Using reaction at price levels to determine price direction.
Support and Resistance Trading. Part 3.
Part 1 of this case study showed how I choose support and resistance price levels using red horizontal lines. Part 2 of the case study I discussed how I can use the levels to determine trading direction, where to enter, place limits and stops. Here in part 3, I will continue to discuss the clues provided by price action for USDCAD during Q1 2013.
Once price chooses a direction, I must remain focused and watch closely for clues suggesting the move will continue, stop and or reverse. Stop and or stalling, at a level, in itself, is not enough to suggest the move is over. The clues of continuation or reversals come from price behaviour at structure levels: making or failing to make new HH or LL, putting in new HL or LH. All of this helps to define the trend direction and it’s strengths. In addition, I like to use Fibonacci retracement and extension levels.
Note: 1.00000 is a psychological big number, it can be expected to see natural resistance around it. So too is 1.01000 but to a lesser extent. Careful with trading at these levels and be wary of false breaks though once a side is chosen the moves can be significant.
The chart below brings in my use of Fibonacci retracement levels when they align with horizontal lines.
The second chart brings in EMA lines, I like to look at the charts in this order. First identify levels, then bring in Fibonacci levels and then EMA lines.