Theory of the Market

[shellsnail]

Hi guys,

Just thought that I will start a discussion on the theory of the market.

Some of these stuff are inspired by the book "How I made $2,000,000 in the Stock Market" written by Nicholas Darvas and his trading method, and others are from my experience with the charts.

Support and Resistance

To start things off, I have a different interpretation (or use) of Support and Resistance lines that I would like to share. To me I think Supply and Demand or Support and Resistance represent bull/bear zones.

When price reaches a resistance area, it means the bulls are in control at the moment. Yes, it's true that you expect sellers in this area, but most resistance lines in the market are broken especially when a market is uptrending. For Price to get to a resistance line in the first place, it means the bulls must be in control. (that is the first thing to note especially when trading intra-day charts).

Similarly, when price reaches the support area, or what I like to call the bear zone, the bears are in control. If bears can break this line of defense, then price will plummet.

So how do you possibly apply these concepts to your trading? Instead of thinking of selling at resistance or buying at support all the time, why not let the market decide?

What do I mean?

Here is where the box trading concept from Nicholas Darvas comes in. If you haven't read the book I suggest you read it. It is the BEST book on trading I have ever read out of say 60 books that I have read on trading. I say personally that he is a better trader than Jesse Livermore.

His way of selecting stocks is by looking at stocks that exhibit strong activity and have been rising in the recent past. Then he looks at these stocks and identify certain boxes where price will bounce up and down within these boxes (i.e now we know them as support and resistance lines). He will then buy these stocks once price breaks out of the boxes and his results are simply phenomenal.

How to apply the Box Theory to Forex

Similarly, we look for activity at the resistance and support levels. On an intraday basis, when the london session opens, we expect a certain daily range to be fulfilled for the pair because that is just how the market works - it moves!

So now the questions are:

1) How do we decide whether to go long or short?

Basically you look at price. When price reaches an intra-day resistance level, or a weekly resistance level or a monthly resistance level, or any resistance level that is significant that you can mark off on your chart, look for signs of bullishness. You want to be LONG from a resistance area because that is a bull-line of the day. Once bulls cross this line, price is likely to breakout. A short trade from a resistance area is also possible but is more AGGRESSIVE in nature, but they can work very well too.

Similarly, you want to be SHORT from a support area because that is where the bear-line is. A long will be more aggressive but they can work out very well too.

So the key is to NOT have market bias beforehand, especially when trading intra-day and to really watch price.

What do I mean by watching price?

Well think of the BOX theory. When price reaches this support or resistance zones, there will be a lot of selling and buying and price will usually reach some sort of equilibrium at that level, dropping some hints as to which side has an advantage. Go and do yourself a favour and watch price, and you can spot many patterns that will reappear consistently before a breakout or a reversal at these areas.

2) Where do we take profit at?

I have talked about this in another thread in the Money Management Section of the Forum:

http://www.stevehopwoodforex.com/phpBB3 ... =23&t=1411

But basically it goes along the lines of - you expect a certain daily range to be fulfilled each day. So you just place your order, take off the risk at some point, and let the market do its job.

So now, on to you guys - what do you all think?

How do you guys think a price chart should be read?

[phil_trade]

Hi guys,

Just thought that I will start a discussion on the theory of the market.

Some of these stuff are inspired by the book "How I made $2,000,000 in the Stock Market" written by Nicholas Darvas and his trading method, and others are from my experience with the charts.

Support and Resistance

Hi

One big difficult thing is to detect correctly those S/R zones. What tools are you using for this ?

Philippe

[shellsnail]

Hi guys,

Just thought that I will start a discussion on the theory of the market.

Some of these stuff are inspired by the book "How I made $2,000,000 in the Stock Market" written by Nicholas Darvas and his trading method, and others are from my experience with the charts.

Support and Resistance

Hi

One big difficult thing is to detect correctly those S/R zones. What tools are you using for this ?

Philippe

I keep it simple, I look at daily pivots, weekly pivots and monthly pivots, and significant areas such as daily high or low, yesterday's high/low.

Take this morning EUR/USD for example,

price opened in london at R3 and at daily high, and is severely overstretched. So I just look for signs of weakness and entered. +58 pip now.

[phil_trade]

Hi guys,

Just thought that I will start a discussion on the theory of the market.

Some of these stuff are inspired by the book "How I made $2,000,000 in the Stock Market" written by Nicholas Darvas and his trading method, and others are from my experience with the charts.

Support and Resistance

Hi

One big difficult thing is to detect correctly those S/R zones. What tools are you using for this ?

Philippe

I keep it simple, I look at daily pivots, weekly pivots and monthly pivots, and significant areas such as daily high or low, yesterday's high/low.

good example just now on €/$ fighting on WP pivot

[shellsnail]

Hi guys,

Just thought that I will start a discussion on the theory of the market.

Some of these stuff are inspired by the book "How I made $2,000,000 in the Stock Market" written by Nicholas Darvas and his trading method, and others are from my experience with the charts.

Support and Resistance

Hi

One big difficult thing is to detect correctly those S/R zones. What tools are you using for this ?

Philippe

I keep it simple, I look at daily pivots, weekly pivots and monthly pivots, and significant areas such as daily high or low, yesterday's high/low.

good example just now on €/$ fighting on WP pivot

LOL from me editing the last post to now it's +65 pip already...

[phil_trade]

Hi guys,

Just thought that I will start a discussion on the theory of the market.

Some of these stuff are inspired by the book "How I made $2,000,000 in the Stock Market" written by Nicholas Darvas and his trading method, and others are from my experience with the charts.

Support and Resistance

Hi

One big difficult thing is to detect correctly those S/R zones. What tools are you using for this ?

Philippe

I keep it simple, I look at daily pivots, weekly pivots and monthly pivots, and significant areas such as daily high or low, yesterday's high/low.

good example just now on €/$ fighting on WP pivot

LOL from me editing the last post to now it's +65 pip already...

waooo very very nervous market...bloody war I'm afraid to get in !

[shellsnail]

Just thought that I will share the analysis of yesterday's trade.

basically, I sold when there was signs of weakness (price action) appearing at the resistance level, aided by a confluence of other factors.

If instead price action showed signs of bullishness/strength, I would have happily taken the breakout trade at R3 too (although in this case I don't think I would have because of certain filters I apply)

the key thing about being an intra-day trader is to be able to hold opposing concepts in your mind at the same time.

i.e. if price shows bullishness here and breaks this level, direction is LONG, if price shows bearishness at this level and weakens, direction is SHORT. If price consolidates here and does not break out then do not enter.