MASTERING the. CURRENCY MARKET This page intentionally left blank. MASTERING the. CURRENCY MARKET Forex Strategies for Highand Low- Volatility. Chapter 3: What Moves the Currency Market in the Long Term? Fundamental Analysis. Technical Analysis. Currency Forecasting—What. Make Volatility and Risk Work for You with Forex Trading! Mastering the Currency Market and millions of other books are available for site site.

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indications that a pit trader, market-maker, specialist, or a top professional trader . In any business where there is money involved and profits to make, there are. [Download pdf] Mastering the Currency Market: Forex Strategies for High and Low Volatility. Markets. Mastering the Currency Market: Forex Strategies for High. Day trading and swing trading the currency market: technical and fundamental was published in , the foreign exchange market has changed dra-.

Stochastics — Stochastic is the point of the current price in relation to a price range over time. The method aims to predict when prices are going to turn by comparing the closing price of a security to its price range. Read the glossary for definitions of many more words and concepts. Day Trading vs The Alternatives Yes, you have day trading, but with options like swing trading, traditional investing and automation — how do you know which one to use?

Swing trading — Swing traders usually make their play over several days or even weeks, which makes it different to day trading. It can still be a good method for the trader who wants to diversify. Traditional investing — Traditional investing is a longer game and looks to put money in popular assets such as stocks, bonds, and real estate for long-term value appreciation.

Unless you are already rich and can invest millions, traditional investing returns too little to make much of a difference on a daily basis. However, the intelligent trader will also invest long-term. Robo-advisors — An increasing number of people are turning to robo-advisors. You simply chose an investing profile, then punch in your degree of risk and time frame for investing. Then an algorithm will do all the heavy lifting. This is normally a long-term investing plan and too slow for daily use.

Day trading vs long-term investing are two very different games. They require totally different strategies and mindsets. Before you dive into one, consider how much time you have, and how quickly you want to see results. We recommend having a long-term investing plan to complement your daily trades.

Day Trading For a Living So you want to work full time from home and have an independent trading lifestyle? If so, you should know that turning part time trading into a profitable job with a liveable salary requires specialist tools and equipment to give you the necessary edge.

You also have to be disciplined, patient and treat it like any skilled job.

Top 6 Books for Beginning Forex Traders

The discipline and objectivity that you will require as a result of learning to master one forex trading strategy at a time should spill over into other areas of your trading such as managing your risk and remaining calm and collected. When your thoughts are scattered on multiple trading strategies and or you have little confidence in the strategy you are currently using, you are obviously not going to make very wise trading decisions.

Essentially, our goal in mastering one setup at a time is to reduce variables in our trading, many traders do the exact opposite when starting out by actually increasing variables through analyzing greater and greater amounts of technical and fundamental market data.

Thus, it is paramount to your success as a trader that you adopt the same trading philosophies that your new mentor or trading strategy teaches, wash your mind of what you have learned thus far and completely immerse yourself in this new approach to the markets.

In regards to what we teach here at learn to trade the market, this means learning to master one price action setup at a time, as this is how I initially found success in the forex market and so it is also what I recommend all my students do. As I have stated previously, after you master one price action setup you can move on to master another, until eventually your forex trading arsenal is fully loaded. What do Tiger Woods and Bill Gates have common?

Or how about George Soros and Venus Williams? But what is the fundamental reason, behind all else, that these people and others like them make so much money while the rest of the world struggles to get themselves out of bed in the morning? When economies are strong, such as that of the United States in the s and from through , it creates the expectation that strong economic growth will continue.

For many, it does not make fundamental sense to drive a large motor vehicle that gets poor gas mileage or to take on a large home and mortgage in anticipation of a promotion and monetary raise the next year.

The newspapers were full of these types of stories in and early , and they projected economic slowdowns after extended periods of excess.

The fact that many people have excessive debt is projected to weigh on consumer spending and therefore on business spending. This is what happened in the second half of and the beginning of Governments embarked on a policy of notching down interest rates so that they could attempt to borrow their way out of trouble by lending to and downloading into industries and companies hurt by 30 T h e W h y o f P r i c e Va l u at i o n the uncertainty and fear created by falling stock prices and anemic consumer and business spending.

We do know this, though: The volatility created by economic uncertainty is a feeding bell for professional traders. Current business conditions, meaning income and cash on hand for companies 2. Interest rates, in which differentials between countries can create market momentum 3. Fundamentals are the why of price action. Key Economic Reports Fundamental traders, economists, and market analysts gauge economic activity by studying and interpreting economic reports and readings released by companies and government agencies.

These news releases are available at a number of online sites. We use www. Releases with a red icon have the highest expected level of impact. Another great resource is www. Note that these are generalizations and cover only one factor affecting currency prices. We do not recommend that anyone trade ahead of a major news release, as the results can be extreme and unpredictable.

The way traders react to the reports in their positioning in the marketplace—their downloading and selling—is also a very dynamic process. The way traders and markets react to the different fundamental news releases and events is a study in chaos. How many contracts players trade and the direction in which they execute their trades immediately after a fundamental news release may have as much to do with the way they were positioned before the news release as it does with what the actual news told them.

A large player making an adjustment to its long-term position can have an outsized effect on a market that may trigger price signals for other traders who operate on shorter-term time frames. Do not expect that after reading a chapter in a book or even reading a series of books you will 34 T h e W h y o f P r i c e Va l u at i o n understand all the factors that affect releases of economic numbers.

Over time and through experience, however, you will start to understand these pieces of the puzzle and the way they relate, if at all, to your trading plan.

Nonfarm Payroll The nonfarm payroll reports the amount of jobs added to or subtracted from the U. This number is reported by the U. Department of Labor, Bureau of Labor Statistics, at www. Figures and show the powerful effects of the nonfarm payroll number on June 6, , in both the U.

The report indicated a sharp drop in payrolls accompanied by a 0. The committee meets eight times a year, and there is an announcement after the close of each meeting. A change in the federal funds rate the rate at which banks lend money to each other as mandated by the Fed affects interest rates across the board and can have a major impact on business decisions across a wide range of businesses and industries.

The release comes out at the end of every month and is a compiled from a variety of sources. Census Bureau and can be found on its Web site at http: This is an example in which a market already had taken a direction and the report served to reinforce that existing bias. Retail Sales The monthly report on retail sales provides a reading on retail activity over the previous month that gives investors insight into consumer spending habits.

Retail Sales Release released by the U. Census Bureau and can be found on its Web site at www. Figure shows a good example of a mature up move in a dollar-based pair. Traders took advantage of a dollar-friendly news release—a better than expected U. The textbook example for a recession is two straight quarters of negative GDP growth. We did not provide a graphic example for the U.

GDP because the market rarely has a strong reaction to a U. GDP release, having taken its measurements and made its reactions from the more timely economic indicators. Generally, a higher than expected U. PPI release leads to U. Figure shows an example of a slightly higher than expected PPI release, after which the U.

This puts support in the market, and we see a rally going forward on what initially was taken as a bearish fundamental release for EURUSD. As with many other reports, there are multiple segments, but it is best to focus on the core rate and avoid being distracted by other segments. A higher than expected CPI release generally leads to strength in the U. The market was already in a pronounced downtrend, and the surprisingly stronger than expected U. Leading Indicators For leading indicators one looks to the markets themselves: This stock index consists of of the top U.

It provides a forward look on the health of some of the largest companies in the world and is thus a good gauge of the economy overall.

Treasury bonds and notes. This currency index shows how the U. The results are too unpredictable, and the risk too high. In general, however, fundamental analysis is most useful for long-term positions. As you can see from the many examples just reviewed, there are times when the current trend in the market takes precedence over the fundamental news, just as there are times when a news release overrides the current trend.

There are no constants in economic developments and releases because the economy and the many moving parts that constitute it constitute a very dynamic process. As traders, many of us devise a 46 T h e W h y o f P r i c e Va l u at i o n more accessible framework for determining the direction from which to trade a market not by studying the causes of price movement—the fundamentals—but by going along with the effects of price movement.

You will never read the phrase fundamentals versus technicals in this book, as we know and understand the complementary value of both schools of thought. Major Currencies The U. Most central banks around the world maintain U. Because of this, the U. The global marketplace is a dynamic pricing apparatus that always is subject to change.

Because of this, all the other major currencies are quoted in relation to the U. Federal Reserve, which is the central bank of the United States, and the U. The euro is the currency of the European Union and is second only to the U. A consideration in understanding European Central Bank policies is that rather than speaking for one independent entity or country, it must balance the economic interests of many. The Great Britain pound is arguably the oldest of the major currencies, with its issuer, the Bank of England, having been around since the s.

It is ranked third in currency reserves held around the world. GBPUSD is a heavily traded currency pair that in recent history has been a leader among the majors, having led the rally in and and having topped in and led the majors lower from there. The central bank of Japan is the force behind the yen and is known for being more active than the other major central banks when it comes to managing the national currency.

Canada is a truly hour-a-day country. A chart is a sequence of prices plotted vertically over a horizontal time frame, with each individual price bar, or candle, marking the open, high, low, and last price for a particular time period: The biggest advantage technical analysis has over fundamental analysis is that it takes much of the subjective nature out of the decision-making process.

We are interested only in going where the market wants to take us. There is no opinion for us, no right or wrong price direction. We know it is unreasonable to think we can predict what will happen tomorrow, and so we always avoid getting attached to one outcome over another.

We do not predict which way a market will move; we position ourselves to follow along with the market. That saying is one of the cornerstones of what we are going to teach you.

In analyzing markets, there are many choices in the tools we use, and choosing a chart is no different. In the charting package I use, seven different kinds of charts are listed.

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We will discuss the three most common ones now: The line chart is the most simple type of chart and can keep traders from overreacting to price extremes on a short-term basis.

Bar Charts Figure shows a price bar from a bar chart. On the left side of the bar a horizontal tab indicates the opening price for the time period, and on the right side a horizontal tab 53 Mastering the Currency Market Figure Figure Price Bar Monthly Bar Chart 54 C h a rt s f o r T r a d i n g indicates the closing price. The height of the bar represents the entire range of trading within that time frame; hence, it provides the high and the low.

Mastering Chart Analysis Skills

Traditionally, bar charts were indicated in black and white, but newer programs use color designations such as green and red to indicate upward and downward movements in price. Figure shows a monthly bar chart.

In Figure , notice the pattern of higher highs and higher lows before and then again after the price correction in This price behavior or pattern is characteristic of a bull market. Candlestick Charts Candlestick charts display basically the same information as bar charts but in a somewhat different way.

If the body is white or green , the market moved up and the open is represented by the bottom edge. If the body is black or red , the market moved down and the open is represented by the top edge. The shadows, which also are called wicks, are the lines above and below the candle body and represent the high and low of the time period.

Figure shows candles in black for a down candle and in white for an up candle. They give similar information when one is looking at a single time period, but more important, they visually signal other clues about the market when one is viewing a larger time frame. There are important things to note about the differences between bar charts and candlestick charts see Figure If the closing price of the current bar is higher than the closing price of the previous bar, the bar will be green or white.

For examples of both types of charts in color go to www. Candlestick Shapes: Body Size One way candlesticks provide information about market behavior is through the length of the candle body. Figure shows candles with long and short bodies.

Long bodies indicate strong price movement, and short bodies tend to indicate indecision. Long shadows represent a failed attempt to move a market in that direction see Figure Doji The doji Figure represents indecision regarding price and frequently occurs near market highs or market lows.

It is characterized by a body that is very small and usually has long wicks. We will talk more later in this chapter about how to use the doji as a signal of a change in market direction. Spinning Tops Spinning tops Figure are similar to dojis in that they have short bodies and long wicks, with both indicating indecision in the market.

They can occur at market tops or bottoms, but they also can show up in sideways-moving markets and during periods of low volume. Bullish Candle Formations Some of the most useful information can be gained from candlesticks when they signal a change of direction in the market. Figure shows six common formations that may indicate that the market is headed upward. If you were going to hire a person to work closely with you, you would want to know more about that person than what her last job was.

You would want an accurate picture of her entire work history before you made that commitment. Similarly, we always start out analyzing a chart by going back as far as we can to get a broad view of its long-term behavior.

Figure shows a monthly chart that supplies a fairly clear picture of the levels that bound the USDJPY market from to Many inexperienced traders make the mistake of thinking that a chart with such a high time frame is not needed, particularly if they are using charts with lower time frames.

In our work we could not disagree more. The next step would be to take a look at the chart of the next lower time frame, which would be the weekly chart: The weekly chart in Figure provides a picture of how this market has traded over the years from to Here we are still just looking at the big picture, not focusing on individual candles.

At this point we can hone in to take a closer look at what the candles are telling us on a shorter-term basis, within the context of the longterm picture.

When a candle has a long body, it is telling us that the move has conviction; in other words, it is an impulsive move. Conversely, when the candle has a small body, it is telling us that the move for this period is lacking in conviction and probably is characterized by reactive behavior. The distinction between impulsive and reactive behavior, taken collectively, is how we recognize whether a market is exhibiting trending or countertrending behavior.

This is an important aspect of market 66 C a n d l e s t i c k C h a rt s behavior to recognize. When we see that a market has strong conviction, or momentum, by noting how long the rectangular body of the candle is, we need to recognize that the market is showing us its current trend.

This distinction between trending behavior and countertrending behavior can be seen clearly in Figure There are actually two types of impulsive or trending behavior to account for: We will cover the subject of coordinating time frames in detail in Chapter 9 in the section on quantifying trends.

Watching the Clock The most important thing we need to know about an individual candle is that we do not make an analytic, or trading, decision until the candle is closed, which means that the time period is complete.

You will be hearing this again. Another important aspect of individual candle analysis for forex intraday charts is the time of day.

In trading, even for the hour-a-day market, all time periods are not equal. If there is very little trading volume, as is generally the case from the close of the U. In forex markets, it is widely known by experienced traders that volume generally trails off noticeably leading up to noon EST and stays very low until the Tokyo open.

Regardless of your own experience in trading, you do not want to initiate short-term trades that are based on individual candles or candle formations during those hours.

The exception to this would be U. Change-of-direction candles tend to reverse the previous pattern or direction of the highs and lows. If the preceding candles were moving higher, a change-of-direction candle would be a candle in which the close was lower than the low of the preceding candle or candles.

Similarly, if the previous candles had developed a pattern of lower lows, lower highs, or lower closes, a change-of-direction candle would be a candle that closed above the high of the previous candle or candles. Figure is a daily chart of the British pound from January 20, that exhibits its share of both dojis and change-of-direction candles.

You will learn in Chapter 9 that change-of-direction candles are used as trade signals.

It is important that as analysts and traders we understand that neither one of these candles means that a market will or will not perform as we expect. Changeof-direction candles do not mean the market is going to change direction, just as a doji does not mean the market must take a breather or must reverse.

We never know what event could happen at any time to change the behavior of the market. Notice in Figure how twice we see a doji candle followed by the 69 Mastering the Currency Market Dojis and Change-of-Direction Candles Figure Dojis and Change-of-Direction Candles change-of-direction candle to put in a market top. This is indecision followed by action as the British pound completes an up move before swinging lower.

Some of those formations see Figure , which can include dojis depending on the size of the reversal candle bodies , are shooting stars, which also are referred to as evening doji stars, and hammers, which may be referred to as hammer dojis. A candle we did not mention is the inside candle, which can be either a reversal or a continuation signal. An inside candle is essentially a candle that is engulfed by the previous candle.

If the market reverses after an inside candle, the engulfed candle will go on to become a harami pattern; if that does not happen, it will become a continuation pattern. Figure is a minute chart of EURUSD with a shooting star doji in the upper left corner of the chart before a move lower, then an inside bar toward the bottom of the chart with the market stabilizing, and then a hammer doji, followed by a change-of-direction candle before an up move.

The inside candle is telling us that the market lacks conviction in regard to its direction. The inside candle is considered pivotal in that the market is expected to increase momentum in whichever direction it closes in relation to the high and low of the inside candle.

A close above the high of the inside candle is considered bullish, and a close below the low of that candle is considered bearish. When you are viewing intraday forex charts, keep in mind that low-volume candles such as those between The hammer, which is also a doji, is considered a bullish candle.

A hammer is created after the market trades lower after the opening before moving higher and closing in the top third of the range. What has happened is that price probed lower during that period but found support as downloading came into the market to propel it higher.

The long shadow stands as evidence that lower prices were rejected. When it is seen in a downtrend, this behavior can be taken as indicative that the market is pausing or possibly trying to reverse. The shooting star is also a doji and is similar to the hammer but is considered a bearish candle. When it comes 72 C a n d l e s t i c k C h a rt s after a rally or uptrend, it indicates that the market could be ready for a pause or a reversal. The long wick and short body below it in Figure emphasize that the higher prices were rejected.

Always remember that individual candles and candle formations do not necessarily predict what a market will do; that is, they do not always work out in favor of our position. There is always a danger in looking at a short-term indication such as an individual candle that we may be missing something of importance in the big picture. Candle patterns play an important part in our analysis and trading and are especially useful when combined with other aspects of technical analysis.

We should never take a trade solely on the basis of an individual candle or bar or even chart pattern without considering additional factors, such as whether this price behavior came on support or resistance. For forex markets, we discount candles and formations during low-volume, low-trade periods such as from lunchtime in New York to the Tokyo open, and we do not make any analytic or trading decisions until the candle is closed.

Another candle that can be either one of these is a benchmark candle, which we will cover shortly. Note also the number of dojis and inside candles on the right. A benchmark candle see Figure is an elongated engulfing candle with few or no wicks and leaves no doubt about who won out at the end of the candle, the bulls or the bears. The term benchmark candle came from the trader and author John L. Person, president of www. What we will learn to appreciate about markets is that they have 75 Mastering the Currency Market a tendency to pull back in the opposite direction after a benchmark candle to retest the previous conviction.

A rule of thumb is that if we see a retracement after a benchmark candle, we should look for it to stop halfway into the candle, giving us a 50 percent retracement, before resuming the direction set by the benchmark. A benchmark Benchmark Candle Figure Benchmark Candle Followed by 50 Percent Retracement 76 C a n d l e s t i c k C h a rt s candle is a long candle with few or no wicks and leaves no doubt about the direction of the market.

In this case the market sold off hard to close below the lows of the last eight candles, very likely clearing out plenty of long positions along the way. There is no doubt that this is bearish behavior. Before the down move accelerated, however, note how the market went back and retraced 50 percent of the benchmark candle.

The fact that benchmark candles have a tendency to do that is good information to have, because it will give you a chance to get in on the move or exit a position if a benchmark traps you while you are going the wrong way. We have seen how the longer-term charts give us historical perspective on price direction and behavior and how individual candles and candle formations provide a good look at current price action and can help us in timing trades.

This is important information to have because just as people develop patterns or habits that we want to know about before interacting with them, so do markets. Figure is a minute chart of the mini Dow futures contract. Note the pattern of lower lows and lower highs. Now take a look at the right side of the chart and you will see how the market broke the previous cycle of lower lows by posting a couple of bullish change-of-direction candles in mid-July, followed by a higher high.

The fact that a higher high on a closing basis followed the bullish change-ofdirection candles was a signal to exit any short trades. In Figure we take a closer look at the same mini Dow futures contract as it starts to bottom out in mid-July That is a hint that perhaps the power of the sell-off is waning.

We do get a shooting star doji, which is a topping candle, afterward, followed by a sell-off through the London 78 C a n d l e s t i c k C h a rt s Figure Collective Candle Behavior before Market Reversal session and the U.

The 11, level did hold as the market reversed and launched a short-covering rally that carried the Dow to 11, by mid-August. Over the course of this chapter you have seen how the collective behavior of the individual candles establishes and reinforces the direction for the trends on the charts for all time frames.

The study of individual candles and candlestick formations in all time frames is an important aspect of trading and is well worth the time it takes to review their behavior on a regular basis. Markets generally move up and down in a somewhat irregular manner and rarely reach the point to which they are heading in a straight line.

A bear market moves lower and then pauses and tries to move up before running into resistance and turning lower again. Conversely, resistance is a level at which supply is abundant and downloaders are scarce; competing sellers 81 Mastering the Currency Market Figure Horizontal Support and Resistance Levels mark down price quickly to entice the shrinking pool of downloaders.

Typically, whenever we see an isolated high point or low point on a chart, we know that it is at that point that demand overpowered supply or supply overwhelmed demand.

Support and resistance levels are drawn horizontally on the chart and mark isolated high and low points. The level may hold, or the market may move right through it. For this reason, we say that support and resistance levels are estimated; we have no guarantee that they will hold under live market conditions. A market is said to have broken a level of resistance or support if a candle closes beyond that level.

This is what makes the closing price of a candle so important.

Trendlines One of the tenets of technical analysis is that prices trend. Trendlines are made by connecting two or more points of support or resistance. A downtrend means a series of price bars or candles exhibiting lower highs, lower lows, and lower closes; 83 Mastering the Currency Market conversely, an uptrend means higher lows, higher highs, and higher closes.

We draw support or up trendlines by drawing a straight line connecting the higher lows and extending it into the future. We draw resistance or down trendlines by drawing a straight line connecting the lower highs and extending it into the future. Trendlines are a favorite tool among traders for a very good reason: Markets respect them. Uptrends, or bull trendlines, act as areas of support. Downtrends, or bear trendlines, act as levels of resistance.

Trendlines have to be updated as the market moves through time, and they can be used for Figure Support Line Connecting Isolated Lows 84 S u p p o rt a n d R e s i s ta n c e Figure Resistance Lines Connecting Isolated Highs both trading and forecasting. In drawing trendlines on candlestick charts, we also have the option of drawing them from the highs and lows of the wicks or from the highs and lows of the bodies.

This price breakdown was followed by penetration of the long-term bull trendline, and a major sell-off followed.

We also can see that just above the Conversely, when prices went below Next, we examine a weekly chart of the same market extending back a little more than two years. Once again demand dries up on the rally as downloaders drop their bids and sellers move prices down quickly to unload inventory. Once prices pull back in May and again in June, we see the importance of the horizontal support level drawn from the January lows. It becomes clear that we are in a long-term uptrend and that downloading support is rewarded as the British pound continues to have demand at the As is always the case Figure Support and Resistance Levels on a Weekly Chart 87 Mastering the Currency Market in trading, this information is twofold as the bounces off Figure shows a weekly chart of the U.

The more experience you gain as a trader, the more respect you will develop for the long-term trend. Stock Market Chart 88 S u p p o rt a n d R e s i s ta n c e long-term trendlines is a twofold process: You respect them when they hold up and recognize that a big move may be in the making when they do not hold up and the market settles through them.

As you can see from the chart in Figure , charts and trendlines are not just for traders. Short-Term, Intermediate-Term, and Long-Term Trendlines In doing trendline analysis, we need to understand that just as there are long-term, intermediate-term, and short-term trends Figure Long-Term, Intermediate-Term, and Short-Term Trendlines 89 Mastering the Currency Market simultaneously unfolding in a market, there are long-term, intermediate-term, and short-term trendlines.

This is the case because as a trend extends itself, its angle, or slope, may increase or decrease as the market adjusts to the supply available for sale and the demand from downloaders.

This is a good example of how markets trend and serves as a reminder of why we need to keep trendlines updated. It also shows another aspect of trendlines, which is that not only do they serve as support or resistance, they also serve as attractors. Note what happens when the angle, or slope, between price and the trendline becomes steeper as the market moves lower.

Similar to a mean reverting mechanism, the farther the slope increases, the more likely it becomes that price will react back toward the trendline. The slope can act as a rubber band that when stretched too far snaps back, taking the price the other way.

These snapbacks, or retracements, are to be expected. Once price does rally back on the USDCHF minute chart, then falters, and then resumes the previous long-term downtrend or resumes its path of least resistance, we draw a new trendline. The process of price motion based on supply, demand, and the emotions of market 90 S u p p o rt a n d R e s i s ta n c e participants plays out again in a cycle of lower highs and lower lows until eventually it shifts to a pattern of higher lows and then higher highs.

The daily chart in Figure shows another example of a market that corrects only after sharp sell-offs, leaving us to update the new bear trendlines it creates. Notice how every time the market increases its speed, angles away from the oldest or longest trendline, and goes vertical on the chart, it sets itself up to give us a snapback correction, or a countertrend rally back toward the older or longer-term trendline.

Figure Price Corrections after Trendline Violations 91 Mastering the Currency Market Once the market makes a countertrend move and then reverts lower, we draw a new, shorter-term trendline. These newer trendlines are going to help us understand the when of the next price correction. When we see price angling away from the new trendline as it accelerates, we should understand that in terms of time, that market is getting closer to a countertrend correction.

Think of a correction as a car traveling at a high speed that needs to slow down before making a turn. A similar dynamic is at work with markets, and the trendlines generally tell us when that resting point occurs or where that turn is.

Each new trendline becomes steeper, leading us closer to the correction. By using the EURUSD minute chart shown in Figure , we can take a closer look at price behavior by marking the previous daily lows and highs. By marking both the previous highs and lows and the isolated highs and lows used to draw the trendlines, we generate 92 S u p p o rt a n d R e s i s ta n c e Figure Daily Highs and Lows and Trendlines Help Distinguish Directional Shifts a simple visual that shows when this market shifted from lower highs and lower lows to higher lows and higher highs.

This illustration makes the point that although the trendlines are important, it is the previous highs and lows that we take as the measurements and draw the lines from that help us determine direction.

Marking these previous highs and lows is also a valuable habit when it comes to operating in markets in which an uptrend or downtrend is not so clear. The tendency of price to increase the slope of its path of least resistance over time, which we talked about before, and the tendency of that behavior to hasten corrections also can help alert us to the possibility of snapback moves or countertrend price behavior.

We know that support and resistance levels mark key price levels at which either the downloaders or the sellers were proved right decisively. A support level marks a clear-cut level below where the market is trading where demand, or downloading, absorbed the selling pressure through more aggressive bidding. It can be said that demand at that level was strong enough to prevent lower prices.

Resistance, in contrast, is a clear-cut level above the market where supply, or sellers, intimidated downloaders into backing off to establish dominance. It can be said that supply at that point overwhelmed demand and that prices at that higher level were Figure Horizontal Support and Resistance Create a Sideways Channel 94 S u p p o rt a n d R e s i s ta n c e unsustainable. Figure shows a commonly seen situation. More often than not a trading range proves to be a price pause before resumption in the same direction in which the market was moving before entering the range.

This occurs because markets tend to trend more than they reverse. Trendlines can be horizontal or angular and connect to at least two price points, with the third point adding validity. Another principle of technical analysis is that resistance can turn into support levels and vice versa.

Figure 96 S u p p o rt a n d R e s i s ta n c e Figure Resistance Lines Turn into Support Levels shows a pair of trendlines that gave way; they did not hold as resistance but remained in place and gave us support on the retest.Retail Sales The monthly report on retail sales provides a reading on retail activity over the previous month that gives investors insight into consumer spending habits. Rising and Falling Wedges A rising wedge is a bearish formation that usually is seen as a reversal pattern but also can be a continuation pattern.

The level may hold, or the market may move right through it. Similarly, when price is above the moving averages, the T e c h n i c a l I n d i c at o r s trend is considered up, and when price is below the moving averages, the trend is considered down.

Stock Market Chart 88 S u p p o rt a n d R e s i s ta n c e long-term trendlines is a twofold process: Once price does rally back on the USDCHF minute chart, then falters, and then resumes the previous long-term downtrend or resumes its path of least resistance, we draw a new trendline. Conversely, if you are on the right side of the move and the currency moves to the same degree, your account value will double.

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