Identifying Dynamic Support and Resistance Levels

 

This week we’re going to try identifying dynamic support and resistance levels. Remember when we tackled   Identify Support   and Resistance Levels Using Price Action Analysis?  Well, dynamic support and resistance levels are what I call the supersonic siblings of the static support and resistance levels that we covered earlier. They reflect the constant change seen on breakouts of support and resistance levels.

Although static models such as pivot lines, trend lines and channels are useful for price action analysis, they don’t adjust themselves based on the market action. Dynamic support and resistance levels reflect that evolutionary change. They are able to self-adjust as price action changes.

So we’ll look at a couple of tools that are popularly  used for dynamic support and resistance assistance.

The first tool is:

Moving Averages

As you are well aware, moving averages   calculate the average price of a currency pair over specific time frames. Ask most traders, and they’ll tell you that moving averages is their favorite indicator. Why? Because moving averages is a better reflector of the speed of light changes occurring on the market. With moving averages, you put in your  order when price dips and touches the moving average.

Now since we’ve already covered moving averages on this blog, we’re not going into much detail. So for the rest of you if you want to refresh your knowledge on moving averages, or you’ve stumbled in here wanting to know about moving averages, check  on  We’re Moving Averages Part I and  We Are Moving Averages Part II.

Let’s take a look at a 15 minute GBP/USD chart using the 50 EMA Moving averages can also act as dynamic support and resistance

Looks like the 50 EMA is holding its own fairly well. Whenever it took a hit from the pair, it resisted strongly, forcing price to bounce back like a ping ball. Keep in mind that there is no such thing as a perfect bounce. There are times when price will miss the barrier a little bit before heading back in the trend.

There are also times when price will say “The heck with this. Let me just blast through the line altogether.” What you could  do in this situation is that you set up two moving averages , and ONLY put in a buy order when price hits the middle of the space between the two moving averages.

Let’s take a look at the 15 minute GBP/USD chart, this time using the 10 and 20 EMA’s.Area between moving averages can be a zone of support or resistance

 

As you can see price climbs past the 10 EMA by a few pips. But then it proceeds to take a tumble afterwards. The whole idea is that moving averages should be treated as zones of interest just like the traditional support and resistance levels. Why? Because that’s where the price action is. Thus, the middle space between moving averages could   be considered a zone of support and resistance.

Which brings us to a burning question?

Can Moving Averages Be Penetrated?

Of Course Yes. Just like any other support and resistance level, moving averages can also break and fold. Let’s take another look  at the 50 EMA on the the 15 minute GBP/USD chart.

As you can see, the 50 EMA is holding firm as GBP/USD keeps ping ponging off the barrier. Unfortunately, repeated body punches sustained by the 50 EMA forces it to bend over, creating the escape the bulls need to head for the hills. Price, feeling so confident all of a sudden pulls back and decides to hit the 50 EMA some more at the support level. Unfortunately for the bears, they run into a bulwark of a 50 EMA at the support level.

Because of the dynamic persona of moving averages, you don’t need to stare at your PC all day. Why? Because it’s always changing. All you have to do  is something popularly termed “Set and Forget.: You set the moving averages on your screen and go grab a cold drink outside the house while the moving averages spot potential  resistance and support trading zones. In other words, GO AND SMELL THE ROSES.

The next tool is

Price Channel

The price channel is another useful tool as far as dynamic support and resistance levels go. The price channel is similar to the traditional trend line, except that it has another trend line running parallel to it. So within the layout of the price channel, you have well defined limits for tops and bottoms.

I guess the first question we need to ask is:

How Do We Trade The Price Channel?

We first start by drawing a line on the chart. To do that we start by identifying a price in the price action where the tops and bottoms are moving with similar gusto. If your eyes are glued on the uptrend, you can draw a line through the tops and bottom. Then draw another line parallel to the first line, which passes through the tops of the price action. If you are able to accomplish these two procedures, you have yourself a price channel.

Let’s take a look at how the price channel looks like on the USD/JPY chart

Channel-Trading-Indicator

 

Here is a typical trend line drawn on a bullish trend. This bullish characteristic is confirmed by the lower level of the channel passing through the bottoms of the price action. Notice the upper level is parallel to the lower trend line, connecting the diagonal boundary where the price action takes place.

Let break this down to the bearest minimum. The lower level is the support level, while the upper level acts as the resistance level. The black arrows indicate the support and resistance   actions on the price channel. See how price dips to the lower level  of the channel and launches off the barrier like a ping ball? Next the price tries to reach out and touch the upper level of the price channel and does its ping balling routine there also.

 

Entry and Exit Trading Points

As you can see, channels are very useful for marking entry and exit trading points. When the price channel starts acting bullish, you look to make your trade once the price ricochets off the lower level. Then hold your trade until the bulls reach out and touch the upper level of the channel. Once the price bounces off the upper level, you can choose trade the bearish move to the lower level. But I wouldn’t make that choice if I were you, since the price moves are relatively smaller than the general trend moves.

The Moment Price Breaks Out

At some point, the price channel ability to withstand the blows of the bulls is bound to give way. And when that happens, the price, aided by the bulls shoots for the mountains through the upper or lower level. It then ends its run with a strong closure at the lower level. Let’s see an illustration of the price channel breakout

 

Channel-Breakout

As you can see, price initially stays in its lane. But then it suddenly breaks through the lower level (as indicated by the red circle). And here, the bearish influence is everywhere, as evidenced by the strong presence of the bears. The bearish presence also accounts for the price’s dip in value. If you want to kno more about price channels, look up  We Are Going To Talk Channels.

Last but not least is:

Linear Regression Channel

. Now the linear regression channel is similar to the price channel except that it has a middle line which is a median price value. Now avoid unforeseen collisions, the upper and lower levels are clearly distanced from the median line. You can also use this line to facilitate trades going in the direction of the prevailing trend. Let’s look at a pic of the USD/CHF pair

Linear-Regression-Channel

This, ladies and gentlemen is the Linear Regression Channel. Nicely lined are the upper level, lower level, and the median line. The black arrows points to price massaging the median line at both support and resistance. But watch when price pierces the median level. It triggers a shift to the opposite channel line. The Linear Regression Channel is also useful for confirming trades, especially breakouts. Simultaneously, you can also use the median life to execute exits from trades.

If you want to know some more about trading the Linear Regression Channel  look up Trading Linear Regression Channel.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need to Know Ten of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Don’t let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s  a wrap for “Identifying Dynamic Support and Resistance Levels ”   As I said earlier, Dynamic and support resistance levels are a relection of the speed of light changes occurring on the forex market. Thanx to tools such as moving averages and price channels, you can better the capture the price changes,breakouts and other moves happening on the price chart.  Next time we’ll tackle another exciting topic on the forex trade.

If you really want to understand understand dynamic support and resistance levels, I suggest you read up on their static sibling Identify Support and Resistance Levels with Price Action Analysis

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Trading Linear Regression Channel

Hello

We’re gonna look at “Trading Linear  Regression Channel”.  Don’t panic! We’re not doing Michael Jackson’s moonwalk here. We’re going to look at an important trading tool called the regression channel. This tool is very popular among traders as far as price action analysis is concerned. Without wasting too much time,we’re gonna do the following: We’re going to look at what this regression channel is all about. Then we’ll transition into looking at the three lines that make up the regression channel,and finally we’ll end with how to trade the regression channel. But first,

What exactly is a Linear Regression Channel?

Well a linear regression channel is a technical indicator consisting of three lines. Well, that’s not all,if that’s what you’re thinking. The linear regression channel outlines the upper and lower limits of a live trend. It helps traders hunt for the best entry and exit points available  even if the price gives traders mixed signals. Which brings us to:

Structure of the Linear Regression  Channel

Now the linear regression channel is structured in three parts namely, the Upper linear regression line, the lower linear regression line, and median .  Now the upper linear regression line signifies the top of a live trend with the lower and middle line lines running  parallel with the linear regression line.

The lower linear regression line is pretty self-explanatory. The lower linear regression line marks the bottom of a trend.Now how does the lower linear regression line  come about? The lower linear line  comes about by cutting through the most obvious bottom trough of the trend. Of course the upper and middle lines trudge along as they run parallel with the lower linear regression line.

Last but not least, the median line is what we’d call the base of the linear regression channel.  It’s more like the conduit of the entire regression trading process in that it is draws the midpoint of a trend. So to avoid colliding head on with this trend the upper and lower lines are evenly distanced. They keep as far away from the midpoint as possible.  Let’s see the Linear Regression channel in action

linear-regression

There you have it. The linear regression channel indicator in all its splendor. You can see the upper line, lower line and median line, all nicely lined up. The black arrows point to the top and bottom projecting the most in the trend. While, of course, the three blue lines point nice to the upper lower and median lines.

Now there are two types of  regression channels- namely the bullish and the bearish regression channels. These two channels  have built their reputations based on the linear regression slope.  We’re going to take close look at both regression channels.

Starting with:

Bullish Regression Channel

The bullish regression channel makes itself known on bullish trends.  When you see the bullish regression channel setting up shop, that should tell you two things: price is increasing, and the slope is heading upwards. Let’s see the bullish regression channel in actionbullish-channel

Ladies and gentlemen, here is the is the bullish regression channel in the flesh. As you can see, the trend is bullish with the bulls in full flight with the regression channel in an upward slope.

Last but not least is:

Bearish Regression Channel

The bearish regression channel is the complete opposite of its sibling the bullish channel. Unlike the bullish channel, the bearish channel makes its home on  bearish trends.  In  this scenario,the bears drive down the price, causing the slope of the linear regression to  dive downwards. So basically everything is slaloming downwards in the bearish scenario. Let’s see the bearish regression channel in action.bearish-channel

This is none other than the bearish channel. As you can see the trend is bearish. And when you have a bearish situation,it can only mean one thing:the bears have come out to play. And when this happens, the  channel slopes downward as illustrated above.

I guess  the question burning on everybody’s mind is:

How Do We Draw The Linear Regression Channel?

There is not much to it.  Just draw the linear regression channel.Okay, on a  serious note, pick the starting point of a trend and strecth the regression indicator for all its worth until it reaches and touch another significant point of the trend. Meanwhile,the three lines will correct themselves according to the most obvious top and bottom of the trend.Let’s see the drawing of the regression channel in action.drawing-regressionchannel

Right in front of us is the live drawing of the regression channels in an uptrend.  And   as you can see, the regression channel(on the left) starts from the bottom of the uptrend and touches the engulfed candle at the top of the uptrend. A word of warning though. Dont ever force a regression channel to fit a trend. Do  so at your peril.

What to Look For in Regression Line Analysis

Now that we’ve drawn our three lines, it time to analyze these lines. The main feature you need to keep your eye out for when analyzing regression lines is price reaching out and touching these lines. Whenever price caresses the upper or lower line  a sea change occurs on the chart,  be it uptrend or downtrend. And like I said,the three lines tend to correct themselves depending on how prominent the tops and bottoms of the trend are. Let’s take a look at such an illustration in an uptrend

linearregression-analysis

We’re looking at price action in a bullish regression channel. The black arrows at the bottom of the channel indicates the price action being contained within the channel.

Now let’s take a closer look a the lower line of the regression channel  indicator. If you have the   vision of the hawk, you’d notice a trading opportunity through the freshly created   bottom on the lower line. And  guess what your trading position should be:GO LONG OF COURSE. This is a bullish trend,and naturally your trading inclination would be to go long. You should be able to ride the trend’s momentum until you reach the top of the trend where the other black arrow is situated.

Take a closer look at the lower line, and you see a major reversal taken place.  The bears have taken over the show after putting so much pressure on the bulls. They’re basically saying “Anybody for a slalom ride?” Also take a close look at the pin bar formation followed almost immediately by another bear breakout at the low regression line. And if you want to know more about the pin bar formation,check up on Pin Bar Strategy – How To Trade It.

I guess the question everybody is burning to know is:

How Do I Enter Linear Regression Trade?

Wellif you’re dealing with a bullish trend,  buy  the pair once the price ricochets (bounces)   a second time off the lower line of the regression indicator. The second bottom at the lower line should signify the uptrend and announce the bulls presence. Therefore make your trade at this time, while the bulls’surge is on.linearregression-analysis

See how  the second bottom forms at the lower line where the second black arrow is pointing. Make your trade once price bounces off that area.You would most certainly want to take advantage of this bullish surge while you can.

I guess the next appropriate question will be:

How Do I Enter Bearish Linear Regression Trade

Well entering a bearish linear regression trade works similarly to that of entering a bullish trade. The only difference being that the bearish regression trade works in reverse.By reverse,I mean  a reversal occurs with the bears dominating things Let’s take a look at the situation.Structure-of-the-Linear-Regression-Channel-IndicatoYou can enter your trade at the second  bounce going down instead of going up-.See how the second bottom forms at the lower line.Excep that it forms towards the end of the slope,instead of the beginning. And just like I said for the bullish trend, you absolutely want to take advantage of this bearish slalom while you can.

Worried about safeguarding your trading position? I guess your question will be:

Where Do I Place My Stop Loss?

Before I even get started,you’d be crazy not to place a stop loss when trading linear regression channels. Your trading account wont forgive you for such negligence. But anyways, back to the question: Well, if you are  trading a bullish linear regression setup  below the high created by the high bounce from the upper line of the regression indicator.

Going the opposite direction, if you are trading a bearish setup, place your stop loss above the high created by the high ricochet from that same upper line of the regression indicator. Let’s take a  look at a bullish linear regression channel illustration.

Linear-Regression-Trading-Strategy-1-

As you can see this is a bullish line regression channel.Take a close  at the two bottoms labelled  numbers 1 and 2. These two bullish candles create the regression channel indicator. Such that when price takes a high bounce for the second time,we connect the two bottoms, using the  regressive indicator and prepare to go long(buy). However, to protect your trade against an unexpected U-turn by the market, place a stop loss below the new low.

However, some serious action is taking place at the median line(middle line). The bulls surge through the medial line, creating a swing in the process. Then the price,with the help of the bulls expand to the upper and

Upper  level. And when that happens, listen to that little inner  voice when it says “Close Your Trade.”

Watch the second trade form when the bulls reach the lower backyard  of the regression channel. The bullish candle goes up a notch once after touching the lower line and bouncing off the lower line. Look to enter a trade and then place  your stop loss below the freshly created bottom.

Once the bulls bounce off the line ,see how  these  head for the hills and manage to reach the upper echelon of  the Linear Regression Indicator with rapid speed. Once the bulls reach the upper line,it’s time to close the trade.

However, much to our surprise the unexpected happens. The price makes a U-turn back to the lower line o the Linear Regression Indicator. Notice the price bounce off the lower line again. What does this mean?It means we’;ll have to go through the process all over again. We buy the currency pair and place  our precious stop loss below,you guessed it,  the freshly created bottom. Then we hold our horses until the bulls reach the upper echelon(level) of the linear regression indicator.

Take Profit Rules In Linear Regression Channel

The way I see it, you have two options as far as take profits trading the linear regression channel is concerned.  First,you can put your trade on hold until the price hits the opposite Linear Regression level, as discussed earlier.

The second option would be to hold your trading horse until the price action pierces the median(middle line) opposite the dominant trade. What does it mean? If you decide to go long, until the price breaks the median line and heads downwards. But if you decide to close the trade when price dips below the median line and heads for the hills.

Oh, and by the way! You’d be commiting suicide If your trades arestill openwhen the price break the channel in the opposite trend. If a breakout occurs, just close your trade and get ready for the countertrend.

Now let’s look at a an illustration of these take profit rules using a bearish linear  regression exampleLinear-Regression-Trading-Strategy-2

 

The two numbered points are the bases of the Linear Regression Channel. See how price bounces off the upper line for a secondtime. /In such  a scenario, look to go short. You then protect your trading position with a stop loss above the freshly created top, as inidicated by the red horizontal line.

Also ,see how price takes a dip and goes below the median line. Since you want to protect your trading position at all costs, you’d do well to close the trade once the bulls break the median line from below.

And , just like the bullish regression line example,earlier, price comes back to hit the upper echelon of the linear regression . This bearish bounce off the upper line suggests that you enter a short trade, and, you guessed it, placing a stop loss above the freshly created top.

Take a close look at price dipping below the median line and touching the lower level. If you’re tempted to jump into the fray,DON’T! Wait untiluntil price makes a switch above the median line and then close the trade.

Have you noticed how the bears came back to create another bounce by hitting the median line for the third time? Seems the bears enjoy this hit and run tactics. Don’t they? Unfortunately you’d have to sell the currency pair and place  a stop loss  as the image suggests.

If you want to know some more about trading channels look up We Are Going To Talk Channels.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s  a wrap for “Trading Linear Regression Channel. ”   As I said earlier, trading the the linear regression channel is very valuable to traders as a price action analysis too. You can  sure get some exciting trades using this tool even if the market tries to throw you off the tangent. Once you catch these opportunities on the regression channel, you are good to go.

Next time we will look at Trading Dynamic Support and Resistance Levels, the sibling of the static  Support and Resistance Levels.You may want to look up Identify Support and Resistance Levels With Price Action

Looking to open a forex trading account?

Sign up with EasyMarkets and Get a free eBook- The Beginners Guide to Forex Trading