There exists an 80-20% rule that says 80% of the time the markets are grinding through trading ranges, pullbacks, and other counter-trend action that tests boundaries and only 20% of the time the markets are actually trending. Goodle "Are you a trend trader or a swing trader" and follow the 80 - 20% rule links for more information. In analyzing the markets over time I have experienced that approximately 60% of the time the markets are trading in a trading range and 40% of the time they are actually trending. In my analysis of the 10 most volatile currency pairs I notice 60% or 6 are in wide trading ranges and 40% or 4 are trending as I would have expected. Why is this important? The answer is I need to be aware when I analyze the markets that 60% of the time my major support and resistance lines will be horizontal lines and only 40% of the time they will be trend lines. Not knowing this it is easy to try and fight the system by trying to make my monthly analyses have trendlines. So when I look at my monthly charts and a trending market doesn't just jump out at me, which will happen the majority of the time, I know to look for important price levels where I can place my major support and resistance lines.
Why did I say all this? Both for educational reasons and because this chart is a good example of a monthly trending market. When I look at this chat going back more than 5 years I can see there is no place where I can place a horizontal support line that connects two or more price swing points (also called fractals and pivot points) to indicate an important support or resistance levels. This market is either trending upward of downward.
So while I am more interested in the price action over the last 3 or 4 years I have zoomed in on the price action over the last 2 years to place my major support and resistance lines. Notice these two lines are not parallel to each other but are slowing converging on each other. Normally when two trend lines converge on each other it is an indication the market is in its final downward rally and will soon reverse back upwards. Well, since we are looking at the monthly chart this could take seversal years to happen. As a result I am not concerned about that at this time. Right now I expect price action to continue to bounce off support and move to resistance, bounce off resistance and move back to support.
Now let's get serious! The last bounce for this currency pair was off support so I would expect price action to move to major resistance, but look at the last two candles; they are doji. When Doji appear at an important support or resistance line they indicate that price is most likely going to reverse directions very soon. However, when Doji appear during a trend they indicate the current trend will continue. Look at the red oval. In this case price action had bounced off major resistance and was headed for major support when the market posted 4 Doji. These doji indicated the market was simply consolidating its sell-off before resuming its downward trend to major support.
Here is what I expect so see happen: Once this market completes its consolidation of the current run up I expect this market to continue to move upward to test major resistance. So when I go to the daily or 4 hour chart to look for trade setups I will be looking for high quality Long trade setups and not low quality Short trade setups.
Note: EURCAD is one of the 10 most volatile currency pairs. I am very interested in analyzing these 10 pairs for entry opportunities as they can provide the best money making opportunities.
Why did I say all this? Both for educational reasons and because this chart is a good example of a monthly trending market. When I look at this chat going back more than 5 years I can see there is no place where I can place a horizontal support line that connects two or more price swing points (also called fractals and pivot points) to indicate an important support or resistance levels. This market is either trending upward of downward.
So while I am more interested in the price action over the last 3 or 4 years I have zoomed in on the price action over the last 2 years to place my major support and resistance lines. Notice these two lines are not parallel to each other but are slowing converging on each other. Normally when two trend lines converge on each other it is an indication the market is in its final downward rally and will soon reverse back upwards. Well, since we are looking at the monthly chart this could take seversal years to happen. As a result I am not concerned about that at this time. Right now I expect price action to continue to bounce off support and move to resistance, bounce off resistance and move back to support.
Now let's get serious! The last bounce for this currency pair was off support so I would expect price action to move to major resistance, but look at the last two candles; they are doji. When Doji appear at an important support or resistance line they indicate that price is most likely going to reverse directions very soon. However, when Doji appear during a trend they indicate the current trend will continue. Look at the red oval. In this case price action had bounced off major resistance and was headed for major support when the market posted 4 Doji. These doji indicated the market was simply consolidating its sell-off before resuming its downward trend to major support.
Here is what I expect so see happen: Once this market completes its consolidation of the current run up I expect this market to continue to move upward to test major resistance. So when I go to the daily or 4 hour chart to look for trade setups I will be looking for high quality Long trade setups and not low quality Short trade setups.
Note: EURCAD is one of the 10 most volatile currency pairs. I am very interested in analyzing these 10 pairs for entry opportunities as they can provide the best money making opportunities.