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Price Action Trading (Gap theory (Support/Resistance (Good chances to…
Price Action Trading
Gap theory
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It's the gap between close of the first bar and the open of the next bar. In contrast to being at the same time as usual.
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At pairs with low liquidity the price action might come from bots / algorithmic trading. Gaps there are rather artificial.
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Pivot Points
Types of traders
Range-bound traders use pivot points to identify reversal points. They see pivot points as areas where they can place their buy or sell orders.
If price is nearing the upper resistance level, you could SELL the pair and place a stop just above the resistance.
If price is nearing a support level, you could BUY and put your stop just below the level.
Breakout forex traders use pivot points to recognize key levels that need to be broken for a move to be classified as a real deal breakout.
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You can also incorporate candlestick analysis and other types of indicators to help give you more confirmation.
For example, if you see that a doji has formed over S1, or that the stochastic is indicating oversold conditions, then the odds are higher that S1 will hold as support.
Calculation
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The average of the high, low and close
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Others
Woodie Pivot Point
Some traders prefer to use the Woodie formulas because they give more weight to the closing price of the previous period.
Camarilla Pivot Point
The Camarilla formulas are similar to the Woodie formula. They also use the previous day’s close and range to calculate the support and resistance levels.
The only difference is that you should calculate for 8 major levels (4 resistance and 4 support), and each of these levels should be multiplied by a multiplier.
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People prefer the standard formulas because many traders make use of those, which could make them self-fulfilling.
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Market Environment
Trending Market
The more movement a currency exhibits, the more opportunities there are for price to move strongly in one direction as opposed to bouncing around within small ranges.
Contrary to what you might think, prices really range 70-80 percent of the time. In other words, it is the norm for price to range.
The more liquid a currency pair, the more movement (aka volatility) we can expect.
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Range-Bound Market
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Indicators
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Bollinger bands are contracted, as price is just moving within a tight range.
Using oscillators, like Stochastic or RSI, will help increase the odds of you finding a turning point in a range as they can identify potentially oversold and overbought conditions.
By buying near the low price, the forex trader is hoping to take profit around the high price.
By selling near the high price, the trader is hoping to take profit around the low price.
The best pairs for trading range-bound strategies are currency crosses. By crosses, we mean those pairs that do not include the USD (BTC?) as one of the currencies in the pair.
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The similar growth rates shared by the European Union and Switzerland pretty much keep the exchange rate of the EUR/CHF stable.
Trend Retracement
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Is a Short-term, short-lived reversal.
Fundamentals (i.e., the macroeconomic environment) do NOT change.
In an uptrend, buying interest is present, making it likely for price to rally again. In a downtrend, selling interest is present, making it likely for price to decline again.
Identifying Retracements
Fibonacci Retracement
For the most part, price retracements hang around the 38.2%, 50.0% and 61.8% Fibonacci retracement levels before continuing the overall trend.
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In this case, price took a breather and rested at the 61.8% Fibonacci retracement level before resuming the uptrend.
After a while, it pulled back again and settled at the 50% retracement level before heading higher.
If price goes beyond these levels, it may signal that a reversal is happening. Notice how we didn’t say will.
Pivot Points
In an UPTREND, traders will look at the lower support points (S1, S2, S3) and wait for it to break.
In a DOWNTREND, forex traders will look at the higher resistance points (R1, R2, R3) and wait for it to break.
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Trend Lines
When a major trend line is broken, a reversal may be in effect.
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Trend Reversal
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Fundamentals DO change, which is usually the catalyst for the long-term reversal.
In an uptrend, there is very little buying interest forcing the price to fall lower. In a downtrend, there is very little selling interest forcing the price to rise further.
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Breakouts
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Breakouts are significant because they indicate a change in the supply and demand of the currency pair you are trading.
This change in sentiment can cause extensive moves that provide excellent opportunities for you to grab some pips.
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False Breakouts
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How to avoid
A good way to enter on a breakout is to wait until the price retraces back to the original breakout level and then wait to see if it bounces back to create a new high or low (depending on which direction you are trading).
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Support levels are areas where buying pressure is just enough to overcome selling pressure and halt or reverse a downtrend.
A strong support level is more likely to hold up even if price breaks the support level and it provides traders a good buying opportunity.
Resistance levels are just like support levels but work in the opposite way. They tend to halt or even reverse uptrends.
Resistance levels are areas in which selling pressure is just enough to overcome buying pressure and force price back down.
Fade the Breakout
Trading FALSE breakouts
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You would fade a breakout if you believe that a breakout from a support or resistance level is false and unable to keep moving in the same direction.
Keep in mind that fading breakouts is a great short-term strategy. Breakouts tend to fail at the first few attempts but may succeed eventually.
Potential fakeouts are usually found at support and resistance levels created through trend lines, chart patterns, or previous daily highs or lows.
Trend lines
In fading breakouts, always remember that there should be SPACE between the trend line and price.
If there is a gap between the trend line and price, it means price is heading more in the direction of the trend and away from the trend line.
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Independent retail forex traders have greedy mentalities. They believe in trading in the direction of the breakout. They believe in huge gains on huge moves. Catch the big fish, forget the small fries.
In a perfect world, this would be true. But the world is not perfect. Frogs and princesses do not live happily ever after.
The odds of a fake out are higher when there is no major economic event or news catalyst to shift forex traders’ sentiment in the direction of the break.
Clean Double Close
Bullish
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When price next trades to the level, it closes above it impulively
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Bearish
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When price next trades to the leel, it closes below it impulsively
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Time Frames
Higher time frames
Higher time frames are superior, especially daily charts
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Still works on intraday time frames, especially really clear levels
Recommended: D1, H4 (H1 and M15 if very clear)
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Probability Enhancers
Good level selection
Clear, high time frame, violent and significant levels perform better than random highs / lows.
It's a broad church: multi-touch levels, single swings, inverse levels, range highs / lows
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Trend consideration
In an uptrend, bullish CDC setups are more likely to form
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In a downtrend, bearish CDC setups are more likely to form
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Source
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Channels
The MACD was showing strong bearish momentum as EUR/USD broke below the lower line of the trend channel.
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Chart Patterns
Reversal Bias
Double Tops / Bottoms
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Trading
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You can measure the distance of the double bottoms from the neckline, divide that by two, and use that as the size of your stop.
Reversal Pattern
This is a strong sign that a reversal is going to occur because it is telling us that the buying pressure is just about finished.
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Head and Shoulders
It is formed by a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder).
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The slope of this line can either be up or down. Typically, when the slope is down, it produces a more reliable signal.
The reason is, that it makes lower lows in this case. That's signaling a downtrend.
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You can see that once the price goes below the neckline it makes a move that is at least the size of the distance between the head and the neckline.
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Wedge
Rising Wedge
If the rising wedge forms after an uptrend, it’s usually a bearish reversal pattern.
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With prices consolidating, we know that a big splash is coming, so we can expect a breakout to either the top or bottom.
On the other hand, if it forms during a downtrend, it could signal a continuation of the down move.
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The price movement after the breakout is approximately the same magnitude as the height of the formation.
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Falling Wedge
As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would come next.
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As a continuation signal, it is formed during an uptrend, implying that the upward price action would resume.
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If you want to go for more pips, you can lock in some profits at the target by closing down a portion of your position, then letting the rest of your position ride.
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Trading
To trade these chart patterns, simply place an order beyond the neckline and in the direction of the new trend. Then go for a target that’s almost the same as the height of the formation.
Quasimodo
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The idea is to extend a line into future price from the left shoulder (see red and green lines) and to then execute trades from this base. This is the support and resistance.
Point 1 illustrates that the market is hopeful, visibly chalking up higher highs and higher lows. This type of action attracts breakout traders, trend traders and also contrarian traders. Breakout traders look to buy the break of previous highs, trend traders aim to time/buy the dips (placing stops beneath lower lows) and contrarians attempt to fade this action from areas of resistance.
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Continuation Bias
Rectangle
The price will “test” the support and resistance levels several times before eventually breaking out.
Bearish Rectangle
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Once the pair falls below the support, it tends to make a move that is about the size of the rectangle pattern.
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Bullish Rectangle
After an uptrend, the price paused to consolidate for a bit.
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Once the pair breaks, it will usually make a move that’s AT LEAST the size of its previous range.
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A rectangle exhibits a period of consolidation or indecision between buyers and sellers as they take turns throwing punches but neither has taken over.
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Pennants
Direction
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Formed during a steep, almost vertical, downtrend.
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After a big upward or downward move, buyers or sellers usually pause to catch their breath before taking the pair further in the same direction.
How to trade
To trade this chart pattern, we’d put a short order at the bottom of the pennant with a stop loss above the pennant.
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Differences
Triangle vs. Pennat
Looks similar, but the Pennant follows a sharp move in price
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Candles
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Doji
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If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus), the Doji signals that the buyers are becoming exhausted and weakening.
In Downtrend
If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus), the Doji signals that sellers are becoming exhausted and weak.
In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.
While the decline is sputtering due to lack of new sellers, further buying strength is required to confirm any reversal.
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