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Trend Trading with Moving Averages for a Living

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Trend Trading with Moving Averages
Trend Trading with Moving Averages

Trend trading with moving averages can keep you out of choppy conditions in the Forex, futures and stock markets.

There are many trend trading indicators and many trend trading strategies, but I find that using a 50 day moving average strategy is the best way to keep a trader out of non-trending market conditions.

Let me know if this video on trend trading with moving averages was helpful to you. Leave a message in the COMMENTS section at the bottom of this page. 

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VIDEO TRANSCRIPTION

Welcome to this video on trend trading with moving averages. Today we are going to look at a very simple concept, but a very important concept. And that is the cycle of trends. That’s right. Trends actually go through cycles. That essentially means that sometimes the market is trending, and then it goes into a period of non-trending, non-directional. Now first of all let’s define trend.

A SIMPLE TREND FOLLOWING STRATEGY

Webster’s dictionary defines trend as this, “The extended general direction.”

This definition tells us that the word trend means a long-term move, as implied by the terms “extended” and “general” in the definition. Whenever you’re talking about trend, you are referring to a long term move, not a short term move. I like to use the 50 period simple moving average and that’s this line right here. I have it color coded so when it goes up, the trend is green, when it goes down, it turn red.

Now if it’s just flat, I consider that we have no trend. It’s a trendless market. We are in a cycle of non-trending. A non-directional cycle at that time.

TREND TRADING WITH MOVING AVERAGES

Another thing that I do however is I also look at price action in relation to trend trading with moving averages. We have it above the 50 MA, and it goes below the 50 MA. Then it goes back above the 50 MA, then back below the 50 MA. Then back above the 50 MA, then back below the 50 MA. We consider that a trendless market. We are now in a cycle of non-trending. It’s basically directionless. In the sense that it’s not committed to either bullish direction or bearish direction for an extended period of time.

I use 50 period moving average, but also this black line that is the 15 EMA. Many traders use a 20 period moving average strategy, but prefer the 15 exponential moving average.

Now how do I use that? It doesn’t define trend for me but it defines the relative strength of the move. I’m not trend trading with moving averages of either the 15 EMA or the 20 SMA. Nor am I interested in a moving average crossover.

THE BEST MOVING AVERAGE STRATEGY

I don’t want price to come back down below the 50 MA, in order for us to sustain a trend, I actually want it to stay above the 15 EMA to indicate that it’s a fairly strong trend. As long as it’s above the 15 EMA in an uptrend, therefore the relative strength is to the upside, and we got a good trend. As you can see here, we have 5 waves and then a failed 7. Five waves today is about an average that you are going to get on a trend. And basically I am talking about higher highs and higher lows. These are not Elliott waves.

Now let’s take this a little further. We went from a non-trending market over here. We use the moving averages as basically, well creating structure. You could see that just looking at price bars if you wanted to. But I think using the moving averages helps you to see even it more clearly because there is a clear structure there with price in relation to the moving averages.

TREND TRADING FOR A LIVING

Alright so we went from non-trending to trending. Now let’s see what happens. So as the day goes on, well what happens? Okay we kind of start getting all messy again. Don’t we? So we put in our, the top of our trend here, and now things get a little messier. So what you will see here is that we go down, we do get below the 50 MA, 50 MA does turn down.

But look what happens to our 15 EMA. Price comes above it and we get an open and close above the 15 EMA. Now it does go down below it, then it comes back up above it. Again this basically what’s happening here, the market logic, as I like to call it is that when it breaks above the 15 EMA. That means that’s short. We’ve had some major selling here.

TRADE IN THE DIRECTION OF THE DOMINANT ENERGY OF THE MARKET

Now in order for this market to resume a trend right away, we want that dominant energy of selling to remain in the market. So we don’t mind some oscillations. We don’t mind a retrace but we just want to retrace to the 15 EMA. Why? Because that indicates that there may be some profit taking down there. And maybe some retail buying, but no professional buyer. We don’t want a lot of strength coming back up. Because that would indicate that well, there is a lot of volume coming in, lot of buyer volume, may be some professional buyer volume. And that then dissipates the downward energy of the market, the dominant energy of the selling.

So when it gets up above there that indicates, ‘oh okay, hmm well we are getting quite a bit of buying.’ Comes down, makes a higher low, higher high, another higher low, higher high. So even though eventually it goes down and makes a lower low. Boy these are tough times to sell. And you wouldn’t want to because we are looking for an imbalance. We are looking for the market participants to maintain a very very bearish sentiment. And when the market comes back above the 15 EMA, that’s one indication that they have not retained a bearish sentiment at that time. And at that time is critical because you have to determine what time are you going to trade.

THE RUBBER BAND TRADE

Now this actually is a rubber band trade here. And this is the trade I give away for free. It’s a great little trade there and so anyway if you like that, feel free to request that. We give that away for free in a free video. And then it, we come down, and we make a little double bottom here. How much time do we have? Oh we got time for a little bit more. Alright I’ll give you a little bit more.

So again just to engrain the pattern into your brains, again we go back in to a cycle of non-trending. So get used to this, don’t think that just because the market stopped a down trade, that is then going to turn into a uptrend. In fact that’s rather rare. Normally the market, after it’s done with an uptrend goes into a non-trending market, after it’s done with the downtrend. It goes into a non-trending market cycle.

TREND TRADING FOR DUMMIES

Trend trading is best when kept simple. There are many fancy trend indicators, but I’ve found trend trading with moving averages as well as anything. BTW, I’m the author of Trend Trading For Dummies (Wiley Publishing). It’s a great resource if you want to dive deeper into the subject.

I try to keep these videos short, so that we just stay to the point and give you a few examples, though I like to give you more examples so that you can see some of the variations and help get the pattern ingrained into your brain cells. So when you see them in your real trading, you’ll have seen several variations.

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Trading Multiple Time Frames Forex to Dramatically Increase Profits

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Trading Multiple Time Frames forex
Trading Multiple Time Frames forex

Here’s how trading multiple time frames Forex, stocks and futures can dramatically  improve your win/loss ratio.

Trading multiple time frames Forex or any other market is a common practice for those using technical analysis to trade the stock market, Forex, Eminis and other futures markets. It can be used to increase both your win/loss ratio and also your risk/reward ratio.

Let me know if this video on Trading Multiple Time Frames Forex was helpful to you. Leave a message in the COMMENTS section at the bottom of this page. 

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VIDEO TRANSCRIPTION

Welcome to the video on trading multiple timeframes, a very, very important topic.

One of the reasons that using multiple timeframes Forex is very important is because when you have two time frames that align, that give you a good buy signal or good sell signal concurrently, you have a higher probability of a winning trade.

Why is that? There is a market logic to it. The market logic is that you have some people looking at one timeframe, for example here we have the daily chart. This is the spiders. But the point is this is a daily chart. So you’ll have some people, for example, looking at a daily chart. And trading of off that. That’s one group of market participants that are looking for sign and why trading multiple time frames is so powerful.

TRADING MULTIPLE TIME FRAMES IS THE KEY TO PROFITABILITY

A sign that it will be pretty obvious one that a lot of people trade is the market coming up, breaking through this resistance level here, coming back down, and resistance then becoming support, and the market going up. That’s a very traditional technical analysis thing for people to be watching, and especially when it’s a significant support or resistance level. That one is because if you go over here, you’ll see that that level is of off these highs. These major highs here basic triple top. 1, 2, 3, I’ll mark that for you. So there is 1, 2 and 3, so triple top trading pattern.

A lot of people have looked at this, and the more people who see something, the more people respond to it in the future. that means you have more people buying, more people selling. therefore it’s more likely to be a self-fulfilling prophecy. And that’s really how markets work is it’s a big auction place. And the more people that are buying, selling, that’s basic supply demand and so that high then, is going to be one that a lot of people see. Again, that’s the logic of why trading multiple time frames Forex or any other market works so well.

HERE’S LOGIC BEHIND WHY MULTIPLE TIME FRAME TECHNIQUES WORK.

We are going to have some people who will take profits into that. Which is probably why you have that one red bar there. And the market goes above it, and then it comes back, and says well wait a minute, let’s see. Are we really serious about that? We got above it and going to have people be a little skittish, and then when it moves back up, even here you see these bars here for example, these bars are a bit of a hesitation, aren’t they?

You got a doji bar, you got a narrow range bar, another narrow range bar. Until we break the high above this bar, and then you get your big candlestick. And that’s when the market has real extra confidence. So this is your first significant move, and then there and then there in the step 3.

THE PROBLEM WITH THE MULTIPLE TIME FRAME STRATEGY

The problem is, so that yes that is a great pattern. We love it. however, the challenge here is, if we take this trade based on the daily chart, we are getting in, not half way past the move from this low to that high. In fact even less, and then that high and now we are all the way back down to here. So it’s a late entry. As far as I am concerned.

So the problem is the reward on it is not that great. And we want not only a high win loss ratio. That’s got a pretty good high win loss ratio on that tip of the trade. But it’s not a great risk reward ratio. It’s not too bad, but it’s not stellar. We want a better reward to risk ratio. So how do we get a better reward to risk ratio?

Well the same answer. Trading multiple time frames Forex, stocks, futures or E-minis. So let’s bring up a longer timeframe, in this case a daily chart.  In this case a weekly chart. So now I have the weekly chart on the right, and the daily chart on the left. So we’ll call the daily, the shorter time frame, the weekly, the longer timeframe.

EXAMINE THE DETAILS OF A MULTIPLE TIME FRAME TRADING SYSTEM

We have a nice setup over here on the weekly as well. Right in this area here. So trend is up, that’s the 50 period simple moving average. Got a wave 1 and a 2. So that’s a first retrace in the trend. And then we get a very nice 3 bar candlestick pattern for a bullish signal. By the way, this black line is the 15 EMA. Now as that comes in, you see early November, so it comes in around this time, right in here. Early November.

What happens on the daily chart, well we get a gap up. Boom. Nice big gap up. Okay, let me bring my crosshairs on here. So with my global crosshairs, you can see where these match up. There we go. So let’s just do it this way here. Okay, so now you can see, we got in a lot earlier, or we could have potentially got in a lot earlier, if we would have looked for this setup on the weekly chart instead of the daily.

HOW TO IDENTIFY A TRADING TRIGGER ON STOCKS, FOREX OR FUTURES

Now we want a good signal, a good trigger, if you will on the daily chart as well, but we are primarily looking for the setup on the longer term chart. By the way I am using daily and weekly charts but this can apply to any 2 timeframes. You could use an hourly chart, a 4 hour chart or shorter time frames if you want to as well.

The point is, looking for the setup on the longer term chart now, what that does, okay look where we are here with our crosshairs. I don’t know If I can keep that there or not with my drawing tools here. That’s going to work, but here was our, our entry before. Remember breaking above resistance and retracing back to support, and so we got in here, about I’ll say somewhere around 220 or so.

Now we are able to get down, we are able to get in here somewhere around, let’s say 214. 13, 14, 15, somewhere in there. Depending where you would actually take your entry, and oh my goodness, look at that, you have doubled your profits, roughly.

You know that’s where it’s gone, so far. So our initial reward, if you would have taken the setup on the daily chart as that, your reward on it if you take it on weekly chart is that plus that huge difference. Huge difference. So in this case about double. And so therefore I like to always look for setups on the longer term charts, and then look for triggers on the shorter term charts. So that I get a superior risk reward ratio.

TRADING MULTIPLE TIME FRAMES FOREX INCREASES YOUR WIN/LOSS RATIO

I also find, as we said at the beginning of the video, trading multiple time framest also increases my win loss ratio. Now the one thing that I will say is the downside of this approach, is that you don’t get as many trades. And that’s just a logical thing. If waiting for trades on the longer term chart, well there’s just not just going to be as many trades because there’s not as many bars in the same period of time.

One of the ways to resolve that is simply be trading more markets, have a variety of markets that you trade, I would trade a lot of, I do trade a lot of  non-correlated markets so that I get a lot of opportunities on the longer term chart.

So very very important principle and one of the thing that I would say too is timing is absolutely critical. So might ask, well how would you know to get in here, of course that’s a 5 wave pattern, that’s your average trend. So trend reversal there was to be expected.

TIMING IS EVERYTHING

A Timing indicator would indicate that. If you have interest in my timing indicator, I do give away that for free on the webinar, where I train you how to use it and give it to you all for free. Just send me an email at Barry@TopDogTrading.com and I’ll be happy to send you over that info. But timing is absolutely critical. And then again, trading with the trend over here on the long term chart, and trend reversal after 5 wave pattern here is actually in alignment of trade and trace. They are just different signals. But they are still both long signals.

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S&P 500 Trading: How to Get Superior Returns To the Stock Market

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S&P 500 Trading
S&P 500 Trading

S&P 500 Trading is considered the benchmark for market performance. If a fund manager can produce better returns than the S&P index, they’re considered a super star. Yet the vast majority of even professional traders fail to achieve that aim.

For this reason, many investors simply want to learn how to invest in S&P index fund and that’s fine. But what if you want to try for more?

Some learn how to trade S&P 500 options, thinking the extra leverage may help them.

In this video I’ll show you a tool that will help you in your personal quest to outperform S&P 500 Trading benchmarks.

Let me know if this video on S&P 500 Trading was helpful to you. Please leave a message in the COMMENTS section at the bottom of this page. 

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VIDEO TRANSCRIPT

Welcome to this video on S&P 500 Trading.  This one is very interesting. One of the most, really powerful things that I have come across and so let’s dig right in.

This is especially good for swing traders and ways to potentially outperform the S and P 500 which is the benchmark that most firms use and so forth. And of course as you probably know, very few people, very few funds outperform the S and P 500 index, so if you can do that, you are already in the top echelon of traders.

So here is one way to attempt to do that. No guarantees of course. But here is a way that, one technique that I use that works very very well for me. So take it, try it and here it is.

YOU CAN’T USE A NORMAL CHART IF YOU WANT TO OUT PERFORM THE STOCK MARKET

What we have here is a little bit of an unusual chart for most people I would say. And if you look over here, we don’t have any prices. We have percentages. And that’s because we are using a chart that is a percent change chart. So what it does is it starts, I have a start 90 days ago, so when I start on the left hand side of the chart. That’s 90 days ago, 3 months. And then of course it starts at 0.

I don’t know if you can see that. Really thin yellow line, but that starts at 0, so it, of course on day 1, it has 0 change. So then, as we begin, going after, the very first day that we begin, then it’s going to go above or below, and that tells us the percentage change that that market has had.

Okay, then we are going to compare, so anyway, you can tell as of this last day on the chart here, the S and Ps at 5.84 %, okay and that’s the black line. The black line on here is always going to be the S & P 500. Now, then I use another line, and I plot another market. In this case, it is the wrestle, the wrestle 2000.

USING PERCENT CHANGE IS THE KEY TO S&P 500 TRADING

We are comparing the percentage change between two markets. So here is the shift, and this is what we are looking for is the shift where now, again remember this magenta line, this purple line is the wrestle 2000, and it shoots above the S & P 500, and now it is, almost made twice as much money on a percentage basis than the S & P 500. 5%, 10%.

So that’s great, okay now that’s the easy way to read it, that’s the beginner’s way to read it, and not necessarily the best way. So you could look for simple cross of the two markets here. Alright, that’s one way.

A GREAT INDICATOR FOR THE SPX TRADING VIEW

Another way is to use an indicator like this, which is just a simple mathematical formula. It’s called the spread, or sometimes it’s called the difference, and all it does is it measures the difference between these 2 lines. So you make one as the major one and then the other as the secondary one. So what we are doing is, we are really in this case we are going to have all our charts the S&P 500 index.

That’s going to be our standard and we are looking for market that may outperform it. So we are going to have this line, have the dominant market be our comparison market. So if you look at this, what you see is that this line is going down down down down down down. And that means of course that are secondary market, the wrestle on this case is underperforming the S & P.

LOOKING FOR A “SHIFT” IN THE RELATIONSHIP BETWEEN THE S&P INDEX FUND AND ANOTHER MARKET

Then we are looking for a shift. So this will give us a little earlier reading potentially, where if we could draw for example, a trend line here, unless it breaks that trend line, get in there, and then potentially get in a little bit earlier here, instead of here. And that gives us more profits. We are getting in earlier.

Another thing that you can do is you can draw horizontal lines like this, gets you in about the same time at this point. Okay, so that’s all great. Gets in Just a little earlier. Now let’s compare with some other markets.

AN EXAMPLE OF HOW TO POTENTIALLY OUT PERFORM S&P 500 TRADING

So we could go through the major indices and go to the NASDAQ composite. Now here, again the black line is the S & P, the magenta line is the market we are comparing it to. In this case, the NASDAK composite. It’s underperforming. It’s only made 3.9% as opposed to 5.4%. And now you notice the difference line is just kind of going sideways. And it had gone up, now this looks weird.

The way we have to look at this is, that the spread, actually like calling this indicator the spread indicator. The spread between the 2 lines is that distance there which is, well bigger than that distance here. So if you would have bought here, you would have made more money than if you would have bought the S&P 500 at this time. Notice that if you bought the composite.

Even though the magenta line is still under the black, and that’s why, you know if you bought this, breaking this high here, or trend line here, you would have made money because that’s closing the spread, and therefore during this period of time, it’s catching up. Now this period of time, it’s losing ground again and that’s why this thing goes down. And the spread between the 2 lines is much bigger.

THE VARIABLES

So a lot, of it depends on when you get in, you get out, things are in flux, just like everything in the market. They are dynamic flux of up and down. And so it’s not always a long term strategy. It’s a Swing trading strategy. Which is holding overnight but for short periods of time.

Alright, let’s look at couple of other markets just out of interest. So now if we go down here, you can do this for example with, just deciding to what do I want to trade? alright, so for example right now, we have got great opportunities with currencies, but if you don’t want to trade Spot forex, you can always trade, and you can do this with Spot forex, you can do it with futures, you can do it, in this case with ETFs. So say well, maybe I want to invest in currencies.

IT’S ALL ABOUT TIMING IN THE STOCK MARKET

Well, probably not so much right now at least. Because here, again it’s all about timing, right. So here, here, here, here, here, it’s underperforming. That’s the magenta line, that’s the euro. That’s euro. And then it caught up, and then we broke that line, yes you would have made more money buying the euro, than buying the S & P 500. And then we get another shift again. Crossing of the lines here, breaking of the trend line here, and then you would be like, ‘ah no, don’t want to be in the Euro anymore, now I want to be back in and be doing S&P 500 trading.’

So how do we get some indication as to when that might occur. Well during this time, these markets are moving pretty much similar way. The S & P 500 and the emerging markets, and not seen by the spread indicator. Just kind of going sideways here. So what the opportunity is, we look for it again, the cross of the lines, but more specifically I like to look for this breakdown here, this support.

THE ALL IMPORTANT “SHIFT”

That’s the key. That’s where, okay, now we are getting a shift where in this case, the S & P 500 index is outperforming, and it’s going up a bit, but the emerging markets are going down dramatically.Then again, another breakdown occurring there. And that’s where you could go short.

To outperform the S&P 500 index, you don’t always have to be buying something that is doing better on a percentage basis. Being more bullish in other words. So you can get a little tricky and say, hey I am going to short markets that are going down more than the S & P is going up. And that’s another way to potentially, financially outperform doing the S&P 500 trading.

What did you think of this tutorial on S&P 500 Trading?
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Also I am giving away one of my favorite chart patterns that works today. Just fill out the yellow form at the top of the sidebar on the right. Once you do that, I’ll personally send you an email with first video.

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Support and Resistance Trading Strategy That Works in Today’s Markets

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support and resistance trading strategy - how to draw support and resistance lines
support and resistance trading strategy - how to draw support and resistance lines

This support and resistance trading strategy works consistently in today’s markets whether you’re trading stocks, Forex or futures. In this video I’ll demonstrate how to draw support and resistance lines that make excellent buying and profit-taking levels.

Support levels are used by technical analysts as one of the primary methods for determining where to buy and where to take profits in the financial markets.

There are tools available such as:

  1. Support and resistance calculators.
  2. Stock support and resistance websites.
  3. Support and resistance pdfs.

… and those tools can be great, but it’s best to learn how to draw support and resistance lines for yourself.

What are your favorite tool for support and resistance lines? Enter your answer in the COMMENTS section at the bottom of this page. 

PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons above, or at the very bottom of this article.


VIDEO TRANSCRIPT:

Hey welcome to this video on Support and Resistance Trading Strategy. This is Barry Burns with Top Dog Trading, and have you ever wondered how to determine when the market will stop moving in one direction or another. Or whether they will continue to move, when it will bounce, etc.

Support and resistance lines can definitely help you with that and today I am going to show you a little bit beyond the basics. So we are going to a few different details, that will help you to understand not only how to apply these but why they work. That there’s an actual reason they work. I call market logic.

GETTING STARTED WITH A GOOD SUPPORT AND RESISTANCE TRADING STRATEGY

So first of all, here we have an intraday chart. And I am going to apply what are called floor trader pivots for our first support and resistance trading strategy. So there we go and these floor trader pivots, I consider to be very very good and important support and resistance lines. So that makes the first question why do they work? They work because a lot of people use them. That’s the market logic if you will.

There’s a lot of things out there, people will teach you saying, ‘oh trade this average moving crossover, trade this, trade that.’ And that’s all fine but you should always ask what, but why does it work. What’s the market logic, in other words, when I talk about market logic, I am saying the market participants are the ones who move the market up, move the market down. And they buy, they sell, they get excited. So what about the strategy that you are being taught would actually cause or reflect what the market participants are doing, people are actually doing buying and selling. Because that’s what creates tops and bottoms and little peaks and valleys.

WHY THIS SUPPORT AND RESISTANCE INDICATOR WORKS SO WELL

The reason that floor traders work is because they have been used for many many years, and a lot of people use them. So some people say to me, yeah but that support and resistance trading strategy is just a self-fulfilling prophecy. And my answer to that is, well what better reason for them to work. Of course they are self-fulfilling prophecy. That’s why they work. Don’t diminish that. Actually put an exclamation point next to that. That’s why everything works in the market, is because people are buying or selling. And so if a lot of people are looking at something, it’s more likely to have an effect on the markets.

SUPPORT AND RESISTANCE CALCULATOR

First of all I consider this a very very good tool, using support resistance because the numbers are static. In other words, the numbers are what the numbers are, there’s a mathematical formula, you can find a support and resistance calculator for floor trader pivots on the internet. And that mathematical formula produces solid numbers. So these numbers are going to be the same numbers everyone sees. So right here that’s the pivot point or this central pivot. And everyone who uses the standard formula at least is going to have that same number. That’s why this is such a great support and resistance trading strategy.

Yesterday’s close, there is yesterday’s close. And that’s going to be the same for everybody. That’s very very important. Yesterday’s low, that another just rock solid number. The low is what the low is. And you can check the exchange websites and you can get that number, if you need the official number. Support level 1, that is again a solid number, it’s not going to be different for different people, it’s going to be the same number for everybody. So therefore market participants will look at that and it will have an effect.

HOW TO DRAW SUPPORT AND RESISTANCE LINES

And then we have what’s called the mid pivots. So this is halfway between pivot point and S1. And I use those as well. Not everybody uses those now, I’ll be clear about that. I find them very helpful. So these type of numbers are very important. You just lay them over a chart and away you go. Alright, now that’s great. Let’s talk about another type of support resistance level, to put on top of this one. Because what we’re talking about today are clusters of support resistance.

Another common support and resistance calculator used is Fibonacci retracement levels. Many traders ask me how to draw support and resistance lines for Fibonacci. I would just draw from this high here to that low there. And this measures how far the market retraces back to the original points. So in this case, we are measuring an impulse move from this high, high of the morning to the lowest low of the morning before lunch time. And so that’s it. And then it draws these percentage retracements. How far does it retrace, retrace 0% to 0. 23.6%, 38, 50, etc…  Now Fibonacci levels are also great because again a lot of people use them. However they are not as reliable a floor trader pivots. Why?

WHICH IS BETTER: FLOOR TRADER PIVOTS OR FIBONACCI LEVELS?

Because floor trader pivots are solid numbers for the day and everybody has the same numbers, they are a better support and resistance trading strategy. Fibonacci numbers are not going to be the same for everybody. Why? Because it depends on which highs and lows they use for drawing the Fibonacci retracements. So somebody might do it like I did here. Another person might do it from, oh say, here to here. Another person might draw it from a bigger term chart. Maybe a 5 minute chart, maybe a 20 minute chart, maybe a daily chart. A 60 minute chart. 30 minute chart. And so they will get different levels. And for that reason, they’re not as much of a self-fulfilling prophecy. That’s exactly why so many people ask me how to draw support and resistance lines when it comes to Fibonacci.

Here’s the best of both worlds: We draw both of them on here, and then we look for clusters. Clusters are where you get these levels coming together. Here we have yesterday’s low and the 23.6. The market came into there and here is a more significant one. 38.2 And the mid pivot. The market putting both of its little highs there. Now the market came down again through S1, came down to retest this low here.

HERE’S THE KEY!

When I went back up, now this is the key. How would we determine whether it’s going to hold S1, or not. Well it doesn’t really hold S1, it goes all the way back up here, it acknowledges it right. But it really goes higher than after acknowledging it. And it comes back up to the, what, cluster. Cluster between yesterday’s low and the 23.6 Fibonacci. By the way, lot of people don’t use this percentage. I highly recommend you do. And so now, this cluster works. Twice.

Why do clusters work? Because a lot of people talk about clusters, I am certainly not the only one who talks about that, and I certainly did not invent them. The reason that clusters work, again the market logic is that just like you’ll have lot of people looking at the floor trader pivots, and then you’ll have other people. Some people use them, some people don’t. But a lot of people use them. And then there’s a lot of people use Fibonacci. Some do, some don’t.

What you’re doing is, when you get a cluster, the market logic is to why they work, is you have two groups of people. Some are looking at the floor trader pivots, who’re yesterday’s high and low for example. It’s not really a floor trader pivot. It’s just yesterday’s low. A ton of people look at that. And then you also have another group of people, market participants who are watching the 23.6 Fibonacci ratio. So it creates more market participants watching that level and responding to it. They have that on their charts as a support resistance line. Therefore they will respond to it by either buying or selling or taking profits. The whole reason that clusters are such a great support and resistance trading strategy is because you have more people watching it and responding to it. And that’s the logic as to why these levels work.

SEE FOR YOURSELF IF THIS SUPPORT AND RESISTANCE TRADING STRATEGY WORKS FOR YOU

So hey, try it. Draw these support and resistance lines on a chart, look at a few charts, use it with other tools that you are using, and see what you think. See if you think this could be a good addition to your trading.

What are your favorite tool for support and resistance lines?
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