Here is another chart pattern that appears quite regularly and can be quite an addition to any one’s trading arsenal.  What makes this pattern so appealing to me personally is the fact that it gives a very low risk entry point. It can preclude some huge market moves and with such a low risk the rewards can be huge if managed correctly.

An Inside Bar signals  falling volatility and market indecision. The current bar’s range is within the previous bar’s range.   Another way of saying the same thing – an inside bar has a low greater than the previous bar’s low and a high less than the previous bar’s high.  This market indecision can and does regularly supply the trader with the information that the market may be about to reverse.

This pattern can be traded on any time frame but as always the lower the time frame expect a lot more whipsaw. This pattern will complement any trading system or method.  It is another pattern that supplies the trader with both a low risk entry point and secondly supplies the trader with a logical place to put a stop.

As with all candlestick patterns this should not be traded in isolation.  When traded using a trend filter like a moving average this can be a extremely profitable pattern.  Another way to play this pattern could be with an oscillator and take breakouts when the oscillator is overbought or oversold.  Lets look at some examples of these two scenarios and where we would place our stops.

This next chart shows a great example of how to trade an inside bar using the stochastic oscillator to indicate when price is in the oversold zone to confirm the trade.  In this example you would simply trade the breakout to the upside of the Inside Bar Candlestick.  To do this you place a buy stop order a few pips above the high of the Inside bar.  There is two places that you can place your stop, the first and in my opinion the best place to put your stop is a few pips under the low of the Inside Bar.  The reason I say this is two fold, firstly it offers the lowest risk opportunity and secondly the best trades go your way straight away and don’t look back.  The advantage here is that when this happens you have your best position size on and there for the greatest profit potential.

The second place you could place your stop is below the low of the previous and larger candle.  This may appear to be the safer option but as stated previously the best breakout trades go your way straight away and all this stop does achieve is it gives you a larger stop and thus less position size on the trade.  This is an individual thing and you should trade what you feel most comfortable with.

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This next chart is a daily chart of the EUR/USD.  In this chart I have highlighted some Inside Bars that could have been taken as a trend trade.  In this scenario you would be looking to add positions as the trend continues and look for an Inside bar in a retracement with the assumption that this will signify a reversal in price and the resumption of the original trend.  This is an excellent trading style that allows you to build large positions in a good trend.

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Note how in the chart I have placed all the stops just below the low of the Inside Bar Reversal itself and all these stops have held there ground and were not stopped out.  In the above situation you would be able to put on relatively large positions due to the small stop sizes presented buy the Inside Bar setup.  As always money management plays a major role in all trading and is a subject all on its own.  If you have never looked at Inside Bars then maybe you should, check them out and see whether they could complement you’re current methods.

This is just one great reversal pattern, another is the Pin Bar. Read this post and add another great reversal pattern to your trading arsenal the Pin Bar.

Perry

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Most times  when discussing support and resistance we are generally referring to horizontal areas where price has tested a level previously and generally more than once.  There are many other forms of support and resistance that speculators need to take into consideration, some of these are:

1. Moving averages
2. Pivot points (floor pivots)
3. Trend lines
4. Fibonacci levels
5. Round number levels

Lets now look at these and how they could be used effectively in our trading.

Moving Averages

Moving averages can be used effectively in both a trending environment and also in mean revision environment.

Moving averages can be excellent forms of support and resistance. If you look at any price chart and overlay a moving average just watch how price is drawn back to the MA and also how often when touched or just breached it then reverses and moves away again.  One use of these MA’s is that they work quite well in many situations as a trailing stop.  This is because they are a great form of  support and resistance and if it doesn’t hold then it is a great time to take profits. It is much easier to show this in a chart so have a look at this chart and see just how well this can work.

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Pivot Points

Pivot points or floor pivots as they are often referred to are also excellent forms of support and resistance.  These pivot points have been around for a very long time and have been used by floor traders for just as long.  These points are  a nice simple way for traders to have some idea of where the market is heading during the course of the day with only a few simple calculations.  All you need is the markets previous days high, low and closing price. The calculations I use to get these points are-

Resistance 3 = High + 2*(Pivot – Low)
Resistance 2 = Pivot + (R1 – S1)
Resistance 1 = 2 * Pivot – Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot – High
Support 2 = Pivot – (R1 – S1)
Support 3 = Low – 2*(High – Pivot)

But there is a much easier way to calculate these levels and that is to get them from one of the many sites on the web that publish them every day, a good one that I  found is  HERE .  The reason that so many of these levels hold is quite simply that a lot of other traders are using the same methods and when you get enough people with the same opinion then the market moves in their favor.  Pivots are great places to both enter the market and take profits depending on each individual situation.   As always a picture is worth a thousand words and the following chart displays a good example of floor pivots acting as support and resistance.

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In the above image I am using a custom Pivot indicator that redraws the pivots each day for Meta Trader, if anyone would like a copy please contact me through my contact page and I will send you a copy.  It is quite obvious in the above chart just how well these Pivot Points do work.

Trend Lines

Trend lines much like moving averages are excellent forms of support and resistance as well, they also are an excellent tool to use as a trailing stop.  This chart demonstrates this well.

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Fibonacci

Fibonacci has been around since the dark ages and is a tool that is used regularly by many traders.  There are many Fibonacci tools out there,  these include retracements, extensions, arcs, fans and cycles. I personally only have used retracements and extensions in my trading so I will only discuss these here. All good charting packages come equipped with these tools and are easy to use.  I won’t go to much into explaining Fibonacci, if  you want to know more just search the net or you could check out Neal Hughes’s  course on Fibonacci trading which is quite good. These levels are quite effective and can be used on all time frames.

click image for larger view

click image for larger view

Round Numbers

All humans seem to have a natural affinity to round numbers and anything ending in 00 or to a lesser extent 50 , these can be effective levels of Support and Resistance.  When looking at any chart just draw some lines at these levels and note how price reacts, it is amazing just how many times price reverses at them.  Please note that again you are looking to this level as a general area as all traders know this and thus place there orders either side of these round numbers and thus price can be seen to spike through them sometimes and then reverse.  Check out this chart for an example of this at work.

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So as you can see Support and resistance comes in many forms and used correctly can define areas where traders can enter the market, take profits and also gives a logical place to put your stops. I believe for all technical traders Support and Resistance trading should play a major role in there trading plan.

Perry

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Support and Resistance  is a very effective tool for finding and locating turning points in the market.  New highs and lows are points where all traders should be extremely cautious and observe how price reacts to these areas. They are excellent places for traders to both enter or exit a market depending on the individual situation.

The example above  shows just how effective this  is.  Lets walk through this chart and identify opportunities to (a) enter trades and (b) exit trades.   Starting from the far left of the chart you can see that the USD/JPY is in a solid down trend,  you can see that when it reaches the point I have marked “First Test” , that price forms a bullish reversal pattern.   This alone is not a big deal, but when price retests the same level and forms a large pin bar rejection candle,  as it did at the point I have marked “Second Test”,  it is time to take notice.

Price,  if observed closely can reveal small clues like these leading to its future direction.  In the above example the pin bar for me would be a solid confirmation that this area is now support and a good time to (a) exit any short positions we are currently holding and (b) seriously consider taking up a  long position.  These Support areas also supply us with key information as to a great place to position our stops, directly below the support line.

Top and bottom picking can be a very tough game, but when we capture one of these moves the rewards can be phenomenal.  These types of trades are not for everyone and would be considered by some as a fairly aggressive entry.  The more conservative trader can still use support and resistance in there trading, the next example on the chart is just one of these examples.

Resistance when broken  becomes support and vice versa.  In the above example you can see where price didn’t even hesitate as it just punched clean past the previous high,  which we would be watching closely to see how price reacts. This swing  high is considered to be previous resistance and when price doesn’t hesitate at this area and keeps going,  this is an another good spot to consider entering the market.

The only problem with this type of entry is that a stop point is not as obvious.  It could be placed safely under the old support under the pin bar that we previously identified.  The problem with this is that we have a huge stop and our position size is dramatically reduced.  Our second choice is somewhere below the resistance that was broken at the previous high.

Now if for example we are an extremely conservative trader and we didn’t like either of the two entries that have already been identified,  then we can just wait for something that meets our criteria.  If we follow price some more, an example of just such an opportunity presents itself.   Price after punching through the previous high runs up some more and then starts to retrace.  when price forms a bullish reversal pattern like the one I have marked “Change of Polarity” it is time for the conservative trader to take action.  It is at this point that there is enough information that the scales  have been tipped for even the most conservative traders to take up a position.  Now lets just identify exactly what that evidence is that has tipped these scales.

• Price formed initial support at the point marked “test 1″.
• Support formed and confirmed by the double bottom pattern formation at “Test 2″.
• Strong candlestick reversal patterns formed at these support points.
• Price thrusting through previous highs with good momentum.
• Price forming a strong candlestick reversal pattern at previous resistance levels confirming a change of polarity.

This  “change of polarity” pattern appears in the charts time and time again.  It is an excellent place to enter the market that stacks the odds in your favor and also identifies an ideal spot to position your stop order.

Support and Resistance should have a place in every technical traders tool box, these are just some of the ways that you could take advantage of the opportunities that support and resistance trading can present to you.

Perry

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To build a trading system really only requires three ingredients.

1. An entry point – A rule set to get you in the market.
2. A stop point – A rule set to get you out of the market when the market is not doing what you anticipated.
3. A exit point – A point at which you exit the market with profits

This is really pretty straight forward and should be easy to do one would think.  In my honest opinion a strict rule set for all three is absolutely necessary, without this you are doomed to failure.  There is still discretion involved but the market needs to meet a set requirement for you to act.  So lets look at each ingredient and some examples that would fit each ones needs. Read the full story

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I want to just touch on this area before going further with the system development series.  Both of these subjects are extremely important to all traders and without some tools in place to manage them both the road ahead will be quite a rocky one.  Why THE MELD, I believe that if you are trading a good system that produces consistent results and are using good money management practices, the need to work on the psychology side of things is dramatically reduced.  Lets face it the only time we are working on our trading psychology is when we are losing, or playing a long losing streak,  or, trading out of a deep draw down.  All these situations have one thing in common they are not very enjoyable at all, now, if you have a tried and tested system you will have a good understanding of draw down expectations and therefore should be comfortable with it.  If this is not the case and you do have a good profitable system  then you probably need to reduce your position sizing to combat the larger equity swings.

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I would like to explore the process of  designing a trading system. Please note that this is all based solely on my opinions and experience only.  This does not mean these are the only ways and methods, there are literally hundreds of good trading systems out there, but I can only write about my own experiences as this is what I have learn t.

I will explore two systems which I think encompass a very large portion of trading systems generally. The first of these would be trend following and the second I will just call swing trading but would include  methods like scalping, day trading and the like.  I will try and define the two for simplicities sake. Read the full story

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Patterns like this don’t form all the time but when they do they can be profitable. My approach with a trade like this is await a retrace to the bottom trend-line and then look to add some more  size to the position. As this is a risk free trade if it gets stopped out well no gain but the potential is worth the risk of losing nothing and maybe the possibility of building a large position.

Perry

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