A Basic guide on how to read and trade the markets invezted.com
We want to categorize the markets and its current state and therefore draw a “Map” , so to speak highlighting the important “key” levels in order to help us in judging the current market situation and its context based on the buying and selling pressure , aswell as if the market is balanced , imbalanced or about to change in one of the two states. In order to know where we are and how to trade whatever is in front of us at the moment.
For this we only need to know the context, location and price action to make an informed decision in all market situations without getting lost , we do this with the following guide
We do the following in all relevant timeframes , starting with the biggest and work our way down to the lowest.
You can use the following techniques on ALL timeframes , however you should be aware that usually the bigger timeframes dominate the smaller ones , as long term traders dominate small term traders , due to their size , and risk tolerance (wider stops etc.) so if you trade a long breakout on a 1min chart wich trades at a daily or weekly resistance level , you have some big odds stacked against you .
aswell as you shouldnt overdo with drawing in all timeframes from hourly to 30min to 15 min to 5 min etc.. or you will get into analysis paralysis and really all relevant information is allready there.
for our basics we use the Weekly , Daily and Hourly timeframes thats it , anything else can be added later on individual TFs if needed, due to entering or managing a position ,more on that later..
Start with the Weekly then Daily and last on the Hourly with the following process
First we draw in the levels of support and resistance
One can expect to find support where the most substantial buying has occurred in the past and resistance where the most substantial selling has occurred. to halt price for further advance and even reverse.
However price may also reverse at extremes due to the fact that there is no interest in following price any higher or lower ,ie less activity, resistance in this case refers to resistance of a continuation of the move.
Second we spot ranges and consolidations which may visualized due to the all ready drawn in support and resistance levels.we also draw in the “mean” of the ranges.
Traders seek value; value is price over time; price is arrived at by negotiation between buyers and sellers. if value is found price is in a balanced state and is moving “sideways” limited between support and resistance , the middle of the range where most of the trading activity is located is considered fair price or “mean”.
Third we draw in trendlines and trend channels aswell as the mean of the channels and the 50% retracements of any relevant trend (intermediate)
Trendlines are simple tools to judge the markets trend direction buying and selling pressure , pace,momentum and stride to gain an idea on the current imbalance and how strong it is and when its likely about to come to an end.
A Trendchannel is nothing more then a diagonal trading range where price is contained in well defined “limits” of upper and lower channel lines reffered as overbought and oversold line with a “rising” or falling “mean”
50% retracements are a good to measure the strenght or weakness of a move as it usually indicates capitulation if its broken or strenght/weakness if it holds.
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if have drawn in all relevant levels we can start our analysis like so
1st we analyse the context of the market ie. the bigger picture
Waht ?
are we in a trend ? up? down ? is it contained within a channel ? are we moving in a range ? at support ? at resistance ?
signs of weakness? signs of strenght ?
Context:
we are still in a downtrend on eur/usd ,the decline came to an halt as price attempted a rally from the lows of 1.0464 , which
tunred into range with resistance beeing 1.1490 and support at 1.0808 whch leaves us with a mean at 1.1160 , we had a
breakout attempt which quickly reversed back into teh raneg , respecting the trendline any furthe atempt of a break
resulted in a lower high and a respect of the resistance , price now is on decline on increased selling pressure breaking
the support at 1.0808 and heading towards the lows of 1.04640
2nd we want to know where we are in the bigger picture
Where?
at support ? at resistance? at a mean? at a 50% retracement? overbought? oversold? signs of strenght ? signs of weakness?
after we broke the minor support at 1.10930 , price tested that level and it turned into resistance the decline happens on
increased momentum and broke the support level of 1.08140
signs of weakness: broken support 1.10929 tunrs resistance
increased momentum to the downside
location: broken support 1.08140
3rd what setups and trading ideas do we lookout for, based on 1-2 and ABC
How?
signs of strenght ? signs of weakness?, buying pressure ? , selling pressure ? what is price capable to do and what not and at
which key level ? what if price does this or that ? higher low ? lower high ? , balanced ?, imbalanced ? indecision? is
momentum picking up or slowing down ?, where are potential stop levels ? how does the market react at certain levels ?
how does this all fit into the context ? what setups are worth to consider ? where are potential trouble areas ahead?
what about the risk ?
we are currently movinge sideways , with a well defined resistance level at 1.0750 any break of the current lows and we will
retest the cuurent lows at 1.0710 representing a short opportunity (A)
should a retest of the lows tunr out to be successfull one could watch out for a reversal for a long play (B) to test
resistance again, if price breaks that low aswell one should excpect further downside potential to the lows of 1.0500
a breakout to the upside and a pullback wich turns resistance into support could be played to test the 50% retracement of
the selloff (C) a potential reversal could be played at the rejection of the 50% retracement at 1.07930 of the selloff (D)
shorts are in the favour of the bigger picture and the current location , which is in the middle of nowhere , so one could
wait til price hits the extremes at 1.0500 or 1.07930
Price is capable of only three things, either a breakout, a retracement or a reversal
If, for example, price bounces off or launches itself off the bottom of the range (support), trade the reversal and go long. If
instead it falls through support, short the breakout (or breakdown, if you prefer). If you don’t catch the breakout, or you prefer
to wait in order to determine whether or not the breakout was “real”, prepare yourself to short whatever retracement there may
be to what had been support and may now be resistance.
if have drawn in all relevant levels we can start our analysis like so
1st we analyse the context of the market ie. the bigger picture
Waht ?
are we in a trend ? up? down ? is it contained within a channel ? are we moving in a range ? at support ? at resistance ?
signs of weakness? signs of strenght ?
Context:
we are still in a downtrend on eur/usd ,the decline came to an halt as price attempted a rally from the lows of 1.0464 , which
tunred into range with resistance beeing 1.1490 and support at 1.0808 whch leaves us with a mean at 1.1160 , we had a
breakout attempt which quickly reversed back into teh raneg , respecting the trendline any furthe atempt of a break
resulted in a lower high and a respect of the resistance , price now is on decline on increased selling pressure breaking
the support at 1.0808 and heading towards the lows of 1.04640
2nd we want to know where we are in the bigger picture
Where?
at support ? at resistance? at a mean? at a 50% retracement? overbought? oversold? signs of strenght ? signs of weakness?
after we broke the minor support at 1.10930 , price tested that level and it turned into resistance the decline happens on
increased momentum and broke the support level of 1.08140
signs of weakness:
broken support 1.10929 tunrs resistance
increased momentum to the downside
location:
broken support 1.08140
3rd what setups and trading ideas do we lookout for, based on 1-2 and ABC
How?
signs of strenght ? signs of weakness?, buying pressure ? , selling pressure ? what is price capable to do and what not and at
which key level ? what if price does this or that ? higher low ? lower high ? , balanced ?, imbalanced ? indecision? is
momentum picking up or slowing down ?, where are potential stop levels ? how does the market react at certain levels ?
how does this all fit into the context ? what setups are worth to consider ? where are potential trouble areas ahead?
what about the risk ?
we are currently movinge sideways , with a well defined resistance level at 1.0750 any break of the current lows and we will
retest the cuurent lows at 1.0710 representing a short opportunity (A)
should a retest of the lows tunr out to be successfull one could watch out for a reversal for a long play (B) to test
resistance again, if price breaks that low aswell one should excpect further downside potential to the lows of 1.0500
a breakout to the upside and a pullback wich turns resistance into support could be played to test the 50% retracement of
the selloff (C)
a potential reversal could be played at the rejection of the 50% retracement at 1.07930 of the selloff (D)
shorts are in the favour of the bigger picture and the current location , which is in the middle of nowhere , so one could
wait til price hits the extremes at 1.0500 or 1.07930
Price is capable of only three things, either a breakout, a retracement or a reversal
If, for example, price bounces off or launches itself off the bottom of the range (support), trade the reversal and go long. If
instead it falls through support, short the breakout (or breakdown, if you prefer). If you don’t catch the breakout, or you prefer
to wait in order to determine whether or not the breakout was “real”, prepare yourself to short whatever retracement there may
be to what had been support and may now be resistance.
good luck , and stay tuned for more ;)
invezted.com