- May 31, 2013
- Missae by: Praenomen to Team
- Categoria: Praenomen Trading Ratio
Introduction and construction
In this topic we'll discuss about trading using only two pivots. But first, let's define them.
As you already may know, the pivots are those support and resistance zones which, according with the variation of the price - they can pass from a category to another. (example: from support to resistance).
As an example we took randomly a real scenario on the AUD/CAD pair; we spotted a resistance on the 0.9833 level. Until the 1st October 2010, the price haven't pass through that level. On the closing of the bar formation, on the begining of October of that year that level was touched. Later on, we can observe that the price find support on that level for the future up movement - so the resistance has transformed in support now.
conclusio: a support which is becomes resistance (or vice versa) is a pivot.
Always, there was a large investment problemm in this area of investment regarding the price trends in a given time. The big issue is if the price is in up trend, down trend or has a tendency to develop in both directions ( notions known as: sideways, range).
Always, there was a large investment problemm in this area of investment regarding the price trends in a given time. The big issue is if the price is in up trend, down trend or has a tendency to develop in both directions ( notions known as: sideways, range).
Trading using two pivots coming in solving this dilemma.
For starters, you need to determine (on any given chart) two most important levels of the price, where the price often reacted significantly or even more violently than the usual. We need to built only two horizontal lines. The ultimate goal of this is to have a system define for you in a very precise manner if there is trend or not or future warnings regarding the possible shifts in trend.
In the example below, on the AUD/CHF pair, we established two pivotal values of 0.9850, 0.9473 respectively.
Usually, the bias it is established by looking not so much into the past (the chart has to remain on the original zoom as you find it default in the metatrader platform) or even zoom one notch if it truly necessary.
I did look in the past much longer only to highlight and make you better understand these areas and I urge you to do the same when you analyze these areas of price where you struggle to attach two pivot lines because of the chaotic price action or lack of significant areas of support or resistance to draw the pivots. But these situations are rarely seen.
Now, depending on where they are placed in relation to the price of these two pivots, we have three areas of bias, as follows:
1. If the price is above the pivot with the higher value - the bias is up.
2. If the price is situated between the two pivots - the bias is neutral.
3. If the price is situated below the pivot with the lower value - the bias is down.
These areas are drawn automatically through this indicator, with green (for up bias), gray (for neutral bias) and orange (down bias).
Characteristics of the biases
The up bias
When the price enters this area of price the major target will be the temporary highs and going even to the extensions of the Fibonacci retrace tool (141.4, 161.8).
The neutral bias
As an important rule, if you really choose to trade these areas (neutral ones) even if I don't recommend it you to do it, because of the messy corrections and chaotic price movements, you need to put 5x times to 10x times lesser risk on that trade than in the other trade situations.
On this particular bias we can have tho different situations
a) when the price came from the up bias.
In this case we'll target the first Fibonacci level of retrace of the entire up movement. If it is too close from the current price action skip the trade. You need at least 30-40 pips to the targeted Fibonacci level, in our case is 38.2 level.
b) when the price came from the down bias
In this case the main target will be the first Fibonacci level of retrace from the entire down movement. If it is too close from the current price action skip the trade. You need at least 30-40 pips to the targeted Fibonacci level, in our case is 23.6 level.
On the neutral bias, when your price reach the target I recommend you to close as much of the lot as you can, the stop-loss should ensure on profit of any level. If the price is nearly your target you can do an exception and close partial profit earlier, the price in this area can be very erratic sometimes.
The down bias
When the price enters this area of price the major target will be the temporary significant lows and going even further to the extensions of Fibonacci retrace tool (141.4, 161.8).
[tube] http"://www.youtube.com/watch?v=qymU4wWjh-4 [/tube]
Have a good week!
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