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Support and Resistance

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Part 1: Trading by Reading a Market

Fri, Sep 26 2008, 09:01 GMT
by Tomas Cedavicius

Investija.com

Forex market is a place with endless possibilities. And not just financials. By trading currencies you are learning to understand yourself, you find your strong and weak points. Some traders claiming that if you now how to trade the market, you gain financial and personal freedom. Yes, if you are making money by trading, certainly you have a possibility to live your life as you wish, but one thing is not complete correct by saying if you know how to trade – you gain freedom. It is opposite: if you feel strong and free from the politics and economics, you can become good trader.

Before you trade – educate yourself, build up your strong personal characteristics and improve your good qualities as a human being. It is not a trading method what makes money, it is your behaviour. In my series along the way with the technical trading method you always will find some sort of philosophical-psychological advices or remarks. What is the key for my method and I would suggest to pay at least some attention.

First of all, before enter any trade you need to analyse the market and this analysis will be base for all decisions. So, bad analysis leads to bad results over the period of time. Your method must contain some sort of analysis: technical or fundamental. My method contains technical analysis and I certainly have nothing to say about fundamental. This is some sort of psychological point: I do not understand fundamental analysis properly and I do not base my decisions on it. Always remember if you feel what you do not know something, ask. There if nothing wrong to ask, wrong do not ask and take the decision, when you have no idea why are you doing this.

By analysing the market first we want to know in what state market is right now: trending or in some sort of consolidation, in other words flat. How do we do that? By drawing trend lines. How exactly to draw the trend lines we are going to discuss in details, because I had opportunity to meet some traders, who draw trend line as they wish, just with one glance at the market. I would not suggest that and if you have this habit, you better get rid of it. Why? Because you must have some rules. Why? Because rules will make your trade easy and without emotions. Generally, rules demolish emotions and emotions demolish trading account. Less emotions, better results.

First, before we start talking about how to draw trend lines, I am going to show some sort of examples trending and flat markets. Please note, all examples and descriptions about trending or flat market is completely based on my experience and some books talking differently. Non of us are wrong. My method produces positive results, other authors as well. It is not that description of one or another chart matters, more important how you use it. I created my own understanding about the market, but I did not go far away from classical technical analysis. Flat market. Market conditions, when price moving up and down in some range, without giving

any particular direction is flat market. Usually we have support and resistance lines and price is moving between them. Occasionally breaking those lines, just to annoy us. How to draw those lines, we will discuss in the second part, but for now let's take an examples.

In this 1 hour USD/CHF chart you see market for short time stayed in the rage twice. In every range you will find some very short trends up and down. If price stays in the our prescribed range, we called flat market simply because prices bouncing up and down between two lines. Is it? Price never stayed in the same position for long time, price always moved up and down and in every flat market you will find very small trends. So why market is called flat, if prices always moving up and down? No one exactly knows why, but here important role plays support & resistance, and we will come back to answer this question, but for now familiarise yourself how in my eyes flat market looks like. By the way, support & resistance is the essence of my trading method.

Now, let's take a look at the trending market. I personally do not separate market to fast or slow market. While trend line has not been broken, trend still valid and how long it is going to last, just market knows.

In this 1 hour AUD/USD chart we see market is going down and we see three trend lines. Market from the price 0.8800 sharply moved down and trend line was valid until price crossed it. Is this end of the trend? No. And why I will answer in the second part, when we will talk about drawing lines. Second line was broken at the price around 0.8555 and what is the end of the trend. I never actually draw a line No 3, to draw line likes this by my opinion could lead to losses and I show it as example – never draw lines where you like, even chart looks like going down. Next minute you could find yourself in the wrong side of the market. Is better to miss a trade, than make a bad trade.

In the second part after two weeks we will discuss everything about drawing lines. Till next time open any chart and find for yourselves places where market is flat, where market is trending. And try different time frames. Just by simply accepting and knowing in what state market is, you already on the way to success.

Now question is: why to spend so much time on market on the things what looks so simple and unimportant? I could just write where I entering position, where to take profit(!?). Well, if I do that you will never get to understand my method and it will bring more confusion than actual profit. This because of very simple reason: every time market behaviour is different, despite all similarities. Where is no chance to explain all possibilities of the market. But is possible to describe some guidances. And most important guidance is this article. Without proper understanding in what conditions is the market, all other rules and methods and any sort of magic, will fall apart. In the trending market we take one actions, in the flat market – we do differently. In different situation we acting differently. That is natural. So how can you take correct actions if you do not know what the situation is? My advice would be: if you are not sure market is trending or not – stay away from it. It should be first ground stone in your trading method. I divided market in two parts: trending and flat. And any other market conditions such as very volatile market without any direction, hardly will attract my attention, even with possibilities to make fortune in one go. Reason is – I have no idea how to trade in such conditions, so I stay away. It will come my time. It always does.

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Published on  Wed, Jan 7 2009, 11:52 GMT