Advanced Concepts to Help Increase Your Success Rate

26. Advanced resistance line & Bitcoin

advancedThis is blog #26. Cash Trap was blog #4. The concepts in blog #4 are aimed at beginning traders. Blog #26 will give you some more advanced indicators. It will help you increase your success rate. Let’s start with a Bitcoin example.

The above chart uses one-week candles to illustrate the movement of Bitcoin. The resistance line started in December 2017. It did not cut through the graph until November 2020. That was 3 years later!

advancedTo the right are one-day candles. Note that there were SEVEN bearish days in Nov./20 before the graph finally permanently broke through that 3 year old resistance line.

Crypto and forex traders are by and large very professional investors. They know the product they are trading very well. They remember historical numbers.

The result was a couple weeks of consolidating around the old resistance line.

The takeaway from the above is this: When drawing your support and resistance lines, it can be very useful to go back several years. You can still feel confident that, when they are in the area of current price levels, the old support and resistance lines can help you make a successful trade.

Quiz

Below is a quiz to help you learn the main concepts of this page. Try to explain each concept to yourself before clicking on it.

Support & resistance lines can all be recent

Your support & resistance lines do not have to be from a long time ago. Sometimes, in a consolidation, all you need is a few very recent crests & troughs.
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An advanced HFX trader may use Trading View to set up these support & resistance lines for USDJPY at the very beginning of his trading session. When the 5 minute candles get between the 2 lower support lines, he will call. When the 5 minute candles get between the 2 upper resistance lines, he will put.

The USDJPY chart above has 5-minute candles. The bottom support line is from 2 very strong candles that are almost the lowest candles in this entire time image. The next support line joins two troughs of the consolidating waves. The upper resistance lines extend from the 2 highest crests of the consolidating waves.

Consolidation, candles & EMA

advancedAs you are learning these more advanced forex trading concepts, you’ll need lots of repetition to remember them all. In this Cash Trap illustration, the 5-minute candles are consolidating. A candle wick:

  1. Went right through the EMA.
  2. Touched a resistance line.
  3. Is within the upper Bollinger bands.

That’s 3 indicators at the same time. This is definitely a time to make a put!

advancedIn a related issue, let’s talk about some Cash Trap rules that you can ignore during a consolidation. In the image to the right the Cash Trap rules for beginners would say you cannot call. If you have enough points, you may put for these reasons:

  1. The trend line (EMA) is going down,
  2. The second currency is stronger than the first.

Those rules definitely apply when you at the crest of a consolidating wave. Those rules definitely DO NOT apply when you at the trough of a consolidating wave.

Now that you are an advanced trader and know so much more than you did when you first studied Cash Trap, you can ignore rules #1 & 2. You can call just like the Alert Panel tells you to. The reason would be because there are enough other indicators to tell you to call as the wave is rising. (My friend Steve, who is more advanced than me, says that he would still need a minimum of 5 Cash Trap points in order to take this trade.)

Trade frequently

advancedIn my style of trading, I like to trade exactly 1% of the amount of money in my account each time. (A rollover may increase that amount by 30%.) That way I can take advantage of the miracle of compound interest. Ideally I will have 9 trades a day and win 7 of them.

In each of these 2 spreadsheets we assume that you will start with $1000 in your account. Assume that you invest 1% of the amount of money you have in your account and the currency pair has advanceda payout of 75%.

Note that 8 trades with 2 failures will give you a 2.5% daily increase in your account. Nine trades with 2 failures will give you a 3.2% daily increase in your account. So, you want to find as many opportunities as possible that will give you an extra trade.

Caution: When you trade, use patience and discipline. Use a strategy and stick to it. Don’t take an extra trade just for the sake of having that ninth trade.

Generally speaking, you should not day trade for more than an hour at a time. Otherwise, it is too easy to make mistakes. If you are having trouble getting 9 trades a day, increase your trading sessions to 3 times a day on Mondays, Tuesdays & Wednesdays. Rest you brain for an hour or more between trading sessions.

Double tops & double bottoms (for advanced traders only)

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Note that this chart has support and resistance lines drawn in from long before these candles appeared. Nevertheless, the support line influenced the location of candles in the current trading session. Look the point A. The trend was on its way down. At point A the prices bounced up from the support line to make a double top.

Here’s an important principle. A red engulfing candle appeared at the second top (B). That means there is a high probability that the prices will tank allowing you to put and make an unexpected trade.

(Note that at point C the support line became a resistance line. The market went down again.)

If a green candle were to appear in a second bottom (as it did at point D), that would be a signal to wait for 3 more green candles. Then you could call and make another unexpected trade helping you to get to your daily goal of 9 trades. (Also try to make sure you have the discipline to wait for trades that have a advancedhigh probability of being successful.)

In this image, look at the green candle ending in point C. The green candle after the long green candle going through the resistance line looked liked a confirmation candle. I called at 155 and won the trade at 171.

Low volume vs. high volume

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The candles in area L are very small. The candles in area H are by and large much longer. L stands for low volume and H stands for high volume.

In HFX we are day trading. We are usually making quick trades. Mine are 3 minutes long.

If I’m in area L, I may switch currency pairs until I find one with higher volume. (The major currency pairs have a higher volume. These are EURUSD, USDJPY, GBPUSD AUDUSD, USDCAD, USDCHF & NZDUSD.)

Or I may just trade at a different time of day. (My greatest success  with predicting the markets is 9 am – noon and 6 pm – 9 pm Pacific time.)

With a low volume, it is just too hard to accurately predict price movement. You need lots of movement in the forex market to make much money day trading.

Multiple candle times (advanced idea)

My trades are always 3 minute trades. So, I look at the 1 minute & 5 minute candles to help decide the direction of the market. Sometimes it is useful to add 15 minute & 1 hour candles to that mix. They will help me to decide upon the support and resistance lines.

I use the horizontal ray within Trading View to draw the support & resistance lines. I make sure the support line is green & the resistance line is red. (Note that sometimes a support line can change to a resistance line after a breakout. The opposite also is true.)

If I were to consider this trade, after I had looked at all of the horizontal rays, I think that I would have gone to the 5 minute chart and waited for a candle to reach the 1 minute resistance line. Then I would have looked for a green confirmation candle to form. If it did NOT and if there were 5 or more points on Cash Trap, I would have taken the trade for a put. This is explained in more detail below.

Look at the 5 minute chart below. The 4 charts above were part of this chart.

The yellow line shows a down trend. It looks like that may have turned into a consolidation. To confirm that, I would have waited for a candle to get close to the lower support line. If that would have been followed by a significantly long green candle, I would have taken this trade for a call. If the price went below my entry price, I would have rolled over.

Here’s one little bit of advanced knowledge: People like round numbers. Suppose your support line suggests that you should call at 803. You may want to move your support line down to 800 and make a call trade at 800. Multiple traders may have decided that they will call at 800.

Divergence

Divergence is one of the earliest indicators of price reversal.

Notice that my cursor took me to 50.01 in the RSI chart here. The takeaway from the chart is this: When the RSI graph is below 50%, you in a downtrend. When the RSI graph is above 50%, you are in an uptrend.

(Note that if you are using TradingView, go to tradingview.com > Markets > Currencies > Major or whatever > Select currency pair > Full feature chart > Indictors & Strategies > Stochastic RSI. Then you will get the RSI charted added below your candle chart.)

If you want to use Hourglass (Cash Trap) instead of Trading View, you look to see where the solid lines entered the dashed line area and then went back out again. Where it goes up through the green dashed line, that indicates an uptrend is starting. Where it goes down through the red dashed line, that indicates a downtrend is starting.

Structure breaking candles

advancedAfter you see 3 red or 3 green candles looking like a trend, you can have an amazing trading opportunity. Start looking for structure breaking candles. They are candles that have bodies with tops higher than the previous wick. (For red candles it would be bottoms lower than the previous wick.)

In this image the body top of B is higher than the wick of A. The top of C’s body is higher than the top of B. The top of D is higher than the top of C’s wick. The top of E’s body is higher than the top of D.

Thus B, C, D & E would all be trading opportunities. You may lose trade E. But, winning 3 out of 4 can do a lot to bring you to your trading goal.

There are 2 other indicators that confirm that you have a very favourable structure breaking candle opportunities:

  1. Are the structure breaking candles hugging the Bollinger bands? (Upper for green candles & Lower for red candles.)
  2. Is the RSI above the 60% area for green arrows? (Below 40% area for red arrows.)

Predicting breakouts (for advanced traders only)

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Look at this image from Cash Trap. Notice the long period of time the lines have been above the 60% dotted line in both the Stochastic and the RSI. If they stay up there, look for a green breakout candle through a resistance line. If that is followed by another green confirmation candle, I would make a call trade. (That is assuming there were 5 points in Cash Trap.)

The opposite is true for lines staying below the green 40% dotted line for an extended period of time. Look for a red breakout candle through a support line. If that is followed by another red confirmation candle, I would make a put trade.

Now look at that trending candle chart here. There are 4 resistance lines. At each point where a green candle breaks though the resistance lines (A, E, F & H), there is an extended period in which the Stochastic is above the red dotted 60% line.

At C there is a breakout followed by a fakeout where the candles quickly go back beneath the resistance line. B & D are retest points where the candles went back to the original resistance line.

F is a legitimate breakout and G is a retest. At point I the trend is over.

Note how on the candle chart to the right the long green candle broke through the resistance line at A. Notice how the Stochastic/RSI below that breaks above the 60% line and is up there throughout the trend.

On the chart with the red resistance line at A, the time above the 60% line can help you predict that continuing uptrend and make several 3 minute call trades.  On the chart to the left note how the uptrend takes the Stochastic/RSI above the 60% line. Also note that a retest coincides with a Stochastic/RSI at the 50%  point.

Also know that you can expect the retests to be at or close to the 50% point.

Read an entire blog post on the breakout retest strategy.

How to save TradingView charts

advanced1. After you have marked up a chart, click on the dropdown arrow to the left of the gear icon.

2. Click on Rename.

3. Name your charts with a descriptive name and Save.

4. Click on the dropdown arrow and select Autosave On.

5. Next time you work on your charts, click on the dropdown box and click Last Chart Layout.

Institutional traders

There are three main financial markets in the world. They are in Tokyo, London & New York. In the first hours after each of these markets are open, banks and other huge players invest huge amounts of money.

As you may recall, a large number of investors present at any given time can mean long candles. A few unexpected long candles can make market prediction impossible.

I live a few times zones west of New York. I don’t want to be affected by these long candles. So, I usually trade somewhere between 9 am and noon or else between 6 pm and 9 pm Pacific time.

People like round numbers

Another advanced consideration is this: Because people like round numbers, a support or resistance line is often better if it is a number ending in two zeros.

Consider the animated GIF here. The support line was at 294. So, I raised it up to 300.

When to enter a trade

The green text below briefly tells what to look for when deciding whether or not to enter a trade.

  • Pivot Points
    • The pivot points are the crests & troughs of each wave.
    • They are the points at which prices stop & change direction.
    • They could become future support & resistance lines.
  • Technical Indicators
    • Mathematical tools that analyze prices.
    • Moving averages, Bollinger bands, Trend Lines, RSI, etc.
    • Some investors use these tools to consistently win more than 80% of their trades.
    • Don’t get overwhelmed by thinking you have to learn most of these tools. It may be good enough just to have a very good understanding of several of them.
    • Oscillating tools such as the RSI help to show a change in momentum.  Get to know how to use the RSI very well.
  • Trade Entry Reasons
    • Arrows like you see in Cash Trap.
    • Confirmation candles.
    • Candlestick patterns.
    • RSI Key Numbers (60, 50, 40).
    • Breakout Retest
    • Divergence
    • Etc.

Break of structure candles

Green break of structure candles are candles whose bodies are higher than the previous wick. Red break of structure candles are candles whose bodies are lower than the previous wick.

In this image, candle C breaks through a previous support line which has become a line of resistance. This suggests a possible up trend. Indeed, we have one.

D, E, F, G, H & I are all break of structure candles. The top of their bodies each is higher than the wick of the previous candle. This is a long up trend.

Each of those 6 candles is a trading opportunity! Each one represents a time to enter a trade.

 

More advanced trading info

Steps 1-5 HFX Favorite Videos by Brandon Boyd & Dr. Josh Lee in the IM Academy

Video about support & resistance

 

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