvature of the market that also showed hidden bullish
strength building.
!. "#ick$o%%& Sign o% Srengh
We monitor TIAV in relation to price highs and lows for confirmation6non9confirmation. TIAV
should roughly mirror whatMs happening in price. 'nything unusual N like a divergence N sends a
' QVick9offR occurs when the TIAV makes a new intraday high while price is 37T making an
intraday high N and the further price is away from making a new intraday high, the more powerful
the Vick9off Signal is.
4ook at a= at &+=$ AST 0&=+=$1. I created an indicator to overlay TIAV highs on the price chart, as
revealed by little green dots. It helps me see the signal better to spot divergences and Vick9off
signals N like this.
If you look only at price, you would say Q7h N price is making a new swing highR but if you
compare to TIAV, you see yet another Q5idden Sign of StrengthR as TIAV pushed up to a new high
on the session.
That is a very blatant sign of strength that many traders miss N and it is a very powerful signal that
odds strongly favor higher prices yet to come.
'. (ollinger (and and )* period +,- (reakou
IMm not sure this gave you much of a ^warningM but it was the final signal needed N the final nail in
the bearish coffin for the day N that odds strongly favored a reversal. This was your execution
signal to get long N or take your stop9losses if you remained in an intraday short9sale position.
In a very strong candle, price sliced through the upper :ollinger :and and #$ period "M' 0blue
line1 at &+#$ AST. Hou can get long on the break to new swing price highs to play for a bullish
breakout to materiali(e N I call this a )ositive 2eedback 4oop because short9sellers are rushing to
the exits to stop9out and buyers are now trading long for the breakout.
We would thus expect price to rally higher as long as the positive feedback loop was in effect N and
when they form, they can often go longer than expected N and in this case boosting the market
almost all the way to break9even on the session.
'gain, these are the kind of lessons and examples I consistently teach6describe each day in the daily
subscriber reports.
4essons like this can mean the difference in holding stubbornly short after price broke9out into the
afternoon session, or playing long to profit from the breakout.
The market gave signals and created a narrative of hidden bullish strengthS that culminated with a
powerful breakout in the close.
Aorey ;osenbloom, AMT
'fraid to
2ollow Aorey on Twitter+ http+66twitter.com6afraidtotrade
Aontinue ;eadingS
F Aomments and G ;eactions

Mune Dpdate on 6ndia8s Nifty 3. 6ndex Feco!ery and Fange

Kun <>, <$&$+ &$+>= 'M AST
Thank you for your re.uests for updates on IndiaMs Q3ifty #$] Index. ThereMs actually a very
interesting turning point in the index coming up, and a sharp rally that has led to a recent
outperformance 0to the S)#$$1 of the 3ifty index.
4etMs see the daily chart and the recent strength+
The price structure of the 3ifty 0A3Y31 mirrored the S S/) #$$ almost exactly, though the
^crashM phase was not as severe in May N we did not see a retest of the 2ebruary <$&$ low. The
iShares "T2 symbol for the 3ifty Index above is I3!H.
In addition to the sell9off not being as damaging, the recent recovery or rally phase has actually
outperformed the S/) #$$ N with the 3ifty Index sitting 8ust shy of a new <$&$ high. The S/)
#$$ remains about &$% below the 'pril <$&$ high.
The kick9off recovery was confirmed with a break back above #,&#$ in mid9Kune as price took out
the prior swing high and crossed strongly above the daily moving averages.
:ut, before you get too bullish on the index, notice the strong potential overhead resistance at the
#,=#$6#,>$$ level.
This level will mark the turning point between a continuation of bullish prices in a breakout
phaseS or a resumption of the larger consolidation6range pattern as seen on the weekly chart+
The weekly chart reveals the bigger picture.
The 3ifty is caught in a Q;ounded 'rcR chart pattern that is forming negative momentum
divergences as labeled with the red arrow.
2rom a chart perspective, the price is likely to continue to trade within the boundaries of the
overhead resistance arc N currently at #,=$$ N and the lower #$ week moving average support,
currently at >,F$$.
That places the index within a #$$ index point trading range N which should be a caution sign where
we are now N at the upper range of the boundary.
'gain, a price breakout will signal a new price expansion phase, but until the index rises above
#,>$$, look for this weekly chart pattern to be the dominant technical structure for the index.
,o& "o -se M#.D and M#.D ,istograms
M'A! is the acronym for QMoving 'verage Aonvergence !ivergenceR 5ere*s a typical M'A!
chart with a standard setting of &<6<L6G and set to exponential. The &< day moving average in the
price window represents a fast moving average of price. The <Lema is the slow moving average of
price. M'A! is interesting because it is both an oscillator and a trending indicator. It relies on
lagging indicators 0moving average of price1, yet has predictive power.
In the lower window we have a blue line which represents the actual M'A! indicator 0more on that
in a moment1 and a red line which is our QGR in the &<6<L6G setting and is a G9day exponential
moving average of the actual M'A! indicator. 2or now, ignore the blue bars in the lower window.
M'A! measures the difference between the two moving averages of price. The middle line is the
Q$R lineJ when the &<ema of price crosses above the <L ema of price our M'A! indicator in the
bottom window 0blue1 will cross above the (ero line simultaneously. When the difference between
the two moving averages of price is widening, M'A! indicator line 0blue in the bottom window1
will rise.
When M'A! is above the (ero line and is rising, that means the rate of change of the shorter
moving average of price is rising faster than the rate of change for the longer <L ema of price and
the gap between the two is becoming wider indicating bullish momentum. The same is true in
reverse, when M'A! is below the (ero line and the gap is widening9this indicates bearish downside
momentum9when the two are close you may see crossovers of M'A! and it*s G day ema of M'A!,
whether above or below the (ero line. M'A! is measuring momentum, the G day average of
M'A! is simply providing a signal line when that momentum shifts and the &< day of price looses
it*s momentum you may see these crossovers.
5ere is a shot of Stockfinder9We have been looking at the actual M'A! indicator offered in
TeleAhart. What I did was to create the two moving averages of price, then ask Stockfinder to
compute the difference between the two and it gave me the exact same line as the M'A! line in
TeleAhart9both blue. Then I added a G day ema to the M'A! line I created and you can see we
have the exact same indicator. If you look to the right carefully, you will see (ero and the crossovers
of (ero at the exact same time.
3ow I*ve gone & step further and asked Stockfinder to plot the difference between my M'A! line
and its moving average, I converted the line to bars and prestoZ ' self9made M'A! 5istogram. I
hope this helps you understand how this indicator works.
Short term traders may use the crossover of M'A! and it*s G day ema as trade signals, despite
being above or below the (ero line. 2or example, on =6&<6$G M'A! was below the (ero line, but
had crossed above the signal line 0G day ema of M'A! lower window9red1. This crossover, despite
being below the (ero line, gave the short term trader a buy signal and it didn*t cross under until
>6<<6$G9nearly a &<% gain. The M'A! signal recogni(ed the change in momentum and gave a
crossover buy signal &$ days before the moving averages of price. 5owever, the M'A! was then
plagued by a few whipsaw crossovers that would not have yielded profitable trades.
If the longer term trader were to purchase the S)H on a crossover of M'A! above the (ero line and
stay with the trade until it crossed below the (ero line, the trade would have made approximately
&&.#%. 5owever, here*s where the predictive power of M'A! comes into play. ' strong trend
should see the same strong trend in M'A! and each of the crossovers or pivot points above the
(ero line would make higher highs in a strong price trend. The first lower high gives us what is
called a negative divergence, which is to say that M'A! is signaling fading momentum, even while
price may move higher. So if the longer term trader used the same entry signal, a cross above the
(ero line and used the first cross down showing a negative divergence and got out of the trade there,
that trader would have netted &#.<#%9a bit better than the first example. The same application in
reverse could be used for a short sale.
' short term trader recogni(ing the cross down of the first negative divergence around L6&<6$G9
L6&#6$G could have gone short and exited upon the first sign of a crossover of M'A! above the
signal line around I6&>6$G and could have made a .uick #%9using an 4T;' "T2 that would have
been nearly &$%.
"nter the 5istogram. ' popular way of looking at M'A! is by using the blue bars in the bottom
window, the M'A! 5istogram. This indicator does not care whether the M'A! indicator line is
above or below (ero, the 5istogram simply measures the difference between the M'A! indicator
and its G day ema. When M'A! is above it*s ema, the 5istogram will be above (ero9whether
M'A! is above or below the (ero line. The wider the difference between M'A! and it*s moving
average 0greater momentum1 the more extreme the bars9higher or lower.
)redictive )owerZ 7ne of the most effective ways of looking at nearly every indicator out there
0nearly1 is to look for divergences and M'A! divergences are one of the most reliable signals
available in Technical 'nalysis. Hou have two things that can happen between price and an
indicator like M'A!9&1 AonfirmationJ this means as price makes higher highs, M'A! makes
higher highs and this signals a strong, healthy trend. <1 Is !ivergence and this is when price and the
indicators go their separate ways. 2or example, price may make higher highs, while the highs in
M'A! are consecutively lowerJ this is a negative divergence and tells you that despite rising
prices, the trend has lost its vitality and may be near a reversal. ' common practice is to use the
M'A! 5istogram for this purpose and < or = consecutive divergences in price gives you a strong
likelihood that prices are ready to reverse.
:ack to our TeleAhart M'A!9look at the strong bars at the start of the new trend, the next top in
M'A! comes amid advancing prices around May FthJ this is our first warning. The next top in
M'A! during the first week of Kune, despite rising prices, is even lower than the previous9this is
what I consider to be < divergent tops and a signal of a reversal. :y the second week of Kune, the
S)H experienced a nearly & month decline in prices.
5ere*s a chart of 7il and not 8ust any chart this is the top of the huge oil bull market. 's you can
see, September to March <$$F, everything was more or less ok, the peaks in M'A! were growing,
after that trouble was signalled on every peak after that, each got lower and lower creating a
negative divergence as price was rising. !uring Kuly, the downside peaks were growing signaling
momentum to the downside. Hou can see as M'A! lost it*s momentum, so did price and started
moving sideways. We even saw the start of a rally in oil.
In conclusion, M'A! can be a very powerful tool for all traders and all timeframes. The weekly
chart of the S)H below was right on track in calling the trend.
!on*t be afraid to experiment, I typically use a very long M'A! which eliminates many whipsaws
or false signals. This chart of the S)H and M'A! 5istogram uses a setting of #<6&$>6G and you can
see the downside momentum and the divergence right at the March low that kicked off the rally.
Hou can also see fading momentum in the current 0what I believe to be1 :ear market rally as if
forms a :roadening Top.
sing the same settings, applied to a L$ minute chart, you can see the positive divergence at the
Kuly lows and a string of negative divergences running throughout 'ugust leading me to believe we
are close to a reversal.
Market Direction "o(s #nd ,o& "o S(ot "$e /e*t 0ear Market
:ear Market, Market Timing 6 Market !irection
7ct $<<$&<

Stock mar7et direction since the market made a new > year high on September &> has analysts and
investors worried. The high set on September &> has not been confirmed and the market for the past
&$ days remains unable to breach the September &> high.
The longer it takes for the markets to set a new high in market direction, the more the recent high is
suspect. 's investors we are always worried. "ven in March <$$G as the market set new &$ years
lows investors worried. Then when mar%et direction began a recovery, we still worried. This is
natural because our lifeMs savings are tied into risky assets. So worrying is understandable.
With us now entering 7ctober which brings back a lot of bad memories for investors, particularly
those like me who have been investing for decades I thought I would share some charts that may
assist in knowing when to consider a market top, no matter how short or long9term, may be in place.
Through studying historic charts of other bear markets perhaps we can spot the next bear before it
has the chance to shred our portfolios.
:ar7et Direction ;nd Spotting ; Top
The media is filled with dire predictions for stocks and a plunge in market direction. :ut this is not
new. This has been the case since I started investing back in &GI<. I have never seen a year go by
without scary warnings of all kinds. "verything from !ow Theory to :lack Arosses to 'dvance
!eclines to well, you get the picture. 'ctually market crashes are not all that common. In the past
&$ years it seems like they have become more common but in the big picture of the decades of the
stock market, crashes are not common. Still though learning how to spot a top is obviously
beneficial. "verything from <$$$, to <$$&, to <$$F9<$$G, and the flash crash of <$&$ warrants our
being careful. :ut as retail investors what should we be looking at to determine if some protection
should be added to our portfolios.
oo7 To T$e :ar7et Direction #$arts
To answer that .uestion is actually easier than you may think. While nothing is ever perfect I have
used the method I am describing below, for years and it has served me well. 4etMs look back at a
few stock charts beginning with when I was 8ust a youngster in &GI=.
S&P :ar7et Direction #$art 9 ,-01
In 'pril &GI= the S/) #$$ set a new all time high. The chart below is weekly as I could not find
my daily chart for this period in my records. 'nyway, with a top in &GI=, the market pulled back
and broke the #$ day simple moving average 0first line1, the &$$ day exponential moving average
0second line1 and then the <$$ day exponential moving average 0third line1. 2rom there the market
bounced, retested the <$$ day and then eventually rallied back to a second high which was not as
high as the &st. This was the double top which occurred in late 7ctober &GI=.
2rom there the market began a retreat that resulted in a vicious bear market that lasted through to
7ctober &GI>. The market fell over #$% from its high. 5ere were the warnings signs.
'. The market direction broke through the #$ day moving average on decent volume.
:. The market direction then broke the &$$ day on stronger volume. The market tried to bounce
0canMt see it in the weekly chart1 but failed.
A. The market direction continued lower and broke the <$$ day moving average on average
If you study the chart in May through to September &GI= you can see that the same events occurred.
The moving averages were broken. There is never a guarantee in stocks. :ut when the #$ day SM'
breaks it is an omen worth considering. When the &$$ day "M' breaks consider protection. When
the <$$ day "M' breaks you should have protection in place. "ven if wrong you can always
remove the protection for a slight loss but 8ust like insurance, sometimes you pay for something you
may never collect on.
Think about what happened in &GI=. The market made a new top in 'pril, then spent most of the
year trying to rally back only to fail in 7ctober. The collapse of stocks took a year from 7ctober
&GI= to 7ctober &GI> and the market did not actually begin a strong recovery until Kanuary &GI#.
So a double top in the market does not necessarily mean a sudden collapse of =$% to #$% in stocks.
There are early warnings. In 'pril &GI= there were plenty of warnings. In 7ctober to 3ovember
&GI= there were more warnings and still time to buy protection.
4ast comment about the market direction chart, note how the strategy of selling out of positions in
'pril and not buying back in until the late 2all would have assisted investors who by the fall of
&GI= would have reali(ed that stocks were entering a new bear market and would have stayed away
secure in their profits made to 'pril.
The market direction changed in &GI= ushering in a severe bear market for &GI>
S&P :ar7et Direction #$art 9 ,-50
The way the media paints the market collapse of &GFI you would have thought it was a shock to
everyone. This is far from true. I had shorted a number of large cap stocks in &GFI as there were
only a handful of protection methods available. Shorting overbought and overvalued stocks was a
good method back then. Today there are much better methods.
In &GFI the market had pushed twice in 'ugust to make two new highs. It then pulled back and fell
through the #$ day simple moving average and hit the &$$ day exponential moving average where it
bounced. It retested the &$$ day in mid !ecember and then climbed past the #$ day. It made a
double top on 7ctober <, failed to break that top on 7ctober # and then pulled back through the #$
day on 7ctober L.
'nalysts announced that it was nothing and the market would regain its footing to challenge the
'ugust high. They were wrong.
'1 The #$ day SM' was broken on good volume.
:1 The &$$ day "M' was broken and the following day the S/) #$$ made a low, lower than any
previous low since the 'ugust high 0marked &st1
A1 The &$$ day "M' was cleanly broken on larger volume and the next day the <$$ day was hit.
The market collapse that followed shocked investors. I was holding a number of short positions
which I covered too early as I expected a strong bounce after the one day plunge. I had a number of
stock broker friends who actually .uit their 8obs within a month of the 7ctober collapse.
The lesson here was that most investors did not look at the double top and failed to consider that the
market could sell off bigger than anticipated. There was time in September to consider protection
but in early 7ctober with larger volumes and the double top, no confirmation, the breaking of the #$
and then &$$ day moving averages, the signs where clearly evident.
The market direction top of &GFI was readily spotted but few heeded it.
S&P :ar7et Direction #$art 9 )...
I figured in <$$$ everyone suspected the stock markets would collapse as the dot com bubble was
already breaking. I am using the weekly chart to show the reasons why I though the market was in
big trouble. I was surprised at how many friends thought the market would recover and keep going.
7n March <> <$$$ the S/) made a new all time intraday high of &##=.&&, but there was no follow
through. In 'pril on large volume the market pulled back to the #$ day. It then spent the period
from 'pril through to September & trying to regain that top. 3ote how the S/) #$$ stayed above
the #$ day during most of this period. Many investors and analysts felt that it was only a matter of
time before the S/) would regain the March high and continue climbing. ' lot of articles during
those summer months pushed stocks as being the very best opportunity as they were Qunder9valuedR
according to analysts and the summer sell9off was an event not to be missed by investors.
7n September & a second top was made with an intraday high of &#=$.&&. 2rom there the selling
picked up and the S/) broke down.
'1 The #$ day moving average was .uickly broken and not tested as it has previously done during
the summer period.
:1 The &$$ day held for a few trading sessions but was retested a number of times. The most telling
key was that the market was not advancing but instead retesting &$$ day support. It should have
been advancing.
A1 The market direction continued lower and the S/) #$$ broke the &$$ day support.
I have not included more in the chart as by this point it should have been obvious that the market
was in trouble and market direction had changed to down. 't the &$$ day period in 7ctober and
into 3ovember there was plenty of time to buy protection for what was to come.
I thought everyone was aware of the hurdle facing stock markets in <$$$.
S&P :ar7et Direction #$art 9 )..0
The last period I want to look at is the market direction top in <$$I.
The S/) #$$ market direction continued higher right into Kuly <$$I when on Kuly &L it recovered
to &###.G$ breaking the past high of March <> <$$$. The market tried to break that high for a few
more trading sessions and then sold off back to the #$ day moving average. 'gain the #$ day was
bounced off and the market spent 'ugust and September recovering. 7n 7ctober && the S/) #$$
made a new all time high of &#IL.$G. 'nalysts declared the worry of the summer as over but the
new all time high was not confirmed by a continuation of the rally.
'1 The #$ day was tested but did not hold.
:1 The &$$ day was tested and the market bounced off of it pushing back to the #$ day.
A1 The &$$ day was tested again and failed to hold. 2rom there the rest is as they say, history.
'gain in late <$$I with the S/) #$$ below the #$ day analysts once more told investors that stocks
were cheap and this was a time not to be missed. Indeed a lot of stocks did appear cheap, but in
<$$F as earnings began to drop stocks became a lot cheaper. Instead that fall was a great
opportunity for investors to buy some protection by using the various new bear market products that
had become available to investors. "very retail investor should have made some profit from this
bear market collapse. )erhaps the best non9stock market clue was when the 2ederal ;eserve assured
everyone that all the problems with the housing crisis were well contained. It seems any time
government tries to reassure investors, we need to become concerned.
Market Direction #nd "$e 1essons 2f ,istory
What can we learn from the above charts-
'1 There is never a guarantee that market direction is going to turn south and plunge. :ut there are
lots of chances to buy protection when the moving averages signal that trouble could be brewing.
:1 With todayMs multitude of products there is little excuse for not owning protection when the
market direction is signaling there are problems ahead.
A1 The old strategy of using the moving averages of the #$ simple moving average, &$$ and <$$
exponential moving averages still holds a lot of creditability even after more than = decades.
Therefore heed what they are signaling. "ven if they are wrong, buying protection can still work
!1 When analysts tell investors stocks are cheap by QhistoricR or any other measurement consider
that they are not. In the end earnings win out. "arnings must support valuations and if earnings fall,
stocks will at some point reflect lower earnings.
"1 Stock Market !irection tops especially new highs, that are not confirmed are suspect especially
when they pull back to the #$ day moving average, test it and then fall lower.
21 ' climbing market needs higher highs and higher lows in order to confirm the market direction
as being up. When that simple measuring stick breaks down, consider protection.
D1 3ot only is there time for putting on protection but warning signs often are months in advance of
a severe collapse. This means protection can be applied in stages to insure ade.uate protection if the
bear market is indeed starting and the market direction is confirmed as down.
51 :ear markets are sneaky. They often start long before investors reali(e they are underway.
I1 2inally, no one can truly pinpoint market collapses. The !ow Theory missed most of the above
bear market tops. The death crosses have been wrong so many times I often wonder why people
even bother writing about them. "verything from advance9decline to insider selling has been
flogged at investors as a way to 8udge market tops. In the end I have found that heeding the = longer
term moving averages and watching for a rise in volume as the market breaks the &$$ day
exponential moving average on it way to the <$$ day is as good a signal as any that investors are
worried, that they are beginning to unload stocks and institutional investors are not panicked but
concerned enough that they too are trimming positions to raise cash.
It may seem too simple, but sometimes when it comes to predicting market direction and the next
bear market, simple may be all investors need.
Topics covered in this chapter+
Det a deeper level of understanding by learning how to look beyond the charts and
understand the supply, the demand and the order flow responsible for the creation of price
5ow to look at charts without indicators.
5ow to maximi(e gains and reduce risk with the precise identification of recurring price
action patterns.
More than =$ illustrations to help you recogni(e breakouts, reversals, pullbacks and gaps.
Stop chasing the market and learn to anticipate the movements in the exchange rates with a
proactive attitude.
The most fre.uent mistakes aspiring traders do when supply, demand and order flow are not
well understood concepts.
nderstanding what is happening behind the scenes is the key to develop any trading method. !on*t
look at candles on your screen as 8ust red and green pictures and patterns as they are the expression
of supply and demand.
nderstanding these concepts will make all the difference in your 2orex trading career. It will give
you the ability to trade based on what the market is expressing through price action. This resource
can be useful to shift through the mountain of news and information that is produced every day and
trade what you really see on the charts.
PWhat is )rice 'ction-P is a .uestion fre.uently asked by aspiring traders. This chapter attempts to
explain that there are no secrets when it comes to exploring the foot print of exchange rates across a
chart. 3evertheless price action is more than 8ust swing highs and swing lows. ;est assured this
chapter will not leave you in the dark.
ItMs easy to brush support and resistance analysis off as not important. 'lthough obvious, this
concept is rather abstract and re.uires some practice to be effectively used. nderstanding a
concept from a theoretical point of view is not synonymous with having integrated it into the
practice. This section breaks down the dynamics of price action, and with the help of lots of charts,
you will thoroughly understand this concept and learn how to trade with it. This new knowledge
will make you see the charts with a new sense of ob8ectivity and trade in a much more relaxed and
proactive manner.

,/ Supply and demand - still abstract for youO
The reactions of traders towards the market is what moves the exchange rates. These, in turn, reflect
all the information+ generally speaking, prices fall when most participants think they are too high
and rise when they are considered too low. There is no inherent logic to the market nor a higher
intelligence that can be decoded. It is rather the opposite+ the market consists of a mass of rational
individuals whose reactions are certainly not always driven by rational logic. They are more likely
to vacillate between periods of greed and periods of fear. There are so many market participants and
so many reasons why each one of them decides to buy or sell at a given moment that no system
would be capable of decoding this mass behavior considering all its variables.
Aommonly, it is said that chartism, by its very nature, is more an art than a science. This is a correct
postulate if we consider that markets are made by human beings and not by analytical methods. 'll
traders, in some way, pay attention to price levels but the way they react to them is never exactly
the same.
Hecoming a trader requires you to learn $ow to be$a!e in suc$ an unpredictable
en!ironment/ 6t?s essential to create a strategic framewor7 wit$ w$ic$ identify t$e be$a!ior
patterns made by mar7et participants/ T$is 7nowledge will gi!e t$e trader a statistical
ad!antage to act upon t$e mar7et/
To start developing your analytical skills, it is essential to be able to identify supply and demand
levels and to measure their strength. 7ne of the advantages of supply and demand levels is their
consistency and the fact that they remain visible in a chart for days, weeks, and in some cases for
months and years.
3ot surprisingly, most trading manuals start by shedding light on this issue as it*s one of the pillars
of technical analysis. :y its logic, it*s a simple concept to understand, however, it*s also where most
inexperienced traders fail. Who has not opened a position and seen how the market immediately
turned in the opposite direction to finally li.uidate it at the stop loss- To compound the problem+
how many times has the market turned to your original direction after the position has been closed
for a loss-
The )2Y Team invites you to take a step back to economics &$& to make sure you understand the
Supply is the measure of how much of a particular commodity is available at any one time. 's the
supply of a currency increases, the currency becomes less valuable. Aonversely, as the supply of a
currency decreases, the currency becomes more valuable.
7n the other side of the economic e.uation, we find demand. !emand is the measure of how much
of a particular commodity people want at any one time. !emand for a currency has the opposite
effect on the value of a currency than does supply. 's the demand for a currency increases, the
currency becomes more valuable. Aonversely, as the demand for a currency decreases, the currency
becomes less valuable.
To illustrate how supply and demand interact to determine an ideal exchange rate in the 2orex
market, we are going to use a standard supply and demand graph. Supply is represented by a
diagonal line that is sloping up from a low point at the left end of the line to a high point at the right
end of the line. !emand is represented by a diagonal line that is sloping down from a high point at
the left end of the line to a low point at the right end of the line. 2inally, the ideal exchange rate is
represented by the point where the two diagonal lines intersect.
Aontinue ;eading...
3ext, Sam Seiden recalls what are the basic conditions in a free floating currency market+
The foreign currency 02orex1 market is where global exchange rates are derived for everyone
including market speculators and end users of currency. )eople and companies buy and sell
currency much like you would buy and sell anything else. Strong economies have strong currencies.
When we trade the 2orex markets, we are trading economies. Therefore, supply and demand for
currency depends on the current and expected perceived health of a country*s economy. B...C
;estrictions on capital flows have been removed in most countries, leaving the market forces free to
ad8ust foreign exchange rates according to their perceived values based on pure supply and demand
for currency.
Aontinue ;eading...
In another article, Sam Seiden resumes the main principles which characteri(e today*s financial
The first principle states that P)rice movement in any free market is a function of an ongoing supply
and demand relationship within that marketP. The second law states that P'ny and all influences on
price are reflected in price.P 4astly, the third law says that PThe origin of motion6change in price is
an e.uation where one of two competing forces 0buyers and sellers1 becomes (ero at a specific
price.P 2irst, understand that there are always two competing forces at work in the market, buyers
and sellers. 7ur goal is to .uantify those forces and identify price levels where the imbalance is
greatest as this creates change, or movement in price.
Aontinue ;eading...

3$at is a su((ort4
' support level is a price level below the current one, where the demand was stronger than supply,
driving the price upwards. !emand is synonymous with bullish, bulls and buying.
't a support level, general expectation dictates that demand will outstrip supply, so a fall in price
would be slowed down by the time price reaches that level. Aonse.uently the price is expected to
bounce back upward because support is the price level at which demand is thought to be strong
enough to prevent the price from declining further.
The market, understood as the will of millions of investors, considers a price level low enough and
acceptable to purchase, so when the price reaches that value, purchases soar. The logic dictates that
as the price declines towards support and gets cheaper, buyers become more inclined to buy. 's
demand increases, prices advance higher.

3$at is a resistance4
7n a chart, a resistance level is an identified maximum level where the supply has exceeded the
demand, stopping the upward momentum in the exchange rate, and eventually making it drop from
Supply is synonymous with bearish, bears and selling.
If the market believes that a price level is very high, sales soar at the time price reaches that value.
In other words, a resistance level is a reference price where selling pressure is greater than the
demand. In many cases this pressure is so great it can halt the rapid escalation of prices.
The levels of support and resistance are detected primarily by analy(ing the evolution of price
action on a chart and identifying where prices halted after a rising or falling period.
;esistance thus is the price level at which selling pressure is expected to be strong enough to
prevent the price from rising further. The logic dictates that as the price rises towards resistance,
sellers become more inclined to sell and buyers become less inclined to buy. When the price
reaches the resistance level, it is believed that supply will overcome demand and prevent the price
from rising above it.
In this lesson and ad8acent video of the 2orex "ssentials Aourse, the )2Y team shows different
chart types by looking at support and resistance levels.
'dditionally, Kames Ahen provides us with valuable information about another type of charts, the
)oint and 2igure, to visuali(e price action+
In short, some may characteri(e point / figure charting as trading based upon pure price action.
This is because only price, which is undeniably the most important aspect of technical analysis, is
customarily included on this type of chart 0in the form of Y*s and 7*s1. 7ther data that can readily
be found on bar and candlestick charts, like time and period opens6closes, are generally excluded on
point / figure charts. This leaves only the uncluttered purity of price action.
In another blog post Kames also speaks about a variation of the Kapaneese Aandlestick charts, the
5eikin 'shi+
The distinct look of 5eikin 'shi charts is noticeable on the very first glance. !uring trending
periods, virtually uninterrupted series of solid or hollow candles are the rule. This means that even
during minor retracements in a strong trend, 5eikin 'shi charts will essentially show a one9
directional run. Therefore, during these trending periods, 5eikin 'shi charts work their best in
indicating whether a trend has ended or is still intact.
's you notice, there are different ways to visuali(e price action. Important for you to know is that
all price actions as you see on the charts are derived from market participants buying and selling
currencies. !espite the fact there are several ways to capture price action on a chart, we make use of
Kapanese candlesticks throughout the chapters of the 4earning Aenter.

3$at $a((ens at su((ort and resistance !eve!s4
If you have read texts on chartism, then you already know the saying+ PWhen a resistance is broken
up, we are in an uptrend and resistance becomes support. 'nd vice versa, when support is broken
down, we are in a down trend and support becomes resistance.R !espite being true, this theory does
not explain what really happens behind the charts.
; simplistic explanation suc$ as& KC$o cares $ow it wor7sO T$e trut$ is t$at it wor7sK or
KT$is wor7s because e!eryone uses itK s$ould not suffice w$en see7ing to understand t$e
dynamics of supply and demand/
The concept of support and resistance is .uite easy to understand, and it has some components
which will improve your chart analysis+ the relation between supply and demand which exists at
any price level can be measured using several procedures as you will learn here. 'lso the time
factor is an important ingredient in the analysis and should be also considered. This nit and the
)ractice Ahapter ' thoroughly deal with both aspects.
4et*s start to visuali(e the potential amount of supply and demand on a chart.
In this ";6S! >5; chart you can see how the supply is running out as the price moves away
from the resistance area at the initial high of $.G$F$, from where it trends downwards. 't $.G$F$ is
where most of the supply is concentrated until it gets exhausted at the low level around $.FI#$.
Similarly, we see from the chart below that demand decreases as the price rises after bouncing at the
low level of $.FI#$, when the demand was at its highest.
' support level is a price level considered attractive by a large number of buyers. If the demand to
buy a given currency is high enough 0higher than the willingness to sell1, a downward move in the
exchange rate will eventually slow down and even reverse. This is what happened around the
$.FI#$ level+ the strength of the buyers was able to stop the pressure from the sellers. !oes this
happen always- Well, not always but it happens with an astonishing high fre.uency.
Kames Ahen tells us more about what is usually called a self9fulfilling prophecy+
' .uick note about the important role of the Pself9fulfilling prophecyP in 2orex trading and
technical analysis. 7ne of the key reasons that many aspects of technical analysis, especially such
important concepts as support and resistance, often seem to work remarkably well has to do with
this phenomenon. ' self9fulfilling prophecy is a forecast that causes itself to become true. In the
case of 2orex trading and technical analysis, a certain support6resistance level may be valid and
respected to a significant extent simply because that level is well9known, and is therefore watched
and acted upon by a critical mass of traders. So, for example, a =F.<% 2ibonacci level, an ;& pivot
point, and a key uptrend support line do not in themselves really have magical predictive properties.
It is more the fact these these levels are so universally accepted and therefore so closely watched
and traded by so many traders, that they often take on considerable price action significance. The
role of the self9fulfilling prophecy is one of the keys to effective technical analysis in the 2orex
market as well as all other financial trading markets.
Aontinue reading...
Dood observationZ We will soon clarify this for you, but don*t underestimate Kames Ahen*s words
because more than often they will provide you with an advantage in the market.
In fact, supply and demand are two forces that coexist in the market at any given time. 's shown in
the picture below where the two forces are exposed, price action speed slowed down in the middle
of the chart and consolidated temporarily at a level where the two forces were fairly e.ual. When
supply and demand are e.ual, prices move sideways as bulls and bears slug it out for control.
:uyers and sellers create two opposing forces that move prices. :uyers want to buy cheap and then
sell more expensive. 'nd sellers, conversely, are always looking to sell expensive to buy cheaper
afterwards. So each pip that the exchange rate moves shows the game of power between the two
sides+ if the exchange rate rises by only one pip, it means that buyers are winning, and a pip down
move shows that sellers, for that instant, have imposed their willingness to sell.
' level of support or resistance is a level at which a critical mass of traders 0or capital1 coincide in
their aim to buy or sell a certain currency. These levels are identified by the way traders react to
them and because they show a tendency to reoccur. It*s not that market participants agree on what to
do at a certain price level, they 8ust coincide on their assessment that the exchange rate is too high to
buy 0resistance1 or too low to sell 0support1.
So it*s not even a .uestion of the .uantity of traders deciding how to react to a certain level, but the
imbalance between buyers and sellers at a certain price level.
T$e fact t$at certain price le!els $a!e been significant in t$e past is telling us t$at t$ey may
$a!e sufficient impact on price mo!ements in t$e future/ Sometimes@ le!els of support and
resistance are !ery clear on t$e c$arts and remain intact for a long time/ T$is p$enomenon is
called t$e KmemoryK of t$e mar7et/
When the price reaches a new low and then rises significantly, both the buyers who bought at that
low and the ones who lost the opportunity to buy will be willing to enter long when the price
reaches that level again.
2ollowing this dynamic, the phenomenon can be repeated until the balance of buyers and sellers
changes. This is what ultimately happens, otherwise price action would take place between two
price levels only and the market would be ranging endlessly. :ut the market is rather complex and
many variables can affect price action. The general belief of what was a good price to buy 0a
support1 may weaken until the price finally breaks down.
Take a look at the chart below+ support did not hold and the break below support signals that no
more buyers were willing to buy at that level 0green line1. So a break below a support level
indicates a new willingness to sell as sellers have reduced their expectations and are willing to sell
at even lower prices. :ut e.ually, the break signals a lack of incentive to buy.
Similarly, a supply level does not hold indefinitely and a break above the resistance level is a sign
that supply is exhausted and the demand exceeded it. ' break of a resistance is not necessarily
indicating a huge demand, it*s 8ust that demand is considerably higher than supply, or that supply is
7bserve the chart below+ a break out above resistance proves a new willingness to buy and6or a lack
of incentive to sell.
When price breaks a resistance level and reaches new peaks, this means that buyers have increased
their expectations and are now willing to buy at higher prices. It also means, and this is e.ually
important, that sellers don*t feel coerced to sell at that level and prefer to wait until prices rise above
the resistance level.
When a resistance level is broken, we need to identify another resistance at a higher price level. 's
price approaches that higher level, sellers will be gaining strength again as buyers will tend to stop
buying at higher prices. 't this stage, pay special attention to the fact that price action is something
that always happens between levels of maximum supply and demand. 's a trader, you want to train
your analytic eye to identify those areas between maximum supply and demand levels, which price
can recover when breaking one level to reach the next one.

!on*t think of market participants as two opposed groups of well defined buyers and sellers.
;emember the 2orex is a double direction market, where each buyer turns into a seller when he or
she closes his or her positions. To li.uidate a position in the 2orex means to invert the action you
initially did to enter the market. If you bought low and the price went higher, you will be a seller by
closing the position for a profit.
When the supply is exhausted, as shown on the right side of the previous chart, the resistance is
broken and the price continues its ascending move. sually, when a resistance is broken, it becomes
a support, should price return to this level again as there is likely to be an increase in demand.
"ach moment in the market is uni.ue and many factors and reasons can motivate traders to open
and close positions. :ut one of the factors which may have contributed to accelerate the rapid rise in
the price as seen in the chart above is the activation of stop loss orders from short positions. "ach
stop loss order in a short position is in fact an active buy limit order and can thus accelerate an
upward move.
More information about types of orders, can be found in the Ahapter = of this nit.
:y now you should have at least a basic understanding of how support and resistance works in the
markets. It*s always important to visuali(e support and resistance as an imbalance between supply
and demand forces where demand creates support when traders show willingness to buy or read8ust
their expectations and start to buy at higher prices. :ut a weak demand also contributes to create
resistance when traders disagree in buying at higher prices.
7n the other hand, supply creates resistance when traders are ready to sell and it also contributes to
form support when traders stop to sell lower. This means that support and resistance are not to be
seen as a battle between bulls and bears, but rather as an imbalance of two forces. 'nd ultimately
price moves stronger precisely when one of the forces ceases to exist. If supply decreases, it will be
overwhelmed by forces of demand. The greater this imbalance is, the faster the price will rise.
In an uptrend, for example, demand is not the only cause of the increase. 2or prices to rise, sellers
have to absorb that demand. In the market there is always a counterpart for each position, that is
why the two forces are always present, but representing opposite intentions. ;emember that the
exchange rate you see on your platform is the most recent traded price, a price on which a buyer and
a seller agreed to do an exchange.
Sam Seiden simplifies the above theory and explains price action as being characteri(ed by = main
Principle ,& Price mo!ement in any free mar7et is a function of an ongoing supply and
demand relations$ip wit$in t$at mar7et/
' market is always in one of three states+
2irst, it can be in a state where demand exceeds supply which means there is competition to buy and
that leads to higher prices. What does this look like on a price chart- ' Ppivot lowP is a perfect
Second, it can be in a state where supply exceeds demand which means there is competition to sell
and this leads to declining prices. What does this look like on a price chart- ' Ppivot highP is a
perfect example.
Third, it can be in a state of e.uilibrium. 't e.uilibrium, there is no competition to buy or sell
because the market is at a price where everyone can buy or sell as much as they want. 5owever, as
the market moves away from e.uilibrium, competition increases which forces price back to
e.uilibrium. In other words, competition eliminates itself by forcing markets back to e.uilibrium.
"ven though e.uilibrium is where the ma8ority of candles are, we don*t necessarily want to trade in
that area.
Principle )& ;ny and all influences on price are reflected in price/
't any given moment, there is tons of financial information being created and passed on around the
planet. This information can be in the form of an earnings report, news, income statement, analyst
opinion, economic report, terrorist attack, and so on. 'll this information creates thoughts and
perceptions that are different for everyone depending on their individual :"4I"2 system. :e
careful to notice that most humans assume others* belief systems are the same as their own. This, of
course, is simply not true.
Principle 1& T$e origin of motion*c$ange in price is an equation w$ere one of two competing
forces =buyers and sellers> becomes <ero at a specific price/
4et*s now put numbers to the simple supply and demand I keep mentioning. 5ere, we have =$$
buyers and <$$ sellers at U<$.#$. )rice will remain stable, meaning supply and demand will appear
to be in e.uilibrium until the <$$th seller sells. )rice will begin to increase or A5'3D" when the
last seller has sold. It is when the last seller sells that we are left with &$$ buyers and no sellers. 7ne
of the two competing forces has exhausted itself. In this case, it was the sellers. What appeared to
be supply6demand e.uilibrium was actually dise.uilibrium or imbalance. It 8ust took a certain
amount of time for this unbalanced e.uation to play out.
In other words, motion 0of price1 occurs when one of the two competing forces becomes (ero. The
two competing forces are, again, supply and demand. The time it took for that imbalanced
relationship to produce movement is purely a function of the actions of the two competing forces.
;ead full article and continue reading...
The above reasoning explains why markets don*t remain stuck between two hori(ontal extremes
when supply and demand interact. If support and resistance held forever, then trading would be easy
indeed. We could simply enter and exit as the price seesaws up and down between support and
resistance levels. :ut the fact is that active markets dissipate directional forces because every buyer
must eventually sell and every seller must eventually buy in order to cash profits. This induces to
price action reversals and the whole process can be seen as a cycle that e.uali(es trader*s action and
reactions over time.
's you will see later, a chart may print a strong downtrend on the daily chart, a rally on the L$
minute chart, and sideways congestion on the #9minute chart, all at the same time. While this cycle
process may seem chaotic, it actually reflects the dissipation of the supply and demand polarity.
!erek 2rey clearly defines what is a resistance and what is a support from his perspective+
7ne of the most basic things about trading is support and resistance. Het many do not fully
understand how to find what is a PgoodP or PtrueP support or resist level. I will attempt to clear this
up once and for all. The chart above is a current daily chart of the "ur6S! on it you can see a red
line that i drew to indicate where the strongest level of support is. So how was able to find that-
Simply by finding what the last most significant resistance level is. 'nd that is the PsecretP. ;eal
support was formally a resistance level and real resistance was formally a support level. This works
in all markets and time frames but is most relevant on the !aily time frame. The only exception is if
it is making an all time new high or low. So if you want to find support look for resistance and if
you want to find resistance look for support.
3$ose Su((!y and Demand Is It4
Wed, 3ov <L <$$F, $#+>I DMT
by Sam Seiden 9 7nline Trading 'cademy b Oiew company*s profile
Qote up& && Qote down& <
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When I use the terms PsupplyP and PdemandP, I am simply replacing them with the terms
PresistanceP and PsupportP. Why do this- nderstand that the words resistance and support mean
many different things to different traders. 2or one trader, support may be a 2ibonacci price level.
2or another, support might be a pivot low, and for someone else, support may mean a pullback in
price to a rising moving average. There is really only one definition of supply and demand,
Demand& ' price at which someone is willing and able to buy something.
!emand T 0Support1 T where to buy.
Supply& The price at which someone is willing and able to sell something.
Supply T 0;esistance1 T where to sell.
The markets are purely a function of supply 6 demand, and human behavior. Trading opportunity
exists when this simple and straight forward e.uation is out of balance. The logical .uestion is+
What does this look like on a price chart-
In the 7nline Trading 'cademy Extended earning Trac7 =JT> class, I make sure students
learn to look beyond the green and red candles on the screen and instead, understand the supply,
demand, and order flow responsible for the creation of the candles. This takes the trader to a deeper
level of understanding and helps them attain an edge in a career where owning the edge means the
difference between success and failure.
5aving started my career on the institution side of trading, I can confirm what you already know+
Institutions derive profits from retail traders and investors. Therefore, wouldn*t it be nice to know
where institutions are buying and selling- Most traders are in search of sophisticated, expensive
software and fancy algorithms to help them identify where all the large banks and institutions are
buying and selling. If you know what you are looking for, simple price action on charts reveals
everything you need to know.
3otice the three candles that are basing sideways 8ust above the numbers &$$ 0for sellers1 and <$$$
0for buyers1. That sideways price action gives the illusion that supply and demand are in balance at
that price level. The truth is, that e.uation was always out of balance. It simply takes a period of
time for that unbalanced e.uation to play out. 7nce the last seller sells and you have buyers left at
that price level, price must rise. Who is the main source of demand at that level- It*s not retail, I can
assure you of that. ;etail traders don*t have the buying power to cause a rally in price like that.
Institutions certainly do, however. 5ow do I know this- My career began on the floor of the
Ahicago Mercantile "xchange handling institutional order flow. I .uickly learned to spot what
bank6institution6central bank demand and supply looks like on a price chart. Ironically, where the
smart money buys is where retail sells. Where smart money sells is where retail buys.
How to trade futures step by step@ understanding T$e Klong
Term Participants QiewK/
.he /0ong .erm 1aricipans 2ie3/ o% .he ,arke aciviy is essenial o undersand $o& to trade futures4
and go 3ih he 5irecional move (rend)4 a%er spoing Supply and 5emand 0evels. 0e6s e7amine every sep
one a a ime.
8889lick on chars o enlarge888
5 Ste( 6
:ill re;uired he 5aily 9har o% he produc raded.
1. Open up your daily char and look %or he las lo3 and las high ha .he ,arke made
<places 3here i changed rend (direcion) or roaed=.
Sep * helps us see (in case you do no kno3) ho3 %ar o go >ack o analy?e he marke aciviy. .his
Sep also help us see %urher >ack4 .he ,arke aciviy ha developed over he las monhs. .he /(ig
1icure/ is called.
.he 9ircles represen he las lo3es lo3 (%rom a pull>ack) and las highes high ha .he ,arke
made4 >e%ore he change in rend. From he red circle o he green circle he las s3ing (las rend) is
%ormed and here%ore4 he one 3e 3ill al3ays use o analy?e .he ,arke and rade.
I kno3 you are 3ondering again 3ha a 0as s3ing is:
look a i simply4 as he las change in rend or direcion ha .he ,arke made in a daily and a !*
minue char. In he a>ove char I changed direcion (or roaed) %rom do3nrend o uprend in he
red circle (.he ,arke made a pull>ack %rom a >igger move). .hen i changed %rom uprend o
do3nrend in he green circle (%inished he move up).
5 Ste( 7
(9har (elo3)
2. Open up your !* min char
!. @o >ack a leas 1 monh and a hal% o ! monhs. .his ensures you cover he 0as S3ing.
5 Ste( 2
(9har (elo3)
.ake he area %rom he red circle o he green circle (0as S3ing on daily char o% sep *) and mark
'. .he Aighs and 0o3s <places 3here .he ,arke urned4 roaed or changed rend (direcion)=.
(Aighlighed 3ih circles on he char)
). -reas or 0evels 3here .he 1rice has >ounced several imes (s;uares on he char).
B. -nd @aps (num>er 1 and 2).
-s you can see4 normally @aps and Aighs C 0o3s (places 3here i sopped moving and reversed)
can overlap4 %orming a sronger level o% Suppor (5emand) or Resisance (Supply)
5 Ste( 8
(9har (elo3)
Sep ! is comprised o% /3o ;uesions/ ha make us ponder over 2 very issues or hings4 so 3e can
hink as raders4 3hich is prey 5i%%icul. (5o no 3orry 3ih ime you 3ill ge he hang o% all his).
0e6s go 3ih he ;uesions.
D. :here is he marke rying o go (up4 do3n4 side3ays E).
F. Ao3 good is i rying o go here (a %as move up3ards4 do3n3ards4 slo3 moveE).
.his 3o ;uesions are crucial o undersand $o& to trade futures since you should /ry/ o see4
%rom a long erm vie34 3ho is in conrol o% he marke.
-re (uyers in conrol or SellersE. I% 3e move uprend4 hen >uyers are in conrol4 here%ore4 3e have
a />iased/ o3ards >uying. i% 3e move do3nrend4 hen Sellers are4 and here%ore4 3e have a
/>iased/ o3ards selling.
Ao3 sharp is he moveE. I% moving uprend4 is he move %as and sharp or slo3E. - %as move
indicaes huge >uying pressure and slo3 move indicaes ha >uyers migh >e running ou o% seam.
In he !* min char (elo3 and he one 3e analy?e in sep 24 .he ,arke is coming %rom an uprend
(>lack arro3 sloping up3ards) and no3 .he ,arke is moving ino a side3ays movemen or
">racke& (parallel >lack arro3s)4 here%ore4 in he /0ong .erm 1aricipans 2ie3/ or Oher .ime%rame
aciviy >uyers and sellers have he same %orce (Side3ays ,arke).
.his ans3ers our %irs ;uesion o undersand ho3 o rade %uures.
.he ,arke is rying o consolidae or go /Side3ays/. :e no3 kno3 ha .he ,arke has e;ual
srengh4 eiher up or do3n4 >uyers and sellers are moving ino a /range/ %rom /.he 0ong .erm
1aricipans 2ie3/.
.he (elo3 9har also indicaes ha 3ihin he %orming range (parallel >lack arro3s) here have >een
moves o% e;ual %orce >y (uyers and Sellers . .his ans3ers our ;uesion 2.
Ao3 good is I rying o go ino a side3ays moveE.
2ery 3ell4 3ould >e he ans3er4 since :e can see ha .he ,arke has moved up and do3n 3ihin
he range.
.onc!uding% 3e give (o&er to 0uyers and Se!!ers 9ust as :;ua!
Goe somehing my %riend4 i% you also 3an o undersand ho3 o rade any insrumens4 no Hus %uures4 or
ho3 o rade socks4 .his /0ong .erm 1aricipans 2ie3/ o% .he marke applies Hus as e;ual.
Ok4 3e have no3 %inished analy?ing ho3 o rade %uures %rom he /0ong .erm 1aricipans 2ie3/ o% .he
,arke. Go34 le6s move ino he /Shor .erm 1aricipans 2ie3/ o% .he ,arke and e7amine ho3 o rade
%uures inegraing he /long erm/ 3ih he /shor /erm/ -civiy.
"utures Trading #$arts are t$e map to t$e treasure@ t$ey
s$ow you two t$ings&
R Supply
R Demand
Futures "rading .$arts are he main ool a %uures rader needs. Fuures chars are he map4 hey provide
all he in%ormaion you need o spo Supply and 5emand.
0e6s look a 3ha 5emand and Supply is in futures trading c$arts. (ake ino accoun ha he same
principles e7plained here remained %or commodiies chars4 sock chars4 %ore7 chars4 or all rading chars
3$at is Demand% Su((ort or f!oor4<
(i is he same hing4 and 3ill >e used inerchangea>ly) (so >ear 3ih me pleaseeI).
5emand or Suppor is a level 3here >uying pressure e7ceeds selling pressure4 3here a decline in price is
haled. I is a 0evel %or you o (uy4 :hyE.
(ecause in he -ucion 1rocess a direcional move (rend) is sopped >y an opposie response. I% he marke
is moving do3n4 buyers sop i a Suppor.
I% he 5irecional move is no sopped4 1rice adverises lo3er (keeps he rend moving do3n) %or an opposie
response (more >uyers) o shu o%% he direcional do3n3ard move. 0e6s look a Hus one e7ample o% all he
%uures rading chars you 3ill >e seeing.
3$at is Su((!y% resistance or cei!ing
(i is he same hing4 and 3ill >e used inerchangea>ly).
Supply or Resisance is a level 3here selling pressure e7ceeds >uying pressure and a rally is haled. I is a
level %or you o Sell4 :hyE. (ecause in .he -ucion 1rocess4 a direcional move (rend) is sopped >y an
opposie response.
I% moving up se!!ers sopped i a a Resisance price. I% he direcional move is no sopped4 price adverises
higher (keeps rending up) %or an opposie response (more sellers han >e%ore) o shu o%% he direcional up
move. Jus he opposie o% 5emand.
.his leave us 3ih an eiher 3in or lose siuaion. I% you spo correcly he shu o%% o% he direcional move OR
spo correcly ha4 .A-. direcional move (rend) 3as going o coninue4 you have a 3inner rade.
IF you spo i incorrecly4 you have a loser rade4 and he marke coninues o seek opposie response o shu
o%% he direcional move or >eer said ba!ance t$e market and mee e;uili>rium.
888One hing here4 3hen looking a %uures rading chars and rading in general888.
5onK >e scared o% >eing 3rong4 i is par o% rading4 cos o% his >usiness4 your enry %ee o %ind i% your >e
3as righ or no. +venually4 >eing Righ D ou 1* imes is easy4 i is raher easy.
-pplying a sysem4 having he discipline o %ollo3 i4 and %ollo3 e7reme money managemen rules4 is 3ha
could complicae maers and 3ha is really hard. (u 5on6 3orry ha is 3ha i am here %or4 I6ll >e 3ih you all
he ime.
So4 do your >esI and ry o learn and pracice hrough his 3e>4 >ooks4 videos and .he ,arke isel% (he
>es eacher). 1ulling money ou o% he marke 3ill come as a secondary resul o% doing hings righ (I6ll >e
you so).
3$ere Do &e find t$ese #reas of Su((!y and Demand on futures trading
1. 1revious price areas 3here Aighs and 0o3s are marked. -lso called places 3here price S.O1 -G5
R+2+RS+5 (RO.-.+5) or 9A-G@+5 .R+G5.
2. 1lace 3here price has >eing reHeced several imes.
!. @aps.
'. 2poc o% previous day or days
1et=s define t$em+
1. :henever price rends and changes direcion i makes a high or lo34 ha is our %irs Supply or
5emand area (price).
2. :henever price is reHeced or has >ounced several imes o% a price4 i %orms a Supply or 5emand
!. :henever price gaps up or do3n %rom a previous day session i% %orms an area o% Supply or 5emand
on ha gap.
>. :henever price is a3ay %rom he highes raded price o% yeserday %or a leas he 3hole range o%
yeserdayKs range and hen moves o3ard ha Aigh 2olume -rea4 i %orms and area o% Supply or
5emand. (Lou 3ill learn more a>ou 2olume 1ro%iles laer on).
0e6s 0ook a a char o clari%y his ' poins:
.he green circle provided Suppor %rom a previous Aigh plus a @ap %ormed a he same level. (num>er 1
righ on op o% he >lue line4 he Aigh. -nd num>er 24 he @ap). (noe:num>er 1 in he >oom o% he char is a
0o3 %ormed).
0as >u no leas here is one more hing you need o remem>er 3hen looking a %uures rading 9hars.
Once a Suppor 0evel (5emand) is >roken i >ecomes a Resisance level (Supply) and vice versa. .his is
mainly a simple sory o% emoions4 %ear C greed.
0e6s check ha ou...
Once a Resisance level (Supply) is >roken4 here are very %e3 Sellers le%4 and hey have los money (hey
are in pain)4 and no3 here are more >uyers presen o push prices higher. (.he sellers may also Hump ship
and Hoin he >uyers).
1sychologically his area (he one >roken) no3 >ecomes an area o% pain %or Sellers and an area o% gain %or
>uyers4 so 3ih memory o% his area4 >oh previous >uyers and sellers sep up and >uy again and his level
no3 >ecomes suppor. (5emand level). .he reverse is rue 3hen a suppor area (5emand) is aken ou.
.he char >ello3 sho3s hose emoion in play. Once price >reaks Resisance (Supply 0evel) i >ecomes
Suppor (5emand 0evel).
Ok4 3e have %inished looking a he main ool o% a %uures rader4 Futures "rading .$arts. le6s go and ake
a look a he mos raded price volume43ha is called 2olume 1oin o% 9onrol (2poc) and 3ha a 2olume
1ro%ile is.
Nikkei versus Dow
The Nikkei is a widely traded index of major Japanese shares. It is considered the Dow Jones
Industrial Index of Japan. You would think that since the worlds major economies are
gloalised and inter!connected that the worlds stock markets would mo"e more or less in
sync. #fter all$ a slowdown in the %&# and 'urope should result in a similar mo"e in Japan and
(hina as these countries are export!dri"en.
)ut compare the Nikkei with the Dow on these daily charts going ack to the pre!credit crunch
(Click on image above for larger version)
(Click on image above for larger version)
+ollowing the ,--.!,--/ collapse$ the Nikkei managed to rally to the exact 012 +ionacci
le"el 3lue ar4 5 and has declined e"er since. That was a great place to short the Nikkei.
In the Dow$ we saw a similar collapse$ ut the Dow rallied to a deeper 6,2 +ionacci retrace
efore hitting resistance. That was also a great place for a short trade. )ut here$ the Dow has
rallied$ unlike the Nikkei. 7aye markets are not so inter!connected after all.
8ets take a look at recent action in the Nikkei*
(Click on image above for larger version)
The decline off the #pril peak is a clear fi"e!wa"e affair 5 complete with a positi"e momentum
di"ergence at the wa"e fi"e low. That is pure textook and indicates the main trend is down.
)ut when you see this pattern$ you know a rally lies ahead and it ecomes a good idea to
co"er shorts.
The first rally carried to the +ionacci 012 retrace 3lue arrow4 and after a series of
o"erlapping wa"es 3indicating a likely pause in the ear market4$ the market made two stas
at the +ionacci 9-2 le"el 3lue ars4 and is currently challenging recent market lows.
The rallies to the 9-2 le"el were ideal places to enter short trades$ of course.
I find that the shallow 012 retraces normally indicate a prompt resumption in the downtrend$
while the 9-2 and deeper retraces normally indicate more work efore the ear market can
get ack on track.
EUR versus USD
The euro has een in a ear market for some time$ ut with a recent large correction.
(Click on image above for larger version)
+ollowing 7ondays :.,1 low 5 a new low for the mo"e 5 the market this week has rallied in a
clear #!)!( form 3indicating a correction4$ and has made it ack to the +ionacci 6,2 retrace
with a slight o"ershoot 3purple ar4.
These ;pigtails are <uite common and usually mark the end of the mo"e.
#gain$ a short trade at the 6,2 area was indicated.
#nd finally=
GBP versus USD
This market has een swinging wildly recently with no clear direction. >ere is the action o"er
the past few days*
(Click on image above for larger version)
+rom +ridays high the decline occurred in fi"e wa"es* with a nice positi"e momentum
di"ergence at wa"e 9? then a rally to the 062 +ionacci le"el? then a dip? and then a run up to
the 9-2 le"el. This last run completed a nice #!)!( 3purple lines4 correcti"e pattern.
The odds fa"our a declining market$ which would e confirmed y a mo"e elow 7ondays low
5 and in fact as I write$ this mo"e has just occurred in the past minute@
'!S! has been rising steadily and also gapped up slightly at the start of this week.
$.G>$#$ is the high of <$$G and <$&$. That*s an area where we*ve seen and imbalance of supply and
demand on a number of occasions and we*ve not seen it broken above in over < years.
We can see on the weekly, daily and >hr charts below that price is flirting with the upper :ollinger
:ands as it enters this previous supply region. The last fall from this di((y height was in 'pril6May
of this year.
)rice could well break above the < yr high, but then again if there is plenty of supply in this region,
the *potential* move down makes this pair*s price action, worth keeping a close eye on.