Tag Archives: levels

Analysis 140413

Yes indeed – these posts are coming thick and FAST! (not…)

Right… Since it’s impossible to trade or even look at anything during the day I have come up with an alternate stratagem. This also stems from my complete inability to multi-task.

Through the systematic practice of ‘doing a thing’ you get better and at the very least ‘doing the homework’ ahead of the next day then checking my planning against what pans out could be a good thing.  

A couple of people I follow have mentioned going into the day with a game plan and while I can’t really watch price live I thought there’d be some benefit in putting my own levels/ideas onto a chart and seeing how they hold up. Today I am pleasantly surprised.

Actually even before I opened a EURUSD chart I went over to Forex Factory’s trusty calendar and went through last week’s data to compare the Eurozone data results with the good ‘ole US of A’s. I wanted to get a ‘sense’ of positive or negative between the two contenders before looking at a chart. My conclusion was that as a whole the euro area data had been un-inspiring or at least not positive. Depending on the weighting US data seemed positive/ok.

One clear point looking ahead was that the euro’s chief wind-piece Draghi is talking tomorrow (Tuesday) and looking on an H1 chart we’ve been sideways following an up-swing. 

So… potentially more sideways, maybe it’ll turn into a pennant but a raging attack on 1.3200 seems somewhat unlikely unless someone/something drives it up. Then I had a look on an hourly chart and marked it up thusly… (is that a word?) so this is my ‘before’ picture.

140413 EURUSD H1

I’ll not bore you to tears about it but 1.3066 was what I wrote on the chart Sunday nite and it seems to have been a key point all day.

I put in the European open, US open and EU closes in as verticals below since this helps me get an idea of the passage of time across different chart timeframes.

140413 EURUSD M5 Results

What’s pretty clear is the selling all through the US session and then withdrawal of bids just now so we’re back at the low of the range from early/mid last week of 1.3040 – Is everyone selling euro’s to meet their margin calls in Gold? Who knows 😉

I guess we could see Asia take it sideways and then back up to 1.3066 again before breaking back down but I’ve not looked at this in any detail and I’m not staying up to watch either…

As they said in ‘Stingray’… “Anything can happen in the next half hour!” G’nite!

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A glimmer of hope

Note: I’m not suggesting anyone do the following. It ‘kinda’ worked out but a test group of ‘1 trade’ is not statistically significant in any way 😉 so I need to find some more opportunities to do this.

This last week, following my sojourn in a field in the Welsh hills, I’ve been trying to appreciate the small things in life more than usual and to just bloody well relax.

We all run around like freaking lunatics half the time worrying about all sorts of things that are frankly a complete waste of energy. I’m not going to make any attempt to link anything metaphysical to trading 😉 but it’s been great to take some of the mental pressure off myself and just re-examine what I’ve been doing. Looking at a couple of things with fresh eyes and a more chilled perspective…

Now, I’ve not had any significant ‘lightbulb’ moments but I have come to a new respect for RSI divergence. No, it’s not happening all day/every day for everything however when it happens (and you spot it) then it’s worth paying attention to…

On this basis I was looking at a bunch of stocks (yes, you read that correctly) because IG Index Advanced Charts has a module in it called ‘Pro Real Trend Detection’ that will filter instruments against mechanically generated support, resistance and other pattern criteria. This is still supposed to be a business and manually wading through hundreds of charts isn’t a good use of anyone’s time.

I’d seen a number of interesting results from RSI divergence. In truth I’ve probably read at least three books that highlight this as useful or at least something of significance and I’ve probably ignored them all 😉

However, with my slightly more relaxed mind I’ve been spotting these more and more often… So girding my loins, grabbing my 1 hour chart and a suitable candidate I plucked up the courage to go long on Wolseley (WOS) somewhere mid-Tuesday afternoon. There’s a 4pt spread off 1800 points so not bad at all plus the down-trend seemed to have halted forming a pretty solid ‘base’ under which to plant my stop.

If anyone’s under the impression I know what I’m doing go to my results page then keep reading. Just thought I better point this out before I continue… clear? Good.

Now in the trade but relaxed about the whole thing. Committed. Number of other factors in my favour…

  1. Price has got down to 6+month low from previous resistance in Nov 2010 – should provide some support now
  2. Price fall has not dropped below 1812 all day on the hourly chart
So on this basis I’m in long at 1834 and the following morning WOS gaps up >10 points and end the day with me +46 which is sweet. Now I, more than most, appreciate examples after the fact are completely sod all use to anyone so the rest of this post will not bang on about RSI divergence and how it’s the answer to my trading woes so far 😉

There are probably a stack of other technical and possibly non-technical reasons why this entry worked that I’ve not looked at yet. Maybe the 200 EMA got hit, maybe there was some news release or some other reason I don’t know about.

What I will say though is I’ll be looking for more opportunities like this to check which criteria (levels/price action/others) result in creating similar successes. Watson! The games afoot!

The bit I got wrong (again) was my stop management.

Having seen a +40point gain at the end of the day I moved my stop to something like +18 above my entry. Retrospectively this was due to lack of emotional management and wanting to bank something. I didn’t consider the context of what I was doing.

All prices retrace and I’m going long at the bottom of a six month low. So I’d assume that there are people desperate to get out of their positions but looking to claw back at least something before getting out. Had I personally not been greedy or anxious I could have put my stop just a point above my entry, been in ‘profit’ (psychologically), survived the retracement drop and been >60 points up the following day rather than getting stopped out about +18 as well as still being in the trade with a good ‘buffer’.

Hindsight is awesome. However the main point being is that even with my new found appreciation for green hills, rolling countryside and inner calm I still managed to get too ‘graspy’

Slight detour back to the RSI divergence point on Gold in the last few days…

Ok, so you could also make the point that 1580 is the new support but this is also backed up by RSI divergence too… Hence, a glimmer of hope 😉

Timeframes, levels and trends

I’ve really struggled, as a novice trader, to make sense of timeframes… Believe me when I say I’ve read a lot of books on trading and have yet to find a really coherent explanation of how to use timeframes or an explanation of the value/weighting to ascribe to levels and trends across multiple timeframes.

Maybe it’s because this is something that requires dynamic explanation which is of course a little difficult to get across in a book! Anyway, I’m going to make an attempt at describing how I use timeframes and especially how different levels and trends in different timeframes influence my trading decisions.

After I’ve had a really strong cup of coffee 😉

In this example I’m talking about a trend following strategy on long bets because with a few exceptions most trades I’m looking to get into are on the long side.

Relative weight between levels and trends

At all timescales it seems that levels of possible support and resistance have more ‘weight’ or significance than trends lines. A daily level in gold has more significance than a daily trend… In other words the up trend might get broken temporarily but if the price falls back to a significant level it’s less likely to drop below this point.

From a psychological/market perspective this is simply illustrated by thinking of supply and demand or perceived value.

If the price is trending up it will surely get to a point where people think it’s rising too fast and in the short term their motivation is to sell, or at least not to buy. In their mind the price is perceived as ‘overextended’, ‘expensive’ or likely to fall to a relatively ‘cheap’ level if they hold on long enough… Once the majority of players feel this way the price will inevitably stop rising.

The upwards movement will cease and only when the price drops down to a point (level) that’s nowrelatively cheap to the previous price (which was formerly rising) will the buyers come back in force. The return of buyers is motivated in part by fear of losing out as the price continues to climb. Trends at shorter timeframes (15 minutes for example) are much more likely to be disrupted by news events as there’s an immediate knee jerk reaction which might well be part of the price and included in everyone’s thinking about the ‘value’ of a currency or commodity 4 hours later.

When a price drops back to a level, especially if it’s held for a significant number of days, then there’s an even greater incentive for buyers ‘en mass’ to all reach the same conclusion. The price is back at ‘x value’ which is relatively cheap and it rose to ‘y value’ from here over the last few days. Assuming the commodity or whatever returns to it’s original value (which you remember was trending up previously) then it’s a good bet with a high probability of success.

Now I know that on a daily timeframe crude is going up but it’s also really clear that recently whenever the price gets down to 11,111 the ‘market’ perceives this to be good value. Now, the fluctuations on crude are very large and I don’t have the account size where I’m comfortable taking punts on this as the next realistic level is down at 10,575 and a 500+ point stop makes this a completely un-necessary risk for me personally.

It is however a good example of levels being more important than trends. If I’d have been attempting to follow the crude price based on trend lines I’d have been knackered several times over the last week. My experiences have shown me that intra-day trends are quite a risky proposition to trade off of. However, prices hitting a previously established level and then bouncing off that level during the day (in an upwardly trending market) are good bets.

Relative weight between timescales

So here’s how this works out. Higher on the list = more significance

1. Daily level
2. Daily trend – market direction – must be obvious, right?!
3. 4 hour level
4. 4 hour trend – It’s got to be really working for me to pay attention to these
5. 15 minute level
6. 15 minute trend – I try to ignore these.

So clearly where these values intersect i.e. you’re looking at a 15 minute chart but you’re also about to get to a massive 4hr/daily level it’s highly probable that the level will remain in place as support and you can feel confident in taking the position. I also don’t use moving averages on my charts anymore and frankly feel all the better for it. In the 75 or so minutes it’s taken me to write this up crude is back up to 11,185 so I could probably move my stop to entry and go do something else 😉

To ram the point home further… Where a 15 minute level has held over multiple days it’s very worth paying attention to and also becomes a 4hr and daily level because it’s held on and on.

The longer something remains in play the more significance it has and therefore the ‘easier’ it is to predict and trade off of successfully. It’s interesting to look at how many days or what time period the level has to exist before you begin paying attention to opportunities that might arise so I’d suggest the minimum is 2 occurrences. The example I’ve used is occurrence number 5 but as I mentioned earlier crude is out of my risk range at the moment. Oh well 😉

Other advantages to levels

Make risk:reward calculations simple. Pretty easy to spot. Don’t rely on patterns or setups

When I come up with a more coherent exit strategy than the finger in the air method that I’m currently using for this type of trade then I’ll post it here under ‘comments’

I guess there’s also a ‘counter-trend’ strategy available here for shorts on up-trends that bounce off new highs and fail to break through immediately. One advantage of this would probably be the potential to use tight stops once the retracement is confirmed but I’m attempting to keep it simple at the moment!