In part one we identified the two main types of support and resistance (static and dynamic) and how moving averages can be used to identify areas of dynamic support and resistance. Let’s see how this plays out into figuring out the bigger picture. Take a look at the one hour EUR/USD chart below:
As was the example in part one, the blue line is a 20 EMA high and the orange line is a 20 EMA low. Once we observe the overall behavior of price action to the moving average, for example, the chart above – the area in the center of the chart is showing price action breaking through and righting above the 20 EMA high. The thing to be looking for in this situation is some kind of trigger: a pin bar, engulfing candle, or, in this case, one of my favorite trend reversal indicators, “tweezer tops”, the green candle followed by red candle with a similar wicks (see circled area). A strong reversal signal like this (especially when reinforced with an appropriate filter indicator to reinforce the forecast) can forecast a bearish move through the support level and continuing below it. In the example above we can see that price action reversed after the “tweezer tops” candles, stalled slightly in the channel between the moving averages, and then continued the strong trend downwards and below the 20 EMA low line. Notice also that after first bullish candle that had had broken through the 20 EMA high to the upside and had closed above it, price action tested the 20 EMA high around four times before finally reversing and breaking through it.
Let’s take a look at another chart, again EUR/USD one hour and the same EMA’s as before:
On the left side of the chart we see price action trending nicely above the blue line (20 EMA high) until we get to a very nice pin bar (circled area), strongly suggesting an about-face in trend direction. Several hours later price breaks through the 20 EMA low, tests it a couple times, consolidates and then continues to trend below the 20 EMA low. Also take note that when price action is consolidating, it often tends to occupy the space between the EMA’s, a good indication to avoid entering (or possibly even exiting) a trade while it’s doing that. There, wasn’t that easy? Just like realizing I had plugged my network into the phone line after several hours of trying to troubleshoot why have my network didn’t have an Internet connection!
But here’s something that’s much easier to figure out, and that is, for those of you thinking about becoming a Sapphire member in Slick Trade, it’s time to stop sitting on the fence and sign up! More than anything else, a great opportunity to learn Forex while getting some hands-on experience with trading, receiving trade signals, access to expert advisors, great strategies, help and insight from other traders just like you and more! So what are you waiting for? Sign up today!
That’s all for now – next time were going to get into what I hope will be a very interesting discussion of trading machines. Until then happy trading, and, as always, thanks for reading! JC