DXY (US DOLLAR) ON TRIAL - PART 1 -"OPENING STATEMENT"
It is my belief based upon watching all the chatter on the Forex public forum that traders pick a time frame to trade and look for a place to enter the market. The choice to enter any market should not be the traders' first choice but the last option. Before deciding to enter any market, the trader should first build up a high-quality case before placing a trade; It's like putting the market on trial.
The trial process should go like this:
First, present the opening statement by reading the market structure.
Second, present the evidence by looking at the shorter-term time frame
Third, present closing arguments by identifying support and resistance
Fourth, enter to the verdict by taking a trade position
READING THE MARKET STRUCTURE
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To read the overall market structure, I need to go higher in the time frame so I can see the overall structure. To do this, I find I always end up at the monthly time frame, so this is where I will start.
By looking at the market structure, I can see DXY has made a higher high, followed by a lower high. From these two swing points or fractals, I can connect a resistance line. Remember, from geometry. It takes two points on a sheet of paper to draw a line. If there is only one point on a piece of paper, it is just a dot. In technical analysis, it also takes two points on the chart to draw a line. By connecting the higher high swing point to the lower high swing point, I have drawn in a downward sloping resistance line. Sometimes resistance lines are drawn horizontal to the chart, and sometimes the resistance line is drawn sloping upward.
Next, by looking at the market structure, I can see DXY has made a higher low and a lower low. By connecting these two swing points, I have established a downward sloping support line.
With the establishment of a resistance line and a support line, I have defined the market structure DXY should continue to trade within. At some point in time, DXY will break out of the boundaries of this market structure, at which time the market structure will change as will the establishment of a new monthly trend. However, until that happens, DXY should continue to trade within the boundaries of the resistance and support line and should continue to move in a downward direction.
The trial process should go like this:
First, present the opening statement by reading the market structure.
Second, present the evidence by looking at the shorter-term time frame
Third, present closing arguments by identifying support and resistance
Fourth, enter to the verdict by taking a trade position
READING THE MARKET STRUCTURE
==============================
To read the overall market structure, I need to go higher in the time frame so I can see the overall structure. To do this, I find I always end up at the monthly time frame, so this is where I will start.
By looking at the market structure, I can see DXY has made a higher high, followed by a lower high. From these two swing points or fractals, I can connect a resistance line. Remember, from geometry. It takes two points on a sheet of paper to draw a line. If there is only one point on a piece of paper, it is just a dot. In technical analysis, it also takes two points on the chart to draw a line. By connecting the higher high swing point to the lower high swing point, I have drawn in a downward sloping resistance line. Sometimes resistance lines are drawn horizontal to the chart, and sometimes the resistance line is drawn sloping upward.
Next, by looking at the market structure, I can see DXY has made a higher low and a lower low. By connecting these two swing points, I have established a downward sloping support line.
With the establishment of a resistance line and a support line, I have defined the market structure DXY should continue to trade within. At some point in time, DXY will break out of the boundaries of this market structure, at which time the market structure will change as will the establishment of a new monthly trend. However, until that happens, DXY should continue to trade within the boundaries of the resistance and support line and should continue to move in a downward direction.
Comment:
Added Comment: The purpose of starting with the monthly time frame allows me to learn where traders find support and resistance over the long term. As long as traders continue to believe that these major support and resistance lines will hold then price action should continue to move from major support to major resistance and back again. Once price bounces off either major support or major resistance I now have a better understanding as to how long the new trend will last.
Comment:
Added Comment: By knowing how long a major trend will last it also helps me to understand the direction of the market at the daily time frame. At the daily time frame I can now expect price to move in the direction of the major trend, but I also know that it will be interrupted by periods of shorter term trends in the opposite direction known as counter-trends. Therefore when I see price action moving counter to the major trend I also know that the length of its trend will be short and that it will eventually end and the trend on the daily time frame will again start moving in the direction of the major trend. Knowing all this I now understand when I will be trading with the major trend and against the major trend. It is important to know the direction of the major trend and when to expect it to end.
Comment:
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Note 1: Drawing a horizontal support or resistance line off of just one point, a higher high or a lower low, for example, is not a real support or resistance line, and here's why. In an upward trend, for example, the trend is defined as candles making higher highs and higher lows. So drawing a resistance line at the most recent higher high can quickly be taken out if the upward trend is not complete.
Note 2: To draw a support or resistance line takes 2 points on the chart, for example, a higher high and a lower high would be required to draw a resistance line. Once the resistance line is drawn, then it needs to be tested to see if this line of resistance is going to hold. To complete this test, a third data point, such as an additional lower high, needs to be formed. In a perfect world, this third data point would fall right on the resistance line, but we don't trade in an ideal world. So any lower high data point made close to the resistance line would qualify as a valid test that the line of resistance is going to hold. The third data point (lower high) can either form just below the resistance line (indicating buying weakness) or slightly above the resistance line ( also called a fakeout).