Identifying Support and Resistance Levels.
Case Study: USDCAD 2013 Q1.
How I draw, qualify and use horizontal lines. USDCAD Case Study Jan 2013, Q1.
To begin, I will identify the key horizontal lines from October – December 2012, Q4. Then use these to read and understand why price moved as it did during January to March 2013. Here, I am using quarterly segments as forex trading requires patience in regards to time.
- The first chart identifies 4 lines: the periods high, low, and it’s structure high and low.
- Chart 1 summary:
- High 1.00582 Low .97364.
- Early in the quarter structure high (SH) resistance is about .98800 which then becomes the structure low (SL) support in early November.
- This suggest below the line sellers are stronger than buyers and therefore affect price more. When price level .98800 is broken, to the upside, it suggest sellers no longer find this price level attractive and sell less, if at all.
- After price broke above .98800 it suggest buyers are outnumbering sellers.
- After trading above .98800 price then came back down to it, again. It would be highly probable to expect buyers to outnumbered sellers here and price should move back up. That is exactly what happened and a new HH was set in Middle of November.
- Later in the quarter, early December, the SL at .98800 is broken, as price came back to it, buyers were not liking this price level and therefore price continued further down establishing a new structure low at about .98200
I will now use these identified levels from chart 1 to read and interpret Q1 2013, chart 2.
- Chart 2 has two red horizontal red lines which were the highs and lows as identified on chart 1. Now, in this case, I need to read price action to see how Q4 high was reached instead of the Q4 low.
- The end of December had put in a new structure low at .98200 and this level held throughout January as price moved sideways early on. If price was going to the Q4’s low of .97364 then it would need to break the structure low if .98200, this did not happen as price broke out of the sideways box, up.
- The green box labelled Rotation Bullish; when I see a price pattern like this, I view it as possibly market movers switching sides. In this case switching from sellers to buyers. They are buying USDCAD.
- The early part of January gave clues suggesting price may move up towards the Q4 high. First, the structure low at .98200 held. Second, a bullish price rotation pattern emerged, and price moved up outside of it.
- If price does not move towards the next key support level then chances are it will move to the opposite next key resistance level.
All of the above tells me sellers are selling less and less at these price levels. When sellers are selling less it means price will move higher. Or, I can say: buyers are buying more and more, and as their demand to buy more grows price will move up.
Either way the behaviour of price is suggesting taking long position should have a higher probability of being right than taking short positions.
- Taking a long trade once price moved out of identified bullish rotation box, in this case, paid nicely. Though price stalled a little above the rotation box it did not show any signs of reversing down.
- Possible signs of reversing down would be price moving back into the box. Or breaking below and closing below the impulse bar that moved price out of the box.
- From the slow down above the green breakout box, price then moved up and through SH quickly hitting limit 1 target.
- The closes above the structure high (SH) formed a bullish flag pattern further suggesting the Q4 high is in play and reachable. Once price took off up, again, it quickly reached Q4 high hitting limit target 2. There was nothing in price action suggesting sellers had any fight or interest in slowing down the buyers.
- Above the Q4 high additional highs were not made suggesting sellers liked this price and started selling preventing price from moving further up, and or buyers were unloading their longs, and or fewer new long contracts were being added at this level.
- As price moves down from this level, I need to look for clues to answer is price reversing the long-term trend or is the current up trend just pulling back?
- From this new high, above the Q4 high, price retraced down to the previous structure high (SH), around .99700 finding support. Once a bottom was found and price resumed up it can be safe to say a new higher low (hl) has been put in and price is not reversing but just pulling back.
- Once the steam of the bulls ran out and sellers entered the market a double top was set in early March and priced moved down from there finishing out Q1 2013. This will be where I pick up for Part 3.
I can use previous significant, in this case the quarterly, highs and lows to identify support and resistance levels to gain insights for future price action. At these price points, I can draw horizontal lines then wait for when price reaches them again. If price does not move to one and then aligns to move to the opposite level then, I can look for trades in that direction to that level. Once the level is reached, I should continue to read the price clues, left behind by buyers and sellers, to see where price may go next.
I can further draw in and use structure highs and lows to gain insight to which level price may move to and how to evaluate it once it gets there. The key is to read and see who is winning the battle, buyers or sellers. If buyers are winning then price will move to resistance levels. Once it reaches the level another battle will occur between buyers and sellers. If at resistance levels buyers are winning the battle then price will break that resistance level and move further up. Often when a significant high or low is broken price may come back and test it. These are ideal areas to join the longer term trend but entry signals must provide high probability with low risk.