Hello Again!      Indicators

In our previous 2 posts Part 1 and Part 2 of this Trading 101 series, we introduced you to several types of indicators and how to interpret the meaning of  those indicators.  This post is going to be dedicated to how to use these indicators in a practical sense on a tradeable time frame.

Step 1 –  Higher Time Frame Support | Resistance

The first step in using indicators with which to trade is finding the RIGHT SPOT to trade.  This seems like a logical idea, but some trades ignore this key component to trading and use only the indicators (MA cross, MACD Divergence etc) to trade with.  I believe this is problematic, because they are only looking at 50% of the equation.  Finding the right spot on a chart is just as important as having a signal generated from an indicator.  In the next few examples, I will show you a process you can use to find the appropriate SnR levels on your chart.

Example 1 – Daily Chart

Indicators

In this daily chart, you can see that price rotated around the level (blue line) for 64 days beginning in September 2015 and then again in June 2016 for 58 days.  This price level has been of significant interest to the market as told here on the daily chart.

Example 2 – 4-Hour Chart

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On this four hour chart we have zoomed into the June 2016 rotation to analyze the zone more closely.  As you can see from this chart, there was a trend-line highlighting the lower highs and lower lows as we broke through the initial support line (blue) and found some support at a lower price level (red line).  Once we had a price breakout below that secondary support we had a nice bear channel develop.

Example 3 – 60-Minute Chart

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Fast forward a few weeks and lower the time-frame, you can see how the market began to turn and started to break market structure.  The first break was the bear channel followed by the resistance area (red line) and finally the trend-line.  It is in this area that we begin to look for the trade setup.  That setup is going to be looking for a trade opportunity on the 15-minute chart, around the resistance level (blue line).

Step 2 – Tradeable Time Frame and Trading Indicators

Ok, so now that we have identified price structure (support / resistance level) on a higher time-frame, it is now time to “sharpen the pencil” and dig into finding a tradeable opportunity.  You can do this on any time frame you would like, but for the sake of this example, I am going to be using the 15-minute time-frame.

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It is from this chart that you can begin to see the setup developing.  With a few simple indicators and clearly identified market structure you can develop a trading idea.  Let me explain.

  1. The higher time frame resistance level (blue line) has been identified.
  2. Price action on this 15-minute chart has been rejected several times, further validating the legitimacy of this resistance level.
  3. Price is trading above your trend indicators (MA’s) and has validated their legitimacy by testing those on a number of occasions.
  4. The DMI Indicator (momentum) is showing you that the trend is bullish (+DI) and that the strength is confirmed with a cross over the 20 line.
  5. The last piece of the puzzle is a break and a bar close above your resistance level, which will confirm the breakout.

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This 15-minute chart provides the setup.  Your signal bar closed broke and closed above the SnR level that we identified from a higher time frame (signal bar).  Your entry would be 1 tick above that bar high and your stop would be 1 tick below that bar low.  The total risk here would be 21 ticks.  As you can see the opportunity allowed you to have a possible 6:1 risk reward on this trade.  You can set your targets in a number of different ways, but that is a separate discussion for another time.

Summary

In summary, in order to build an effective trading strategy, you will need to identify the trading indicators that fit your personality as well as identifying the proper trade location from the higher time-frames.  Will ever trade be a winner?  Of course every trade will not win.  But as long as you correctly develop and stick to your trading plan, you odds for success will increase dramatically.

Thank you for reading and talk to you again soon!

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