We can now start to form a full picture of what price is been doing in recent past and see what is currently doing in the present in the very visual way.
The next step is to look how those candlesticks help us identify key price levels that the market has high probability chance of reacting to.
They are commonly called Support and Resistance and it stretches beyond levels highlighted by candlesticks to almost anything that can influence the market to buy or sell at a specific price.
When we are talking about selling the levels we call them resistance, when we are talking about buying the levels those levels are called support.
So what is this and why traders use it?
The answer is simple to support and resistance works because market pays close attention to it.
That's either because a market has seen other traders reacted to the level recently or they are based on some calculation. its highly the market will react to that level in an upcoming session.
The first type of a level is price based levels the second tipe is something called pivot points.
They are used to determine where the market will most likely buy or sell from in the upcoming session based on what it did in the previous session.
Professional traders use them for day trading to give some structure to sometimes volatile nature of those intraday moves.
The most important level is the central pivot or daily pivot, above the central pivot, are daily resistance levels and below are daily support levels.
Sell from levels of resistance and buy on levels of support.
These are proven levels that market trade before.
This is known as trading from confluence levels and confluence simply means more than one thing at the same price.
So for example:
There may be a resistance pivot line with the extreme high from previous session wich also overlaps with psychological double zero level creating a very strong level of resistance.
In this scenario, we would have the extremely strong case to sell from that level during the current session.
If you don't have high probability pattern (you will learn it) you can search for confluence levels for high probability trade.
Remember you must have a pair and direction (pair Strong/Weak) before you look at charts.
Fibonacci Retracement
Fibonacci is similar to pivots, levels are based on the calculation based on recent price moves.
But they are reflected in a different way.
Traders respect the levels and expect everyone else to do the same.
They can be drawn from any high or low on the price charts.
The general rule is you draw it from the left to right, we also use Fibonacci retracement for our confluence levels.
The more things you have in confluence the stronger level is and the more likely the market will see it and react off it.
As you can see here we have: High probability pattern, Round number, fibo level and Resistance wich creates High Probability Trade.
Ignore the open positions.
61,8 and 38,2 are best levels but of corse, all levels work.
Always trade the high probability pattern, or confluence levels, dot take trade without this.
High Probability Pattern:
If you get confluence levels with this pattern and of corse fundamental trend there is very high probability that your trade will be successful.
That's why we never enter a trade without a reason, we are patient and wait for these high probability setups and only trade them.
The next tool we look at is ADR, you can see it at the bottom of the chart.
ADR is a measurement of how much the pair moved over recent session, the reason traders measure this is to see where the price currently is in relation to its usual range.
For example:
If the price is in a range of 150 pips and is already rallied 160 pips its unlikely that price will move much further unless there is a very very good fundamental reason because it's a pure measure of price this is not to be relied upon for any specific trading decisions.
This is useful for placing stop losses.
For example: if a pair is in a range of 300 pips we will not use a stop loss of 30 pips, it's highly likely that stop will be hit.
On the other hand, if you use 100 pips stop loss on a pair that moves 100 pips a day this is too much and you will end up losing money.
We use around 50% of daily range for our stop losses, wich is about 40 pips and on higher moving currencies we use the stop of 50-60 pips.
Moving Averages
The next tool is moving averages and they are used by professionals as a guide to where the price should be.
We use 200, 50 and 24 moving average.
Many traders try to trade them in a shorter timeframe, this is not how institutional traders use them.
We use our moving averages on Daily timeframe.
They show you where the average price should be and they help you to identify the trend.
They should be used with an overall fundamental trend.
When the price is between this 3 lines then that means its very decent price to trade in line with fundamentals.
The further the price goes from moving averages the more likely the price will pull back.
Keep them on a daily chart, that's what professionals do.
Always start your analysis from the highest timeframe and mark big levels, then go back to smaller timeframes and watch zones of confluence.
Contact me so i can send you template and indicators.
Trader Alen
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