Trading CFDs carries considerable risk of capital loss. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
Technical analysis is a speculation tool. Together with fundamental analysis, it is used by traders to buy or sell a financial instrument.
Oscillators or trend indicators are used to forecast future prices, together with trading theories: Elliott Waves, Drummond, Gartley, Wyckoff, and so on. But there are other trading tools that are used by all trading theories.
Things like Fibonacci ratios, channels, trendlines, and Pitchforks were used for ages to forecast prices. Everyone wants to sell at resistance and buy at support, but how to properly identify such areas?
A support or resistance area is one confluence area that proved difficult to be broken in the past and it is projected on the right side of the screen. Market expectations grow that the price will hesitate when is reaching that area again. After all, trading is based on probabilities. Traders should ask themselves: what are the chances for this to happen?
The bigger the chances, the most likely the trade will be a profitable one. As a rule of thumb, the bigger the timeframe a confluence area forms on, the stronger the support and resistance level will be.
It is being said that a support is turning into resistance after it is broken, and a resistance becomes support. This is an important concept to be considered.
Traders are using these support and resistance levels on the horizontal, calling them classical support and resistance levels. However, it is possible to identify even stronger support and resistance levels.
These are called dynamic levels and are not forming on the horizontal. The Pitchfork tool is ideal for spotting them.
Andrew’s Pitchfork is offered on any trading platform. It is based on three points, called pivots, and from those points, three parallel lines are drawn.
The one in the middle is the most powerful one, in the sense that it attracts price. These lines are enough to give strong support and resistance levels, for future prices, based on what the market did back in time.
The picture below shows the Pitchfork tool used on the daily EURUSD pair. The previous dynamic resistance turns into support, and even if the price is still falling, it is expected to react by the time the projected area is met again.
However, the problem with any Pitchfork is that it is based on random points for its pivots. Therefore, it is mandatory for a specific area to be validating back in time before projecting it on the right side of the chart.
The more times it is tested, the less likely it is that the area is going to hold. If for example, an area acts as a dynamic support level for two or three times, there is an increase likelihood that the market will be rejected from that area the first time it is tested after the support is broken.
Even better dynamic support and resistance levels are to be found when a Pitchfork is used in combination with Fibonacci levels. This way, even if the price seems to have escaped, savvy traders will know when to exit or enter a trade due to the likelihood of the price to hesitate at a Fibonacci derived level.
In the chart above, the EURUSD pair is analyzed from a dynamic support and resistance level. The recent trip to 1.09 proved to be the first dynamic resistance level.
It is no wonder sellers stepped in and now the focus turns to the previous lows – the classical support. However, Fibonacci levels are projected on the right side of the chart.
These levels are calculated based on the size of the Pitchfork (the distance between the Upper Median Line and the Median line). From this, the 61.8% and 161.8% dynamic levels are projected.
The way to trade with these levels is to simply wait for the market to test one of them and then look at the reaction. To be validated, it means the first reaction would be a sell-off from those levels.
However, to reach them, the price needs to rise first. What would be a good entry point? How about a dynamic support?
The recent sell-off started from the Upper Median Line of the projected Pitchfork, and if we are to see higher prices, this dynamic line is the one to be broken at first. Any pullback into it and the line should act as a support.
Buying it for the 61.8% forecasted line is the way to trade this dynamic support. While it seems like a simplistic approach to trading, keep in mind that simple things work best.
It is being said that traders are using too many elements before taking a decision. Either there are too many oscillators on the screen that give conflicting signals, or different theories are interpreted at the same time.
Each trader has its own trading style. Some are feeling comfortable trading with tight stops, others enjoy high swings in their trading accounts.
The comfort zone is defined by the risk taken and the approach to trading. There are so many trading tools and theories out there, that it is impossible to use them all at once.
Profitability in trading comes from consistently looking for patterns. That is, a similar situation that happened in the past that gives a high probability for the price to repeat the same thing in the future.
The more popular the pattern is, the less likely it is for it to be confirmed by future price action. If all traders are selling a head and shoulders pattern, then everybody would make money.
We know by know that this is not the case, so a different approach is needed. Dynamic support and resistance levels are exactly this: a different approach to classical support and resistance areas that are having a higher success rate.
There are other indicators that can be used to spot such areas. Moving averages, simple and exponential ones, are such indicators, and they are quite popular among traders.
In the end, it is not important how a support/resistance area is spotted, but how it is traded.