Support, Resistance & Chart patterns

[slipshod]

The trading methods I described in the first few pages of this thread have since been honed & refined over nearly 2 years of trading them, so I decided to remove some obsolete content from my posts below and attach a few videos, which I'll add below as & when I make them.

The "naked chart" technical analysis methods I describe here relate to long-term trading, typically on Daily charts. If you prefer to scalp handfuls of pips on m5 charts, this is not your thread. Although its possible that many of the methods are applicable to lower timeframes, I haven't traded them there and can't vouch for how successful they'd be.

[youtube]https://www.youtube.com/watch?v=GxBfUO450-E[/youtube]

[youtube]https://www.youtube.com/watch?v=Q5Kbb9_o6Cw[/youtube]

Please note that I've tried to aim the videos at traders who have no idea about traditional naked chart analysis, so I apologize if it comes across as me trying to tell experienced traders stuff they already know. Also, the vids describe how I personally look at charts - its not intended as an assertion that this is the only way or the best way to analyse charts & trade the markets, its just my way.

[slipshod]

<this post contains info that is now obsolete, removed to avoid confusion>

[slipshod]

Insomnia has kept me watching the market later than I usually do, and I've come across a setup that I may as well illustrate here. AU - H4 chart first...

20120511-auh4.png

Now M30...

20120511-aum30.png

And finally M5...

20120511-aum5.png

So from the H4 I'm looking for the C-fork to either hold (and I enter a continuation short) or break (and I look for longs). On the lower timeframes I see a bearish pattern, and evidence of selling pressure. On break of the last & steepest trendline I have a signal to short - will see how it turns out. Probably badly, but the reasoning is there - I know why I'm taking the trade & from experience I know its a pretty high probability one.

Oh, and I've also demonstrated how a trade can be driven by the higher TF picture, but examination of lower TFs can be essential to confirming the entry. Sometimes I even drop to M1 to get a feel for what the price is doing, and whether buyers or sellers are in control.

Edit: The only thing I haven't talked about so far is the oscillator, but I'll get to that tomorrow.
Edit #2: I also haven't discussed another use for the MM levels, please remind me if I forget.

[slipshod]

To continue my merry monologue, the trade setup on AU yesterday worked as I hoped and reversed downwards. The question now is, will it continue to run down and breach the 1.002ish support from 2 days ago, or will it find buyers again and possibly start a sharp short-covering rally? Fortunately we have the tools with which to measure & decide. Here's the M15 chart...

20120512-aum15.png

A nice new downtrend line has started (blue), but already its been tested and a C-fork created (blue dashed). If that breaks, I exit my shorts. In fact it allows me to move my stops fairly close, tracking just above the C-fork line. There's every risk this could bounce again from near parity, creating a double bottom and then rallying through the longer TF green C-fork.

Btw, if you recall what I said about fibs & how I find it hard to trust/use them, I went back & placed a fib retracement over the bounce from the previous leg down:-

20120512-aum30.png

I think even Alanis would agree on the irony of that I still don't trust 'em though, but that's just me.

[Fx93]

Thanks for the Stoch rainbow, I'll try it out! I have actually noticed that after the stochastics become all together and then there is further divergence they become splayed apart, which is apparent in the example cited in your last chart.

As far as the C-forks and Wolfe waves, I've been watching them on the 2pip and 5 pip range bar charts, and they are not as reliable as in the higher frames, which I realize you do not trade, just fyi. Part of the reason is that the C-forks get one in later. I do enjoy your trading style though and will keep following your progress.

By the way, I did find a Wolfe wave indicator that updates itself, however it does seem to miss some and also one must look at what it proposes to be the fifth wave, as often it is still within the trendline of the wedge, rather than having broken it.

[slipshod]

One thing I noticed about many wolfe wave indicators is that they break the rules by not insisting that the first 4 points form a wedge. What you end up with is any old 4 point combination with a 5th allegedly being the entry, and how reliable is that?

Honestly nothing substitutes for learning to identify and draw the wedges yourself. Go back over EU, AU and GU on a H4, Daily or Weekly timeframe and I can spot dozens of them, nearly always resulting in reversals.

I'm not sure about their use on range bar charts though. These patterns were designed around observations of standard time-based charts, and a chart based on price movement will look distorted by comparison.

[Fx93]

This is off topic to your trading, but have a look at this indicator I found. I've made over 20 pips tonight trading its divergences on the 2 pip range bar, which do not occur often but seem reliable when they do. I'm currently looking at it compared to your stochastic oscillator and the traders dynamic index.

It is based on "power law impulse responses," coded by a climatologist:

http://www.forexfactory.com/showthread. ... 81&page=50

[slipshod]

Thanks for the indi, but I must respectfully ask that you not go too far off topic, as it would make the work I've put into this thread kinda pointless. If you have a method that uses that indi to trade, and are happy to share it, please create a new thread & describe how it works.

My whole premise though is that relying on signals provided by an indi, even a combination of indis, that say "hey we're oversold or diverging, go long" etc, or with a bunch of colours all turning green or red, is fundamentally flawed. I've been there myself, and for me it ended in confusion, lost money, and the feeling that I still just didn't get how to trade - how could I know, when I'd been trading indicators, not the price itself?

All indicators are based off one thing - what the price does, so why not learn to use my 100 billion neurons to analyse the price myself, rather than relying on a few thousand lines of math code that I don't understand & hope its signals are correct? These methods of analysing price movements - S/R and patterns - are not new. They've been used for decades & longer to good effect. Why not, I asked myself, learn from past masters rather than chase the lastest flashing bauble on FF or ForexTSD?

Btw, if anyone's interested, the best reference by far that I've found for learning chart patterns is Tom Bulkowski's books "Encyclopedia of Chart Patterns" and "Trading Classic Chart Patterns".

The Stoch Rainbow plays a distinct supporting (not primary) role in my method, that's why I included it here but I did consider leaving it out of this thread as it looks colourful & people might think to trade what it says, or add it to a suite of other moving-line indis, and forget the boring old fashioned S/R & trendline guff which is imho where the real treasure lies.

[Fx93]

I've been watching your S/R indicator and noticed price quickly reversed at the orange level (which you label turncoat resistance) then the box disappeared. So from this I thought I'd ask you what color boxes you think or have seen to be the most reliable to trade off of.

[slipshod]

Well, a "turncoat" zone is a zone that's in danger of being disrespected by the market. It happens all the time, areas become significant S/R zones for some reason, then later on the price stops noticing them & they are no longer worthy of consideration.

In the example you mentioned, if the price busted through the zone then reversed back up through it again, that is enough for the indicator to erase it. Had the price retested the zone from the other side & it had held, it would have survived.

I put more confidence in zones that have either had a sharp reversal from them in the past, or better still, have been tested a few times & held strong. Zones created by minor peaks/troughs along a trend may prove to be significant, but until they're tested you can't be sure.

Its better still if the zone is in the same area as a Murray line (if you use them), a Pivot line, an important fib level, or a big round number (like AU near parity). One thing to be aware of with S/R zones is that they're not like trendlines, which need precise bounces off them to be valid. S/R zones act more like the price hitting a trampoline - it cushions the impact, and can bend quite a way before springing the price back the other way. Alternately of course the price can just break through them

The key thing to remember is that support zones are where buyers _may_ be waiting to jump in, and resistance are where sellers _may_ be waiting to TP and/or short. You don't know until the price gets there what's going to happen. The question you need to ask is, if you were a seller, is this price high enough to interest you? If you were a buyer, is the price low enough? I know this is a lot easier with higher TFs - I don't know how you'd work out the answers to that with scalp trading.

If, when the price reaches a zone, you see the expected buyers/sellers appearing via trendlines being broken, C-forks created, Wedges appearing etc, then you know the zone is threatening to break the movement and reverse it. If, on the other hand, the price continues on as it was, then chances are the zone isn't going to do much & you shouldn't look for a reversal from it.