The best strategies are often the simplest. One of the strategies we employ is to trade off universally recognized levels of support and resistance in the direction of the overall trend with the aid of certain price measurement tools to determine entries.
First traders should analyze price each day, and watch carefully for key levels of support or resistance. Measuring the price is also vital, as this gives accurate reference points for potential price action confirmed over multiple time frames, from daily charts down to 15-minute charts.
Next check the overall trend direction. Once a bias has been determined, look to trade in the direction of the trend off the levels identified. Everything is determined using technical analysis and price measurement, from entry all the way through exit.
Some of the best tools to employ to analyze price include Fibonacci studies, pivot points, and fractal measurements. These three will give you all the information you need to place informed trades. MACD and Stochastics can be used for additional confirmation.
When looking for an exit from the market, look to the Fibonacci extension tool as a logical place to take profit, or a nearby pivot point, as it also provides a good risk/reward ratio.
The GBP/USD chart below is an example of what to look for. While you’ll notice we are looking at several days of prices on this one-hour chart, generally we enter and exit a trade inside a single day. This method can be used on any time frame.
Check the direction of the market for that day. In this example we have a long bias, so we are looking to buy. For this analysis, I use fractal price measurement, and look for the break of key swing highs and swing lows. This bias is known as the market flow. So the Fibonacci tool is placed on the lowest recent swing low and dragged up to the recent swing high. Next look at previous trading sessions to determine key levels during that time period and try and match these with other levels such as pivot points and Fibonacci retracement levels. If there is a confluence of levels near the same price, use this price as an entry point. In this example, we can see that the daily first support level, 38% Fibonacci retracement and a fractal swing point all come together at 1.5776.
The first support level uses basic pivot point analysis using open, close, high and low in Greenwich mean time. The fractal swing point is the swing low where the lows of the previous two bars are higher making it a fractal point, or swing low. The fractal “arrow” is an indicator found in the MetaTrader4 package.
As an additional confirmation look for MACD to be crossed on the one-hour for a buy order. An even better confirmation is when stochastics are oversold on the 15-minute chart. But these are just additional confirmations and not necessary to accept a signal.
Once in the market, the next objective is to look for a logical, profitable exit. For this, use Fibonacci extensions as these are recognized profit taking areas. Here we use the 127% Fibonacci extension @ 1.6056.
It is best to calculate everything before entering the trade so you know where to get out, but it is best to actively manage stops in the event price doesn’t take you where you want to go.
The strategy works very well at only entering you into the market once price is actively moving in the overall trend direction. Entering after a price retracement increases the probability of profit while allowing you to keep stop loss exposure to a minimum. In this example, the stop loss at entry was just on the other side of the swing low fractal @ 1.5756 (a 30 pip stop loss).