As the saying goes, “the trend is your friend.” But how do you know when the trend has come to an end?

There are 7 common methods that professional traders use to identify the end of a trend. They are: support and resistance, parabolic moves, using trend indicators, Elliot Wave, price action patterns, momentum analysis and trader sentiment. 

Remember that nobody knows exactly when a trend will end, but these methods will increase your chances of exiting a trade with a healthy profit.

First, I'll show you the basics of how to identify a trend, because you cannot define the end of a trend, if you don't know that you're in a trend to begin with.

Then I'll get into the 7 ways to identify the end of a trend.

These methods can be used in any market. But as always, be sure to do some testing and figure out what works best for you and the market you trade.

You can use the one method that you like best, or use a combination of methods.

How to Identify a Trend

In order to spot the end of a trend, we have to know that we are in a trend first. So let's take a minute to define what a trend looks like.

There are many ways to define a trend, but I like to keep things simple. I'll give you the 2 most basic ways to tell that you're in a trend.

Use the method that makes the most sense to you.

Price Action Trend

First, you can just look at the price action and look for higher lows in an uptrend, or lower highs in a downtrend. The angle of the move will also be steeper than usual.

Here's an example of a bullish trend in the EURUSD. Notice the sharp upward angle, where every pullback is higher than the previous pullback.

The pullback levels are marked with a blue line.

In a downtrend, you'll see the opposite. Each subsequent high is lower than the previous high.

Indicator-Based Trend

Second, you can use multiple moving averages to define a trend. A common set of moving averages that traders use is the following:

• 20 EMA (blue)
• 50 EMA (green)
• 200 EMA (purple)

In an uptrend, the moving averages should be stacked in the following order, from top to bottom: 20, 50, 200.

When there is a downtrend, the moving averages will be stacked the opposite order. Here's an example.

You can use the moving averages as entry and exit points for trades. I'll get into how to use a moving average to exit a trend in a bit.

But for now, understand that moving averages can be a great way to visually identify when you're in a trend.

Support and Resistance on Higher Timeframes

The easiest way to predict when a trend might come to an end, is to look at support and resistance levels on a higher timeframe.

For example, if you're trading on the 1 hour chart, you might look for levels on the daily chart. If you're trading on the daily chart, you can look for levels on the weekly chart.

Be sure to look for major levels and don't get caught up in every single minor level.

I like to use a 4 chart setup to track levels on multiple timeframes at the same time. This way, I don't miss any levels before entering a trade.

I track the following timeframes:

• Weekly
• Daily
• 1 Hour
• 6 Minute

Here's what my setup looks like. TradingView makes it easy to do this.

It can be done on MetaTrader, but it takes a lot more work to set up templates and workspaces.

When you see price approaching a major level on a higher timeframe, be prepared to exit, or at least take some of your profits off the table.

Parabolic Moves

Extreme moves, especially to the upside, are not sustainable. Therefore, whenever price goes straight up, that means that there will eventually be a correction.

This principle works especially well in the cryptocurrency markets and with penny stocks because they are prone to “pump and dump” moves.

Here's an example from a penny stock.

But you can also find parabolic moves in other markets.

Forex currency pairs can have parabolic moves in either direction because the currencies in each pair are inversely correlated.

So if one currency has a strong move upwards, then the pair could have a strong move downwards, depending on how the pair is quoted.

When a trend does go parabolic, you don't know exactly when the move will end. Therefore, a good way to exit is to scale out.

Split up your position into 3 or 4 levels and exit part of your position when price hits those levels.

For example, let's say that you have 1,000 shares of stock and you want to break up your exit into 4 pieces.

When price hits each of the levels on the chart, you'll exit 250 shares. If price misses a level and drops to a previous level, then that's probably a good time to get out too.

This is an illustration of how you might have exited on this parabolic move.

Use an Indicator

As I mentioned in the beginning, indicators can be a great way to identify the end of a trend. There are a ton of indicators out there, but I'll show you 2 popular ones.

The first one is a series of moving averages. You can enter on a bounce off the longest moving average and exit on a close on the other side of the shortest moving average.

In this example, you would exit this downtrend when price closes above the shortest moving average, which is the 20 EMA.

Another indicator that you can use to exit a trend is the Parabolic SAR (PSAR). Many traders trail their stop loss by 2 or more PSAR levels.

That gives price some room to wiggle around so you don't get stopped out easily. Here's the same trend above, but with a PSAR indicator.

You can compare the differences and see which one you like best.

Elliot Wave Theory

In my opinion, Elliot Wave analysis doesn't work well as a primary trading method.

Some traders would disagree.

I feel that some traders put too much faith in the wave count and try to analyze every single move through that lens. Where each wave begins and ends can be quite arbitrary, so it's not a reliable way to trade.

However, I do consider it a very useful way to estimate when a strong trend could come to an end. If you know that the trend could end on the next push, then you'll be prepared to take your profits off the table.

So I would encourage you to count waves in a strong trend.

Elliot Wave Theory proposes that every major move has a a series of 5 waves. There are alternating impulsive and corrective waves.

The numbers mark the end of each wave.

If you want to learn how to count Elliot Waves, this is a good place to start.

You can also read the best book on the topic by Frost and Prechter, which can be found here.

Price Action Trend Reversal Patterns

There are several price action chart patterns that you can use to potentially predict the end of a trend.

Here are the ones that are easy to spot and can be found in most trading books.

Double Top / Bottom

This is an easy pattern to spot. You're looking for price to hit a level twice and there is usually a sharp move between the 2 pushes.

This is a good example on the AT&T chart. A long downtrend ended with 2 touches of a support level (orange line).

If you were short this stock and stayed in after the double bottom, then you would have given back a lot of profits on the retracement after the double bottom.

The Batman Chart Pattern

This pattern is a variation of the double top/bottom. It's a slight difference worth mentioning because this pattern is a little more reliable, in my opinion.

There is a double touch of a level, but instead of 2 successive touches, there is a very noticeable consolidation area in the middle of the 2 touches.

Here's what it looks like when it happens at the end of a trend.

The second touch is usually lower than the first touch at a top, and higher than the first touch at a bottom.

To get more details on this chart pattern, watch this video.

Head and Shoulders

A head and shoulders formation can be thought of as a triple top or bottom. Price tries to break through a level 3 times, then fails.

What makes this pattern easy to spot is the fact that the first and third pushes are not as strong as the second push.

So it looks like the outline of a person with the head in the middle and the shoulders on either side.

This CADJPY chart shows a good example of a head and shoulders top. The shoulders are marked with the blue arrows.

Here's and example of a head and shoulders bottom at the end of a downtrend.

Rounded Top / Bottom

A rounded price structure is like a large ship turning around.

It's gradual, has a wide arc and takes some time to complete.

But once you see this type of move starting to happen, it can be a great clue for you to exit your trend trade.

Here's an example in gold.

In order to see this pattern, you have to zoom out a little and look at the bigger picture. There are no specific characteristics here, like the patterns that I previously mentioned. 

It's just a rounded formation that can have a few spikes and looks a little disorganized.

But if you can identify it as a rounded top or bottom, it can help you get out before you lose a lot of your gains. You might even be able to open a trade in the opposite direction.

Extremes in Trader Sentiment

This is a method that isn't talked about often, but it can be a great way to figure out what professional traders are doing.

The common stat floating around the internet says that about 90% of aspiring traders fail to become consistently profitable.

That might not seem like useful information, until you realize that if you can trade in the opposite direction of the average retail trader, you'll have a very high probability of making money.

There are a couple of statistics that capture positions of both retail traders and professional traders.

The Commitments of Traders Reports

A commonly used metric is in the futures markets is called the Commitments of Traders Report (COT). It tracks the open interest positions of commercial and non-commercial traders.

Here's a description of the report from the CFTC website:

“These reports have a futures only report and a combined futures and options report. Legacy reports break down the reportable open interest positions into two classifications: non-commercial and commercial traders.”

So when the commercial (larger) traders are mostly on one side of the market and the non-commercial (smaller) traders are mostly on the other side, that can be a good time to do what the commercial traders are doing.

Retail Forex Trader Positions

Another trader sentiment indicator was created by my friend Walter Peters. As he has mentioned a couple of times on our Think Profit Podcast, he knows people who started a hedge fund based on trading in the opposite direction of losing traders.

The fund was very successful, but the hardest part was getting traders to continue trading because they would lose money and give up.

Based on this information, he created an indicator that aggregates the net positions of retail traders across several different Forex brokers. When the retail trader sentiment goes in one direction, he looks for low-risk chart patterns that will allow him to enter a trade in the opposite direction.

For example, 83% of retail traders are currently short the GBPNZD currency pair. So it might be worthwhile to look for a long trade.

But it depends on what the chart looks like…

The current chart is in a strong uptrend. So it might be worth looking for a long trade on the next pullback.

Like anything else, don't start trading this method without testing it. Track it over a few months and take a few demo trades.

The bottom line is to look for opportunities to either trade with the big traders, or trade against retail traders.

When either of those groups have a lot of positions on one side of the market, that give you a clue of what may happen next.

Slowing Momentum

Another way to figure out when a trend could be coming to an end is to look at the momentum of the price action.

At the beginning of a trend, there are strong moves with big candles. As a trend matures, the candles get smaller and the pushes have less drive.

Here's an example of momentum slowing at the end of a trend. Notice how price starts off strong, but then ranges, then eventually fails.

You can also use a trailing stop EA to get you out of a trade. When price momentum starts to slow down, the trailing stop loss will “catch up” to price and close the trade before price reverses too much.

We have a MetaTrader 4 EA that trails the stop loss on a trade by risk multiple.

There are also other methods like using a 3-bar trailing exit.

Tutorial Video

Here's the video that demonstrates the concepts mentioned above. Be sure to watch the entire video to learn all of the methods.

Final Thoughts on Spotting the End of a Trend

The big money is made by holding your trades when there is a strong trend.

Nobody knows exactly when a trend will end, but using one or more of these techniques can help you ride every trend for as long as possible.

Like all other trading methods, you need to practice and test, in order to use them profitably.

Get started by identifying the strategies that make the most sense to you. Then backtest each strategy and find out how well it works in the markets you trade.

The post How to Identify the End of a Trend appeared first on Trading Heroes.

Traders that use technical analysis often use chart patterns to identify potentially profitable trading opportunities.

This cheat sheet will help you remember the common chart patterns that traders use.

It helps to print it out and tape it to your monitor or put in your notebook.

That will allow you to reference it while you're trading or when you're testing new trading strategies.

This post will give you the downloadable PDF, 2 bonus chart patterns, and most importantly…the best way to find out if these chart patterns actually work.

Here's what the downloadable PDF looks like.

Chart Patterns PDF (Free Download)

This handy PDF will help you remember these chart patterns. Click the button to download the PDF.

Bonus Chart Patterns

Here are 2 bonus chart patterns that you probably haven't seen on other lists. It's included in the PDF above, but we have provided a more detailed description below.

Batman Chart Pattern

This is a variation of the double top/bottom. The only difference with a Batman is that there is a period of consolidation between the tops/bottoms.

When the market consolidates like that, it shows that the market tried to accumulate and move higher, but was not able to.

So if the second peak shows a sharp rejection of the previous high/low, then there's a good chance that price will reverse. Here's a bearish example.

You can get a detailed description of the Batman chart pattern here.

3 Drives Chart Pattern

A 3 Drives pattern consists of 3 higher highs, or 3 lower lows, followed by a reversal.

In this chart pattern, traders try to push price in one direction 3 times, but if there isn't enough momentum, the push will fail and the reversal tends to be swift.

To get a more detailed description of the 3 Drives pattern read this.

Final Thoughts on Chart Patterns

Remember that chart patterns cannot be traded in a vacuum.

Not every instance of a chart pattern will guarantee a good trading opportunity.

But how do you know which chart patterns are high quality and which ones are low quality? How do you know if a chart pattern will work with your trading personality?

The best way to do this is to test chart patterns until you understand their probabilities and profitability. This guide will show you how to get started with the testing process, so you can find out what to realistically expect from the chart patterns above.

The post Chart Patterns Cheat Sheet (Plus Bonus) appeared first on Trading Heroes.

If your trading personality is a good match for trend trading, then this post will show you how to get started.

There are several different methods for determining a trend.

The most important thing to remember is that you should find the one that works best for YOU.

The trend direction in Forex trading can be determined by using a trend following indicator or by analyzing price action. Frequently used trend following indicators are moving averages, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). Trends can also be identified through price action analysis by drawing trendlines or observing progressively higher lows, in an uptrend, or lower highs, in a downtrend. 

In this post, I'll get into more details on how to use these tools to determine a trend the currency markets. I'll also show you a couple of popular trend trading systems.

Test each of these methods out in demo or backtesting and get a feel for what you are most comfortable with, and gives you the best results.

The 2 Schools of Thought in Trend Trading

There are 2 ways of looking at trend trading.

Each one has its advantages and disadvantages.

Some strategies try to get into the move as soon as possible. When you trade this way, your winning percentage is usually low.

However, the upside is that you also have very large winning trades when you are right.

Another way to approach trend trading is to try to get most of the middle of a trend.

This method requires a little patience because you have to wait for a trend to develop.

In addition, you have smaller winners because you're only getting the middle of the trend.

The potential benefits of this method are that you generally have a higher win rate than the previous method and you might have a little more confidence entering a trade because the trend is more defined.

Now with those concepts in mind, let's get into the methods that you can use for trend trading…

Price Action Analysis

The method that I prefer to identify a trend is pure price action.

This involves looking at the Energy Flow of price, and is the purest form of technical analysis.

So the first thing to look at is:

• Higher lows in an uptrend
• Lower highs in a downtrend

But it's a little more complex than that.

First, let's take a look at a chart.

The circled areas are places where price formed higher lows and you could have potentially entered trend trades.

Next, we need to understand what the market typically does before a trend.

Many times, there's a consolidation period before the trend, as price “gears up” to make a big move.

You might have a chart that is showing higher lows or lower highs, but it might not be the start of a trend because price didn't consolidate before it started trending.

Trendline Analysis

You can also use a simple trendline to define a trend.

Here's the same trend, identified by a trendline.

In this example, we can simply draw a line to connect the points that we circled above.

Some traders will stay in a trade until price breaks the trendline.

Of course, some currency pairs are more volatile than others.

So you should test your trendline strategy extensively before trading real money.

This method might not work in very volatile markets.

Again, there's no right or wrong answer here.

Use whatever makes the most sense to you.

Trend Indicators

You can also use indicators to determine a trend.

Some traders find this more comforting because they have definitive number or line that they can use to define a trend.

Here are some examples…

Moving Averages

One simple way to identify a trend is to use one or more moving averages.

It can act as a dynamic support and resistance level in a trend.

Single Moving Average

For example, the 20 exponential moving average (EMA) is a popular moving average to use to identify trends.

The great thing about this method is that it's very simple and since it's dynamic, it can adjust to market volatility.

Moving Average Crossover

Another way to use moving averages to determine a trend is by using a moving average crossover strategy.

You can use the simple 50 and 200 moving averages, which are commonly used settings.

I did a test on this system with multiple backtesting software products, and the tests turned out positive.

See the results in this video.

Relative Strength Index (RSI)

Another indicator that can be used to identify and ride trends is the RSI.

You can track the 50 level on the RSI and use that as a way to identify pullbacks that can be used to enter an existing trend.

I did a test with this strategy and it turned out profitable.

More testing would have to be done, but you can see the results here.

Moving Average Convergence Divergence (MACD)

The final popular indicator that can be used to trade trends is the MACD.

You are looking for a crossover in the MACD signal line to take a trade.

Here's one example of a long trade. You could have entered at the left arrow and exited at the arrow on the right.

As you can see, this trade would have been profitable, but the exit was not ideal. So you would have to do some testing to figure out a good exit strategy.

Maybe exiting at the next crossover is a good idea.

…or maybe that should just be a signal to start trailing your stop loss.

Only testing will show you the best way to exit. 

Like other trend indicators, you cannot take every signal because that will give you too many signals and eventually blow out your account.

Therefore, you would need to have some sort of filter that will allow you to only trade the higher probability crossovers.

Trend Trading Systems

Now let's take a look at more complex trend trading strategies. They contain some of the elements listed above, but also add in other rules for money management and scaling in/out.

Bill Williams Trading System

This trading strategy is not widely known, but it's one of the most aggressive trading strategies that I've ever seen.

It uses a set of proprietary indicators. Luckily they are available for free on most trading platforms.

If you like huge winners and don't mind a low win rate, then this strategy is for you.

The Bill Williams method looks for consolidation periods and enters the market when price breaks out. Then it aggressively adds positions as the market continues to move in your favor.

I've tested this strategy it can lead to some gigantic winners. The only downside is that it takes a lot of time to manage, so you can really only trade a few markets at a time.

Here's an example of what the indicators look like.

They are available for free on TradingView.

Get the complete trading system in Bill's book here.

The Turtle Trading System

This trading system is well known.

It was featured in the Market Wizards book and many of the traders that learned this system went on to run very successful hedge funds.

After the non-disclosure period was over, “Turtles” like Curtis Faith shared the trading strategy that they were taught.

The system is based on the Donchian Channel breakout strategy.

But it adds in some position sizing rules and other risk management rules that help the trader maximize trending environments and minimize losses in whipsaw environments.

I've found that for some people, this method of trading makes complete sense. This guy is one example.

For others, it's too complex.

…and that's fine too.

You should use whatever trading method works for you.

Here's an example of Donchian Channels applied to a chart on TradingView.

Conclusion

So those are the most frequently used ways to identify and trade a trend.

Of course, the tricky thing about trends is that you never know when they are going to end.

Therefore, you either have to try to get in early to capture most of the move, or look for an established trend and take a piece out of it.

But when you have the right tools on your side, and you practice using them, you can spot trends and profit from them.

Regardless of which method you use, be sure to test your trading strategy thoroughly before you risk real money. 

If you're new to trading, start by taking our free beginner's course.

Once you understand the basics, then it's time to create a trading plan and start backtesting.

Stay tuned for future backtesting blog posts where I test these trading ideas and show you the results. 

The post How to Determine Forex Trend Direction appeared first on Trading Heroes.

There's a rare price action formation called the “Batman” chart pattern. This is not to be confused with the bat pattern, which is a harmonic chart pattern.

Not many websites talk about the Batman, so let's take a trip into the cave where this this mysterious chart pattern lives, and find out what it's all about.

It's called a Batman because it looks like the top of Batman's cowl. These patterns are easy to spot because of the characteristic “ears” and price consolidation between them. 

But that's not all that you should be looking for.

Let's get into a more detailed description of what to look for in a Batman and how it can be traded.

Video Demonstration

Batman Chart Pattern Definition

The “Batman” is basically a variation of the double top/bottom reversal pattern. Here's what you are looking for:

• Strong trend
• Price hits key zone
• Failed high volatility spike
• Consolidation period
• Another failed high volatility spike in the same direction

This is an example of a bearish Batman. We would expect price to drop after the second failed spike and we would look for an opportunity to go short.

The important thing to look at is where this pattern prints on the chart. Just like any other countertrend chart pattern, this one has a much higher probability of success if it prints on a key support or resistance zone.

This is an example of a bullish Batman. It's just the opposite of the the example above, but the principles are the same.

Again, we see the big spike into the support level, followed by consolidation. Then another push lower that's rejected, and price heads higher.

The Psychology Behind a Batman

Like any other chart pattern, you shouldn't look at the pattern in isolation.

Take a few minutes to understand the market backstory, psychology behind the pattern and what it's telling you about the market.

When you understand what traders are doing behind the scenes, it's easier for you to identify a high quality setup.

The first part of a Batman is a strong trend. Obviously, this isn't close to being a Batman yet, but it's an important precursor.

When the market moves swiftly like this, it's also more likely to move quickly through this area of the chart, in the opposite direction. There's no guarantee that it will move through this part of the chart again.

But if it does, it will probably move rapidly. That means quick profits.

…and that's good for a Batman trade. 

Next, price approaches a strong zone.

This is when it's time to pay attention.

Remember that this has to be a significant zone. The more times price has touched this zone and decisively rejected it, the better.

Take a minute to look at the history of the chart and see how significant this level has been. If it hasn't been that significant, then this probably isn't a good opportunity.

Now we wait to see what happens. There could be several reversal patterns that could happen here, including a Batman.

Bulls try to push the price higher, but fail the first time. You'll notice a strong rejection at this point.

That's the left ear.

The bulls gear up to make another push and this is where price consolidates. There's a lot of buying and selling here as the bulls and bears battle it out for what the next big move will be.

Finally the bulls give it another try, and fail again. This forms the right ear and is another sharp price rejection of the key zone.

That's when there's an opportunity to possibly take a trade because there's a good chance that price will start to move away from the support or resistance zone. In this case, it's a resistance zone.

Of course, it doesn't always work out as nicely as this, but here's what this opportunity ended up looking like.

Where to Enter a Trade

There are three places that you can potentially enter a Batman. Stick around because I'll show you how to test this for yourself.

1. At the right “ear” rejection
2. At a break of the “forehead”
3. On a retest of the pattern

Ear Entry

This is most aggressive entry, and potentially the most profitable…but also the most risky. It's riskier because you have less confirmation that price will reverse.

For this entry, you are going to try to enter as close to the top of the right ear as possible. The idea is to enter when you are reasonably confident that the level is going to be rejected, but not too late that you miss out on a majority of the profits.

In our example trade, this might be a good place to go short.

Forehead Entry

The next place that you can enter is when price closes below the forehead.

This is a level that's drawn at the support zone.

It also helps if there was a test of the level from the bottom, as you see to the left of this chart. When you see touches of the zone from both sides, that helps to confirm that it's an important level.

Pattern Retest

Finally, you can trade a Batman at the point where price retests the formation and rejects it. Here's where price retested the pattern twice and is now looking to head lower.

When a Batman Fails

Just like any other chart pattern, this one will not work out 100% of the time. This pattern will usually fail at the forehead or the right ear of the pattern.

Here are the points on the example chart. These are the areas on the chart that price is most likely to continue upwards, in this example. It would be the opposite for a bullish Batman.

Is There a Difference Between a Bearish Batman and a Bullish Batman Pattern?

There isn't a difference between a bearish and bullish Batman. The pattern appears at both market tops and bottoms.

So keep an eye out for this pattern on the timeframe that you currently trade.

But be sure to test the pattern before you start risking real money on it. 

Is the Batman a Type of Head and Shoulders?

No, the Batman is more like a double top.

Even though we are using Batman's head to describe a chart pattern, this is not a head and shoulders (H/S) formation.

A H/S has three pushes into a zone. The middle push is the strongest, with the other two being weaker…looking like shoulders.

The concept behind them is similar. You are looking for a failed push into a key level.

But the way that this plays out on a chart is different.

Here's an example:

Is the Batman a Type of Harmonic Pattern?

There's a type of harmonic chart formation called the bat pattern. Harmonic patterns also include the Gartley, crab and butterfly.

They use Fibonacci retracement levels to predict price movement, and are way too complex to get into in this article.

If you want to learn more about them, you can check them out here.

The bat pattern looks nothing like the Batman pattern.

I'll have more about harmonic patterns in future posts, but for the purposes of this post, it's enough to say that harmonic bat patterns are totally different from Batman patterns.

Does it Really Work?

Alright, now this is all great in theory, but does this chart pattern actually work?

Does it give you a quantifiable edge in the markets? 

That's what we will take a look at in the next Batman chart pattern blog post. I'll do some backtesting and show you the results. 

If you want to check to see when my results are posted, click here to read all posts associated with this chart pattern.

In the meantime, feel free to start testing it yourself. You can get started with this tutorial.

Remember…never, ever assume that a trading strategy you read in a blog post will work. Always test it for yourself. This includes trading strategies that you read about on this blog. 

The strategy may not have an advantage, or it may not be a good match for your personality.

Test it for yourself before risking real money. 

Stay tuned for the results…

More Indicators and Chart Patterns Explained

• The Beginner’s Guide to Trading Pin Bars
• The “Batman” Chart Pattern Explained
• Inside Bar Pattern Explained
• A Forex Price Action Trader’s Guide to Outside Bars
• RSI Indicator Explained: Calculation and Definition

The post The “Batman” Chart Pattern Explained appeared first on Trading Heroes.

The Relative Strength Index (RSI) is one of the most well known trading indicators in the world.

It's available on almost all trading platforms and is used by professional traders.

So if you want to learn more about how to trade with this indicator, this tutorial will give you the history of the strategy, how it's calculated and trading strategies that utilize the RSI.

Alright, let's get into it!

Brief History of the RSI Indicator Creator

Before we jump into the details of the indicator itself, here's a quick background on the creator of the RSI, because it's an interesting story.

J. Welles Wilder Jr. was born in 1935 in Norris, Texas.

He attended North Carolina State University, where he studied mechanical engineering.

After graduating, Wilder served in the United States Air Force as a fighter pilot.

Wilder became a mechanical engineer, then a real estate developer. He later became intrigued by technical analysis in the financial markets.

In 1978, he published his groundbreaking book “New Concepts in Technical Trading Systems.”

This book introduced the Relative Strength Index (RSI) along with other technical indicators such as the Average True Range (ATR) and the Parabolic SAR (Stop and Reverse).

The RSI quickly gained popularity among traders and investors for its ability to identify overbought and oversold conditions in financial markets.

Wilder's contributions to technical analysis revolutionized the way traders analyze markets and make trading decisions.

Throughout his career, Wilder continued to develop and refine trading indicators and systems.

He also founded the Delta Society International, an organization dedicated to the study and application of technical analysis in trading.

The Delta Phenomenon is one of Wilder's most interesting books. In it, he shares his research indicating that all markets have a hidden order.

Wilder's innovative work in technical analysis earned him widespread recognition and accolades within the financial industry.

He passed away in 2021, leaving behind a lasting legacy as a pioneer in the field of technical trading.

Now that you know a little about the creator, let's take a look at the indicator itself.

The Core Principles of the Relative Strength Index

Traders use the RSI to identify potential trend reversals and confirm the strength of a prevailing trend.

It can potentially be used in any trading market, but must always be backtested before trading real money.

Extreme RSI readings can signal potential buying or selling opportunities, as they suggest that a market may be overextended and due for a correction.

Additionally, divergences between price movements and RSI values can provide insight into underlying market dynamics and potential changes in momentum.

Key components of the RSI include:

• RSI Formula: The RSI is calculated using a two-part formula, which is explained in detail below.
• Overbought & Oversold Thresholds: The default settings are 70 (overbought) and 30 (oversold) as potential signals for price reversals. However, these settings can be changed to generate fewer signals (greater than 70 and less than 30), or more signals (less than 70 and greater than 30).
• Divergence: When the RSI diverges from the current price trend, it indicates that the current trend may be weakening.
• RSI Periods: By default, the RSI is typically set to a period of 14. However, this can be adjusted to increase sensitivity (with a lower period) or decrease it (with a higher period).

The RSI is usually beneficial when used in conjunction with other technical analysis tools.

Here's what the RSI looks like on a chart:

RSI Strengths

• Since most markets usually trade in ranges, the RSI can be a good tool for taking advantage of reversal moves within a range
• The indicator is easy to understand
• This indicator is widely available

RSI Weaknesses

• The RSI can create many false signals in a strongly trending market
• An overbought or oversold signal does not guarantee that the market will reverse
• Like any other indicator or trading strategy, it takes time to master and needs to be backtested before using

Where to Get the RSI Indicator

The RSI is available on most charting platforms.

In fact, all of the charting platforms I've used had the RSI.

I would recommend using the RSI on TradingView, but use whatever charting software works for you.

How to Get RSI Alerts

If you don't have time to monitor the markets, then a platform that has RSI alerts is very valuable. 

They will send alerts to your phone so you don't miss a signal.

Some platforms require you to install a custom indicator, while other platforms have alert capabilities built in.

That's why I recommend using TradingView.

It has RSI alerts built in.

Another way that you can get alerts is to use my custom indicator for MetaTrader 4.

Other platforms also have solutions, so find out what's available on your favorite trading platform.

RSI Trading Strategies

There  are several ways to use the RSI to trade. 

I'll be covering each method in more detail in future articles and I'll also backtest as many strategies as possible.

Here's a list of the common trading strategies that use the RSI:

• Overbought/oversold
• RSI Divergence
• RSI exit strategy
• Connors RSI 2
• Midline crosses
• Swing 5

You can learn more about each variation in this tutorial.

Now let's take a closer look at the RSI calculation.

RSI Indicator Calculation

The way that RSI is explained in most books and on most websites is a little confusing.

So I created a graphic that clears up the confusion and shows you exactly how the RSI calculation formula works.

Alright, now that you know the formula, let's break down each component.

First, let's start with the variables.

Number of Periods (n) or Length

n is one of the settings that you would use in charting platforms like TradingView, NakedMarkets or MetaTrader.

It's basically the number of periods that you want to look back on the chart to determine the current RSI value.

The default value is usually 14 periods, but it can be changed, according to what you want to achieve.

When the RSI is set to 14, your charting software will calculate the current RSI value based on the last 14 periods.

Many websites refer to the default RSI setting as 14 days, but that's only if you are trading on the daily chart. The RSI look back can also be measured in weeks, hours or minutes. 

It just depends on what timeframe chart you are using the indicator on.

Therefore, I will refer to the RSI look back setting in periods, which is more accurate.

Your RSI period setting will depend on your goals and your trading strategy.

There's no right or wrong answer here.

It just depends on what you have tested and what is profitable for you.

Relative Strength (RS) First Data Point

The raw Relative Strength number simply shows you how current price compares to historical prices over the last n periods.

It can be a little tough to understand what that number is actually telling you.

So Wilder's formula turns the number into an index that stays between zero and 100.

Therefore, the RSI is an oscillator because it goes back and forth on a fixed scale between 0 and 100.

Having a set scale allows RSI to be easily used across any trading instrument.

It's also a momentum indicator because its goal is to show traders when momentum could be slowing down.

The first RSI graph point is calculated by summing the up periods and dividing the result by the n periods setting in the RSI indicator.

That number is then divided by the average of the down periods over the last n periods.

For example, let's say that you are trading the daily chart and n is set to 5.

The last 5 days are as follows:

1. 10 pips up
2. 20 pips down
3. 100 pips up
4. 30 pips down
5. 200 pips up

In order to calculate the numerator, you would average the up days: 10 + 100 + 200 = 310 / 5 = 62

Then you would calculate the denominator with the down days: 20 + 30 = 50 / 5 = 10

Finally, you would divide the numbers to get: 62 / 10 = 6.2

Therefore: RS = 6.2

Converting RS into RSI

From there, you would turn RS into RSI by doing the following.

So starting from the right side of the equation: 100 / (1+ 6.2) = 13.8

Then: 100 – 13.8 = 86.2

Which means: RSI = 86.2 

Subsequent RS Calculations

After the first RSI data point, all of the following data points are calculated with this modified formula.

This formula is similar to an exponential or weighted moving average, in that it gives more weight (importance) to the current RS reading.

So you would start by averaging the first n-1 periods for both up and down moves.

Then you would add in the current average for up and down moves to their respective averages and divide each total by n.

Let's use the data from the previous example and add in a 6th period, to show you how this works.

1. 10 pips up
2. 20 pips down
3. 100 pips up
4. 30 pips down
5. 200 pips up
6. 30 pips down

First, you would average the first 5 (n-1) up periods:

100 + 200 = 300 / 5 = 60

Then you would multiply the average by n-1 or 5:

60 * 5 = 300

Now we do the same for the denominator:

20 + 30 = 50 / 5 = 10 10 * 5 = 50

Next, average the data from the previous 5 periods, plus the 6th period.

Since the 6th period is a down period, nothing would be added to the up periods calculation:

300 + 0 = 300 / 6 = 50

Add in the 6th period down move, then average by 6:

20 + 30 + 30 = 80 / 6 = 13.3

Then RS is:

50 / 13.3 = 3.75

RS = 3.75

Converting RS into RSI

Again, we do the RSI calculation to convert the RS to RSI:

100 / (1+3.75) = 21 100 – 21 = 79

RSI = 79 

RSI Signal Levels

As mentioned above, the default signal levels are usually 30 and 70.

But some traders will use different settings, depending on what they want to achieve.

Other common settings are:

• 20/80
• 10/90

This is where to find the signal levels on a chart.

If the RSI is over 70, price is considered overbought and is a potential sell signal.

On the opposite side, when the RSI goes below 30, that's a potential buy.

The concept is simple, but it takes testing and practice to master.

Common RSI Misconceptions

A few websites will tell you that a longer look back period is more “accurate.”

This is simply not true.

A shorter look back period will make the RSI more sensitive, which can work well for certain trading strategies.

A longer period may work better for other strategies.

Always test your strategy with different RSI settings and find out what really works for you.

Never take anyone's word at face value, always test it for yourself.

Other people on the internet will tell you that the RSI is a lagging indicator, so it's not useful.

The bottom line is that professional traders use the RSI.

Larry Connors is one trader who is well known for developing RSI trading strategies and has published his research.

Final Thoughts on the RSI Indicator

So that's how to RSI works and what it can tell you about a market.

Like with any other indicator, it has strengths and weaknesses.

This indicator is not for everyone, but if you like the idea of using this indicator, you should certainly look into it.

Review the different trading strategies that use the RSI, pick your favorite, then start backtesting.

The post RSI Indicator Explained: Calculation and Definition appeared first on Trading Heroes.

Volume Profile is a handy trading indicator that shows you the price point at which the most volume has been executed. In this video, I'll show you how to add it to your TradingView chart, how it works and when you might want to use it in trading.

If you prefer the text version, it's provided below the video.

Getting Started with Volume Profile

What's up traders, this is Hugh and in this video I'm going to show you how to put Volume Profile onto your charts and why you might want to use it.

Okay, so this is TradingView. I'm looking at the other screen, so forgive me if I'm not looking directly at you. Here is my Volume Profile indicator and this comes with TradingView. I think it's only available with the paid version, but it's a really handy tool because you can see where the most volume has occurred on a chart.

And that's important information because you want to know where you might run into some issues if you're looking at the charts, what price points you're going to run into those issues and where the buying or the selling pressure might be coming from.

Volume Profile vs Regular Volume

So let's take a look at some examples. First of all, I've put the regular volume down here at the bottom. As you can see, it can be a little tough to read this because you have to go candle by candle and you have to really dig into what each candle is telling you.

Whereas Volume Profile is just one line and you can also make it multiple lines, like some people do. So you can show Volume Profile like this and this will show you the levels at which there was the most volume.

So I haven't set it so that it shows me the volume on the candles that are only on the candles that are displayed right now. So as you can see, there's a bunch of volume here and this is the highest volume level.

There's a bunch of here. And then down here around this level is where you're going to see the most volume in this area. So this is really useful information. I only look at the highest volume level because I don't want my charts cluttered up with all this other stuff.

But it's useful to see the volume at all levels. And as you can see, this level is the second highest volume level on this chart. So there's a good chance that there's going to be a turning point.

How Do You Use Volume Profile to Trade?

I don't use it as a rule specifically per se, but I do use it as a guideline to show me where price might turn or where the profit targets might be. So for example, with this Volume Profile right now, I'm actually looking for a short here.

If I do end up taking a short, then I'm going to look for this Volume Profile level as the, as well a little bit above it. But I'm going to sit that as my limit as to how far price could go.

So I'll probably set my take profit a little bit higher than that. And if you are looking for something that's above the level or below level, let's see if I have an example here. So for example, if I move this chart backwards, it will show me the change in Volume Profile level.

Okay, so here, there's a big Volume Profile level here. So if, if you were looking for a long right here, it really helps to know that there was a lot of volume below your level. So you have some confidence to take the trade because a lot of trades have happened here, so there's a good chance that it'll push it out. Right? On the flip side, if you see a volume level really, really close to where you want to take a trade, for example, let's see if we can find one here. Let's scroll back and see, okay, here's a, I think this is a good example right here.

If the Volume Profile is exactly at your level or maybe a little bit below, then you might be in trouble. If you wanted to take a short here and if you had the highest Volume Profile level right there, then that might tell you, maybe you shouldn't be taking that trade because you're going to run into a bunch of volume and you never know what's going to happen at that point.

So if we put the profile back on there, we can see that yes, that is the highest volume level followed by this level down here. It might not be a good trade level, but again, it's just a guidelines. So it's up to you if you want to actually take the trade or not.

If I scroll back a little bit more, like I said, does it help? It helps to zoom out so you can also see the key levels around price and when you zoom in and out like this, you can get a good idea of where the big volume is and you can trade accordingly.

Conclusion

So try it out, backtest it with Bar Replay and see how it works for you. I just use it as a guideline, but maybe you can use it as a specific training program or a trading system.

All right, thanks for watching.

To learn more about TradingView's Volume Profile indicator go here.

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The post How to Setup and Trade with Volume Profile appeared first on Trading Heroes.

Where are the best places to set a price action take profit? Well, that really depends on your trading strategy and what your testing has shown you.

But if your take profit is frequently being missed, or you feel like are leaving money on the table after a lot of trades, then you should consider testing these two take profit levels.

They are the most reliable take profit levels that I know of.

Like a lot of things in trading, the simpler your method, the greater your chances of success.

…and these are very simple.

Just Before the High or Low

The first target level to look for is just below the high, or just above the low. If there are only two candles at the support/resistance level, then putting your level through both candle bodies is your best bet.

For example, if your trading method is signaling a long trade at this point, this would be a a good profit target.

This is also a good potential target level because there aren't many major price action levels between the current level and the target level.

Here's another example of where a profit target just above the low would have been a perfect take profit for a short trade. The target was hit at the blue arrow and once price hit that level, it went up and never looked back.

A common beginner's mistake is to set the take profit at the highest/lowest point, like this…

This is a low probability take profit level and is not likely to be hit, unless there is unusually strong bullish price action. This is what commonly leads do missed profit targets and losing trades.

It may be tempting to try to milk every pip out of the trade. But remember what they say about hogs and pigs…

Inside the Elbow

Another high-probability zone is in what I call “the elbow.” It is the area inside where price turns. This is especially true if price action is choppy in that area.

Here is an example of a chart where the elbow was hit. The elbow is marked by the blue arrow.

This chart shows an elbow that not super obvious, but would act as a good profit target, IF your trading strategy has signaled a long trade. At the time this post was first written, this is a live chart, so I don't know for sure if that level will be hit.

But if you are reading this later, you can see if that level acted as resistance. It may not get to that level, but if it does get there, you can see how it reacted.

Here's one more example where the elbow was hit and acted as heavy resistance. Again, it was an ideal profit target.

Before a Previous Level of Support/Resistance

The last place that I look to take profit is at a previous level of support or resistance. This can come in different forms, so here are some clues to look for.

• Price ranges
• Multiple rejections of a level (engulfing bars, pin bars, reversal bars)

Final Thoughts on Trading Take Profit Levels

The bottom line is that these two areas are heavy support and resistance levels. That is why they work so well as take profit levels.

But don't take my word for it, test it for yourself. This guide will show you how to backtest it. There is so much random information on taking profits out there. Find out for sure!

Remember that you will need to have a good reason to go long or short, in the first place. You cannot target any elbow or extreme and expect to make money.

This is simply a way to potentially optimize your exits. 

Happy trading!

The post The Best Take Profit Levels for Price Action Trading appeared first on Trading Heroes.

The Three Drives Pattern is a well-known harmonic chart pattern. It is a relative of the ABCD pattern, for reasons you will learn about in a bit.

This pattern was mentioned in Robert Prechter's famous book “Elliot Wave Principle.”

In this post, I will explain how to identify it and show you how it is traded.

If you want to learn how this pattern works, this post will give you everything you need to know.

But that's not all…

I will also show you how to backtest the pattern so you can find out if it is really something that you want to pursue in your live trading. 

Here we go…

How to Identify the Three-Drive

The pattern consists of a series of three higher highs or lower lows, which signals a potential reversal.

Sometimes the reversal can be a huge move because the built-up pressure is finally released.

Not always of course, but that is what happens when it works well.

Are there time and distance requirements for the moves? Some books say yes, others say no.

So I'm going to take the most basic explanation that I think all Three Drives traders can agree on.

Let's take a look at how it works…

Bullish Three Drives

In the bullish version of this pattern, there are three drives or pushes in the upward direction.

After each push, there is a retracement, marked A and B. The retracements are a 0.618 Fibonacci retracement of the previous drive.

The next drive needs to end near the 1.272 Fibonacci extension for the price action to qualify for the for the pattern.

When price gets close to the drive 3 point at the 1.272 extension, you would put in an order to sell.

Your target would be the 0.618 retracement of the entire move from point zero to the top of drive 3. 

At least that is how the textbooks teach it. So that is where you should start testing it.

Let's take a look at a real example, so you can get a better idea of how this works.

This is the GBPUSD 4 hour chart on May 16, 2016, on TradingView and Oanda data.

For those of you who want to follow along at home.

Here's what the chart looks like when we mark point zero.

The first retracement hits the 0.618 Fibo level almost exactly.

Now if you Fibo the retracement, you will see that price extended way beyond the 1.272 extension. So if you were following the rules of the Three Drives Pattern exactly, this would no longer be a valid signal.

However, just for fun, let's keep going…

The next retracement also blows through the 0.618 retracement level.

The next push hits the 1.272 Fibonacci extension exactly.

Then when we look for a profit target, the 0.618 Fibo retracement of the entire move.  In this example, that gets hit easily.

So in summary, this was not a textbook pattern, but it would have ultimately worked out. That brings up the question:

Should I follow the system exactly or should I allow the rules to be bent?

Well, that all depends on what your backtesting tells you. 

Bearish Three Drives

Then of course, the bearish pattern is the same thing, but upside down.

How to Trade this Harmonic Forex Pattern

Just like with any other trading strategy, different traders will trade this pattern in different ways. But let's take a look at the most commonly taught way to trade this setup.

It is a good starting point for you to do your own testing and optimization.

There are basically three ways that you could enter a trade:

1. Put in a pending order at the last 1.272 level, with a stop loss guess
2. Wait for the market to print a strong rejection bar, like a Pin Bar or Outside Bar, then enter the trade, with a stop loss on the other side of the bar
3. Wait for the market to break through the 1.272 level, then put in a pending order if the market drops below the 1.272 level and use the previous swing high/low as the stop loss

Most resources will tell you to wait for the level to be rejected, then put in a trade (#2). So let's go with that method for now. 

Potential Optimizations

When you are testing, one way that you could potentially optimize your entry, is to look for divergence of some sort. RSI can be a good indicator to use.

As you can see from the example above, drives 2 and 3 form higher highs on the chart, but RSI forms a lower high on drive 3.

Another potential optimization is to look to see if the top of drive 3 matches up with a previous major support or resistance point. In the same example, the turning point does indeed match up with a resistance level.  

How to Backtest the Three Drives Pattern

Alright, now let's get down to business.

After most traders read about a trading strategy, they go directly into trading it in their live account.

…and big surprise, they lose money and they say that it doesn't work. There are so many things that can go wrong in between the time you learn a trading method and actually trading it with real money.

Here's a short list:

• You misread the instructions
• You are risking too much per trade and are freaking out every time your trade moves one pip
• The trading method doesn't actually work and it turns out that everything on the internet is not true
• You start trading it correctly and forget the rules because you didn't write them down
• You think you know better and keep changing the rules
• You second guess yourself and miss good trades
• And more

These are natural mistakes that all humans make. Myself included. So why risk your hard-earned money on your unproven skills? 

First, write down the exact rules of the system that you want to test.

You can download the backtesting plan worksheet for free here.

This will ensure that you don't deviate from your plan.

Next, you need to backtest your system and make sure that it has positive expectancy.

Fire up NakedMarkets and test your system.

If it does not work in backtesting, then it certainly won't work in live trading.

Once you have a system that works in backtesting, then move it into a demo account. Do not risk real money at this point. 

Only when you are comfortable in a demo account, should you even consider trading live. 

Other Resources

Here are some other resources that you can use to learn more about this chart pattern.

It's always a good idea to look at how others are trading a chart pattern, to get ideas on how you can improve your strategy.

You don't have to follow them exactly and you will probably throw out a lot of the ideas. But it only takes one good idea to dramatically improve your results. 

• TradingView Three Drives tag – These are charts that community members have posted on the TradingView website.
• YouTube videos – Here are the search results for videos related to this chart pattern.

A Close Cousin: The ABCD Pattern

One pattern that you will hear associated with the Three Drives is the ABCD Pattern. This could also be called the Two Drives pattern…I guess.

If I had to choose, I would personally start testing the Three Drives first because there is a greater chance that price will reverse after three moves, than two.

Price simply has to travel a longer distance and therefore will be more “tired.”

Conclusion

So that is how you identify the Three Drives technical chart pattern.

Remember that just because you see other traders using this pattern, does not mean that it will work for you.

You need to backtest it for yourself and figure out if it matches your trading personality.

Never take anyone's word that a trading system works.

Not even me

Do you own homework and you will progress much faster as a trader.

The post Three Drives Pattern Explained appeared first on Trading Heroes.

When you first learn about support and resistance (S/R) levels, it seems a little like voodoo. Price seems to magically hit a support or resistance level, and turn on a dime.

“This is easy,” you think to yourself, as you go through the price action trading course.

But when you actually draw the levels yourself and try to trade them in real-time, it's a whole different ballgame. The levels you draw seem to get violated all the time.

If you haven't tried this yet, give it a whirl. I struggled with it for a long time.

The key is to learn how to draw support and resistance levels correctly, so you give yourself the highest probability of success. 

In this post, I'll show you why support and resistance levels work, why they fail, and the best way that I have learned to find significant support and resistance levels.

Why Support and Resistance Works

At first, it may seem weird to be drawing these lines on your chart and expecting price to react when it reaches a line.

But there is a reason why support and resistance trading works.

When we buy and sell anything, there is a price range where an item is considered cheap, and when it is expensive.

For example, would you pay $1,000 for a cup of regular coffee at Starbucks?

Of course not.

Starbucks coffee is probably a little overpriced as it is, and that's fine.

But $1,000 is ridiculous.

On the flip side, would you pay $1,000 for a brand new BMW M3?

Oh hell yeah! It's basically free.

You get my point.

Currencies prices operate on a similar principle of “cheap” and “expensive.”

Traders also call expensive: “rich.”

The only difference between currency pairs and a cup of coffee is: What is considered cheap and expensive in Forex, changes by the minute. For example, here are examples of areas on an EURUSD chart where cheap and rich has changed over time.

Also notice that the more times a level is tested, the weaker it becomes. 

The range of prices can also be very wide with currency pairs because there are so many factors that affect the value of a currency pair…

• Changing interest rates
• Wars
• Political turmoil
• Central Bank policies
• And more…

Traders remember these cheap and rich price levels. That means that there can be big orders and existing positions sitting at these levels.

To put this in car terms…

The base retail value of a new M3 is currently about $64,000.

Serious buyers in the market for a M3 would certainly buy a new one for $30,000 (cheap) and stop buying, when price reaches around $75,000 (rich).

If the price of a new M3 could ever reached $30,000, buyers would probably have an alert setup on their phone or they would have a dealer call them. Obviously, this would never happen, but it illustrates the point.

This would be the support level for M3 prices.

In a similar fashion, 1.1200 might be cheap for the EURUSD currency pair, this week. So every time price reaches that price, traders will buy the pair, which will drive the price up.

Once you understand the principle of cheap and rich, and how the markets “remember” these levels, support and resistance makes perfect sense.

But it's not a guarantee…

Why Support and Resistance Levels Fail

Let's get something straight right now…

Support and resistance levels are NOT hard lines.

Price does not have to bounce at that level. They are merely zones where price has a good probability of turning.

If you think of them in this way, they become much more useful.

…and a lot less frustrating.

For example, many people who are new to drawing support and resistance levels would probably draw a resistance level like this.

…and that's a very good line.

However, some traders will look for price to bounce off 1.1441 exactly and head back down.

But in reality, this level is more of a zone. Like a trampoline, it has some give.

It might look something like this…

As we move this chart forward, we see that using this zone is much more useful in giving us a good level to take potential short trades. Even if you just draw a single line, you should understand where the other edge of the zone might be.

With this in mind, there are two basic reasons why support and resistance levels fail.

First, some traders simply don't draw them correctly or don't think of them as zones. How do you know if you have drawn a zone correctly?

Well, there are no guarantees. But price will either respect the level, or it will at least have a significant pause at that level, before breaking through.

I'll get into the exact process of how to find the best levels, in a bit.

Second, the market move is so strong, that the support or resistance level does not hold.

It happens.

You are going to be wrong some of the time and even the best drawn levels do not hold.

So if a level gets broken, now you know why it happened.

When it does happen, first ask yourself if you drew the level correctly. If you did, then there is nothing more that you can do about it.

Don't sweat it and move on…

How to Draw Support and Resistance Levels the Right Way

Here's a list of the steps for figuring out how to draw a good level. After the list, I'll go over each step in detail.

1. Look for the next major support and resistance level immediately above and below the current price
2. Examine how much price rotation there is around a level (and don't forget the elbows)
3. Take a look at historical price action to see if the level makes sense
4. Repeat the process to find the next major support and resistance levels
5. If you are really stuck, then switch to a line graph

Look for the Next Major Support and Resistance Levels

You don't have to draw every single S/R level on your chart. That will drive you freakin' nuts.

…kinda like having too many indicators on your chart.

All those lines will talk you out of good trades.

But a few good lines will give you clarity.

So draw just one support level below the current price level and one resistance level above. Don't be too concerned about being exact at this point.

Just draw it in a place that makes sense to you right now. We will optimize it in the next step.

Here's an example…

Remember that you are looking for a major support level and a major resistance level.

Here's how to tell if it's a major level…

Examine How Much Price Rotation There is Around a Level (and Respect the Elbows)

Now that you have drawn two (and only two) lines on your chart, it's time to examine if those lines are positioned in the best possible place on your chart.

The easiest way to figure this out is to see how many times price has hit this line. You will usually have to adjust your line a little so it hits as many points as possible, above and below your line.

In the example above, I think that both lines are drawn in a good location. Price hits those lines from the top and bottom several times, showing that they are significant levels.

Price might break your line more times than you are comfortable with. Occasional big breaks can be OK. Sometimes price just needs to break out of the zone for a bit, to clear out existing orders.

One such pattern to watch for is the “elbow.”

What the heck is an elbow?

The best elbow formations on this chart are marked in green. Above the elbow (in a valley) and below the elbow (in a peak) can act as support and resistance levels too.

It is simply a type of rotation point where price failed to hold the line and price snapped back. I wouldn't trade elbows by themselves. But if your lines fall on these levels, it is a good indication that the level is valid.

Here's another example of a significant elbow.

Also pay attention to the wicks and bodies of candles. I would give a body more weight than a wick. In the charts above, you will see that the S/R lines pass through several wicks, but not very many bodies.

Examine Historical Price Action

Those lines look really good huh?

Well, don't pat yourself on the back just yet. Now it's time to scroll back on your chart and see if those levels still make sense.

You don't have to go back to the beginning of the chart. But at least look at recent history and also check the next higher timeframe.

If we scroll back on the first chart in this section, we see that these are very good support and resistance lines because they are still valid with older data.

When you see this, it will give you more confidence that you have drawn the right support and resistance lines.

Remember, what is considered cheap and rich, changes over time. So your historical levels might not match up exactly with your current levels.

But as you get some practice, you will start to see which levels are more significant.

Repeat the Process to Find the Next Major Support and Resistance Levels

Now repeat the process to find a second set of support and resistance levels. You need these levels to give you good profit targets or stop loss levels.

Here is what the second set of major S/R lines would look like on the previous chart.

…and that's all you need to make your next trading decisions for this currency pair, based on support and resistance.

In this example, the next major levels are pretty close. They are more like the other side of the zones. So you might be better off waiting for price to react to the outer lines than the inner lines.

If You are Really Stuck, Then Switch to a Line Graph

I learned this one from my friend and mentor Walter Peters.

If a candlestick chart doesn't provide an obvious support or resistance level, then switching to a line chart can help a lot.

Since a line chart only gives you the closing price, it shows you the final price that traders decided on, at the end of each time period.

This is very important information. In the battle between the bulls and the bears in each candle, it will show you who won.

For example, it can be difficult to see the resistance level on this chart. This might be my first guess at drawing the line, since it touches most of the candle wicks.

But I wouldn't be totally sure about that one. When I switch to a line chart, this level becomes more obvious.

Now when you jump back to the candlestick chart, here is where the line ends up being. This is a better level, in my opinion, because it incorporates more of the major price reactions.

Again, support and resistance levels are more like zones than exact lines. But more precise lines can save you a few pips in your entry price or exit and greatly increase your return over time. 

Conclusion

Now you know how to draw support and resistance lines. The only way to get good at this is to practice in live market conditions.

So practice as often as possible. Add support and resistance lines to charts that you aren't even interested in trading.

Then add your prediction of where price will go at that level. I like to use an arrow in TradingView.

When drawn properly, horizontal support and resistance levels can be powerful places to enter trades and set great profit targets.

It's not an exact science. But just like anything else in trading, you are just looking for an edge.

…and support and resistance lines can give you that edge. 

In the next tutorial…trendlines!

The post How to Draw Support and Resistance With Confidence appeared first on Trading Heroes.

Understanding a couple of things can shave months, or even years, of your learning curve. One of those things is figuring out your Trading Timeframe Personality and the other is figuring out your Chart Pattern Personality (CPP).

When you understand these two things, it makes it much easier to select trading strategies that match you and gives you a higher likelihood of success in Forex trading. Luckily, there are only three types of Chart Pattern Personalities.

Yes, you might be naturally good at two or all of these types of chart patterns. But in the beginning, just choose the ONE that you are best at and perfect a strategy around that chart pattern type.

You need to do this because people's brains are generally best at spotting one type of pattern and it will help you focus on methods that are more likely to bring you success. 

Just because a trader tells you that one type of pattern is the best, it doesn't mean that it will work well for you. They mean well, but you have to experiment for yourself, to find out what is best for you.

I'll show you how you can do that at the end of this post.

But first, let's take a look at the three chart pattern types.

Trending Chart Patterns

The first chart pattern type is a trend. I'm sure that you have heard the saying: “the trend is your friend.”

Well…

Not if you and trend trading don't get along.

Some traders are really good at it. However, if trend trading does not suit you, then you will struggle at it for a long time…and wonder why.

As with any other type of chart pattern, there are different ways to define a trend. Some trading systems use moving averages, others simple price action cues.

The actual system is irrelevant. You have to find out if you are good at trading with the trend and riding it to your exit point.

Take this chart, for example. Are you comfortable buying at the arrows?

This is more of a “bargain hunting” trend trading technique.

…or does that totally freak you out?

Another way to trend trade is to buy on new highs. In this example, you would buy at any of the orange lines. It's more of a momentum trend entry strategy.

Are you comfortable with that?

If either of those entries appeal to you, then you might be cut out to be a trend trader. This type of pattern works well for traders who like to see results right away and feel good riding the wave of buying or selling.

Countertrend Chart Patterns

Other traders are better at spotting turning points in the market. If you like to be a contrarian in your daily life and enjoy proving people wrong, then countertrend trading might be for you. 

There are a few different ways that you can be a countertrend trader. One way is to trade against the price action into a support or resistance zone.

For example, on this chart…as price moved up into the orange line, would you be able to take a short position?

Of course, it's easy to say “yes” in hindsight. But imagine that you can only see price action before it hits that line.

It looks like it will keep going up!

But if you have tested your strategy and you know that it has a good probability of reversing, then you will have the confidence to take this trade.

…and if your personality matches this chart pattern you will be more likely to keep trading it, even when you are in a drawdown.

Breakout Chart Patterns

The last type of chart pattern is the breakout.

I'm personally not great at trading breakouts, so I avoid them. But it certainly works for some traders.

Here is a pure breakout from a price range. I say pure because some people trade a breakout and retest of the channel as an entry signal and I see that as more of a trend trade.

As you may have experienced in the past, the biggest difficulty with trading breakouts is that there are a lot of false breakouts.

Like this one…

That can be tough to stomach, unless you know the probabilities.

Breakouts are in a separate category because it's the only type of chart pattern that doesn't take into account the previous price action. You are simply looking for a consolidation, then a breakout of that holding pattern.

How to Figure Out Which of the Chart Pattern Personalities Matches You

Now that you know the three basic types of chart patterns, the next step is to figure out your Chart Pattern Personality. In other words, which chart pattern type do you trade best?

In order to get this information, there is no way around it…

You will need to do some work. 

First, select one trading method from each of the three categories above. Right now, don't get caught up in if the strategy actually works or not.

You are trying to figure out is which type of pattern you prefer trading, not the exact method. 

There are many places that you can get trading systems. You can dig up courses you have taken in the past or choose a system from one of the free forums out there.

If you want to keep it simple, you can just trade price action.

After you understand which type of pattern you gravitate to most, then you can start searching for specific trading methods that work. More importantly, you can start to build your own unique trading method by combining different elements of similar trading systems. 

Again, figuring out your CCP may not be easy.

But if you put in the time to understand this first, it will save you a ton of time later. 

Conclusion

This was a quick introduction to the three main types of chart patterns and why it is important to identify which one you resonate with most.

To get a list of commonly traded chart patterns, read this post.

Of course, there are different variations of each pattern. But when you examine tradable chart patterns, they basically boil down to these three types.

You may resonate with more than one. But choose one and stick to it until you figure out a specific strategy that works for you.

Otherwise, you can get stuck on the Trading Silodrome.

…and once you get on, it's very difficult to get off.

Also remember to figure out your Trading Timeframe Personality. It goes hand in hand with your CPP.

Now get to work!

If you have any questions about chart pattern types, leave a comment below.

The post 3 Types of Chart Patterns: Which One Fits You? appeared first on Trading Heroes.

A “flash crash,” or whatever you want to call it, presents a huge risk for traders on the wrong side of the market. But if you are on the profitable side of the move, it can also be a little disheartening when you see all of that profit that you missed out on.

Believe me, I know.

So is there a way that we can profit from flash crashes? 

Sure, assuming that you are on the right side of the market, you can always take advantage of a flash crash. In this post, I'll go over how to do it and what to expect.

What Flash Crashes Look Like and Why They Happen

Now these events don't happen all the time, maybe once or twice a year. So don't expect to get rich off of this.

But when they do, this is what they look like. Here is the Swiss Franc crash, otherwise known as Francogeddon.

This move was good for over 1,900 pips.

Then of course, there was Brexit. The GBPCAD dropped over 1,740 pips in one day.

Imagine if you caught that move!

…now the recent GBP “flash crash.” This could have put over 950 pips into the bank, at least ideally, if you traded the GBPUSD on the short side.

So how do we take advantage of these types of moves?

It's quite simple actually. Whenever you enter a trade, just get a little ridiculous.

The Ridiculous Profit Target

If you don't have a profit target set on a position, just put in one that is totally ridiculous. For example, let's look at this chart.

Price is forming a pennant on the monthly chart, and might be a good short opportunity. But it is a long way to go to get to the 99.495 resistance point and it might not get there. You probably have a nice 2R+ profit target near the pennant.

But if you trade with two positions, like I do, then you might not have any immediate plans for the second position.

So why not put in that 1,536 pip profit target?

Will price go that far?

99% of the time it won't. But all you need is that one time to make it worthwhile!

After you put in your crazy profit target, then just manage the trade normally. You probably won't keep that profit target forever.

But it is a nice to know that you have the opportunity to possibly make a huge return!

When This Works and When it Doesn't

If you are a swing trader, then this can be a good strategy. However, if you are a day trader, the probably won't help and will take valuable time during the order entry.

Also, if you already set a profit target on every position, then this obviously won't be a strategy for you.

For example, a lot of traders enter two positions and target a 1R or 2R target on the first position, and have a 3R or more target on the second position.

But any time you have a trading method that has a play-it-by-ear exit, then putting in a “flash crash” target can't hurt. 

Don't Forget the Slippage

Before I end this post, remember that this is just a simple way of possibly taking advantage of a big move.

Think of it as a lottery ticket.

But don't go out searching for it by purposely trading during big news events, because just like with lottery tickets you will lose…all the time.

On top of that, remember that the spread can get huge during important news events, so what looked like a profitable trade on the chart, may have been terribly unprofitable in real life.

So trade your plan first, no gambling. The best thing to do during potentially extremely volatile news events is not to trade at all.

Conclusion

By adding a “ridiculous” take profit to trades that don't have a profit target, it puts you in a great position to take advantage of super volatile markets. Of course, this crazy profit target should be way outside of your normal profit targets, so it doesn't mess up your trading plan.

But just like with everything else in trading, do what works for you.

The post How to Profit From Flash Crashes appeared first on Trading Heroes.

Sometimes it is useful to see how correlated a currency pair is to its related commodity. If you understand what is happening with the supply and demand of the commodity, it can help you predict the price movement of the related currency pair.

To see a short list of commodities that are usually highly related to currency pairs (and why), read this post. There are actually more, but those are the major ones.

I provide a list at the end of this post.

Even though a country's economy depends heavily on a commodity, its currency will never move in total unison with that commodity. Obviously, this is because there are so many factors that determine the value of a currency, not just the price of its major exports or imports.

Things like wars, economic health of the country and political climate can also affect Forex prices. In addition, one currency in a pair may be highly correlated, but they other may not be.

But that's not all. It can also be useful to see the correlation between two currency pairs.

For example, if the other EUR pairs are moving up, but the EURUSD hasn't moved yet, that could be a sign that it is a good time to go long the lagging pair. That's just one idea.

So how to you see this Forex correlation?

It is actually quite simple.

In this post, I'll show you how to do it and you can even play around with some live charts yourself.

How to See Forex Correlation Between Markets and Other Pairs

The easiest way that I know to do this is to use TradingView to overlay charts. Watch the video below to see how to do it. If you want the text version, it is provided below the video.

To compare two markets, start by heading over to the TradingView homepage. At the top of the screen type in the currency pair that you want to examine in the search box and hit Enter on your keyboard.

In this example we are looking for the Canadian Dollar vs Japanese Yen, so type in CADJPY and TradingView will pull up the chart automatically.

This will take you to chart of that pair. Next, click the Compare button at the top. If you are on a laptop or a larger screen, you will see the word “Compare.” If you are on a mobile device, you will see the scale icon.

Then the symbol search box will come up. Simply search for USOIL to get the chart for US WTI Crude Oil and make sure that the Overlay the main chart box is checked.

Now you will see the CADJPY chart as a candlestick chart and USDOIL as a bar chart on the same chart. Since the CADJPY chart is the primary chart and the Oil chart is the overlay, the chart scale will be for CADJPY.

Now you can see how closely the price of the CADJPY follows oil. To delete the oil chart, simply click on the bar chart to highlight it, then hit Delete on your keyboard.

Looks pretty correlated to me

Try it For Yourself

Alright now it's your turn…

Which market correlations do you want to see? This is a live chart, so play with it and see for yourself. If you are on a smaller device and this chart looks weird for some reason, click here to visit the TradingView site and see a full-sized chart.

Conclusion

That is the easiest way that I know of to see Forex correlation between commodities and other currency pairs. Since correlated markets are not always in sync, it is useful to understand how correlated they currently are to get a better idea on how to trade them.

To see an extensive live list of how certain currency pairs are currently related to different markets, take a look at this table.

How do you currently do it? Let us know in the comments below…

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The post How to Chart Forex Correlation appeared first on Trading Heroes.