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AR01 Market Structure Basics
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AR01 Market Structure Basics

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AR01 Market Structure Basics

I fell into a trap where I was looking for the perfect indicator before I understood market structure. I thought I could find a green light / red light indicator that covered every situation. I no longer think that way. That's why I started documenting certain basic market structure concepts.

I have added back a few indicators for the soul purpose of having the indicator tell me something specific. You will see when we get to the end that I use a few moving averages and that's it. Some of them I use to know what others are doing. Some I use for other purposes. But I never use them for cross over entries or things like that.

I will periodically post my write up and examples here. I will use any timeframe (Yearly to 5min) or any instrument to make my point. I am done with a large section of my documentation but still have a long way to go.

I hope you find this enjoyable and informative.

Andrew

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Quick Summary
Quick Summary Post

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.

 
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Trends


A trend is defined as, “A general direction in which something tends to move.” Therefore, there is some subjectivity in the definition and reading of a trend. Generally though when reading a price chart if you look at it and can say, “Price is going up” then you are in an up trend. If you look at it and can say, “Price is going down” then you are in a down trend. Lastly, if you look at the market and cannot determine a direction then the market is in consolidation or sideways.

When reading technical charts you have the choice of a timeframe. Keeping this in mind you need to understand that there could be weekly or monthly trends that are up and daily and hourly trends that are down.

The Dow Theory and Elliott Wave principle boil down to the same concept of a trend. Price moves in a direction, pulls back with a correction, and then breaks a prior high. See movements 1 - 5 in the attached Up Trend Chart. Price moves up to 1, pulls back to 2, and then on its way to 3 breaks the high of 1, holds, and creates a new high. As long as the pull backs (even numbers) never break and hold below the prior low then the trend is intact.


If we were reading the Up Trend we would read it as follows:
1 - Higher high (HH)
2 - Higher Low (HL)
3 - Higher high (HH)
4 - Higher Low (HL)
5 - Higher high (HH)

A trend trader’s goal is to enter at point 2 or point 4 when the pull back stops and the trend continues in the same direction.

Other terms that will be used are:
Similar High (SH)
Similar Low (SL)
Lower Low (LL)
Lower High (LH)

If a trend moved downward it would look something like the chart labeled DownTrend and would be read as
1-LL
2-LH
3-LL
4-LH
5-LL

Attached Thumbnails
AR01 Market Structure Basics-uptrend.png   AR01 Market Structure Basics-downtrend.png  

Last edited by Big Mike; October 30th, 2010 at 05:30 PM. Reason: by request
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A Yearly Chart of the S&P500

A yearly chart of the S&P500 is fascinating from 1990 through today. A simple trading strategy would be:
  • Long-Above the prior year close
  • Short-Below the prior year close

You don't get the tops / bottoms, but what trend trader does? Are any indicators or complicated rules needed? And that's the point of this first chart. The longer the timeframe the easier it is to see the trend. The shorter the timeframe the more noise that enters the market for the investor / trader.

I don't make any individual decisions based on this chart but it does give me a flavor for the health of the market.

Attached Thumbnails
AR01 Market Structure Basics-sp-500-yearly.png  
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A Monthly Chart of the S&P500

The next chart shows the S&P500 Monthly chart in the bull market from 2003 until 2007. Notice the consecutive HH and HL confirming the up trend.

That's all for today. More charts on trends coming soon.

Andrew

Attached Thumbnails
AR01 Market Structure Basics-sp-500-monthly-up-trend.png  
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Additional Trend Charts

Here are some additional examples from Daily, Hourly, 5Min, and 1MIN.

Andrew

Attached Thumbnails
AR01 Market Structure Basics-eur_usd-daily-trend.png   AR01 Market Structure Basics-eur_usd-hourly-trend.png   AR01 Market Structure Basics-rimm-5min-trend.png   AR01 Market Structure Basics-eur_usd-1min.png  
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Reversal

Reversal
At some point a trend will become exhausted and reverse. This is the toughest time in the trend traderís price reading. Is this just another pull back or the first wave of a trend in the opposite direction? This is only known after the fact but we will discuss reversals in another section that will provide additional clues.

In the attached picture of the uptrend we get a clue to the reversal at the point where price does not continue up and we have similar highs (SH). Then price consolidates, penetrates, and breaks the prior higher low / similar low (SL).

In the attached picture of the downtrend we get a clue to the reversal at the point where price does not continue down and we do not have continuation. Prices moves above the prior HL and holds.

Andrew

Attached Thumbnails
AR01 Market Structure Basics-sp-500-start-reversal.png   AR01 Market Structure Basics-start-reversal-eur_usd-5min.png  
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Reversal Example-Head and Shoulders

Here is an additional reversal example. Look at this perfect head and shoulders I posted in the EUR/USD thread. Look it up on the internet if you don't know about the H&S.

http://en.wikipedia.org/wiki/Head_and_shoulders_(chart_pattern)
Incredible Charts: Head and Shoulders

I don't know the first individual to describe the H&S but it is described in "Technical Analysis of Stock Trends" - Edwards and Magee 1948. Yes 1948. Traders had to draw their charts at the end of the day manually. That is dedication compared to what we have to do.

There are so many people out there selling "magic" indicators or selling, "You need to use this or that or my special way or or my special room or you can't trade in todays fast paced computer driven market." Hogwash. Price is price because the humans trade it. The computers are programed by humans. I can pull out that book and find every pattern today. But let us not debate here. The pattern is here for all to see.

https://futures.io/forex-trading/6363-eurusd-trading-4.html#post74298
https://futures.io/forex-trading/6363-eurusd-trading-4.html#post74319

All, that is it until at least the middle of December. I've got other things going on that need my attention. We will continue then, that is if you want me to continue. Please thank this post if you want me to continue. There's only 43 people that have even looked at this thread. Let me know

Andrew

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Support and Resistance-Horizontal Lines

It's time to continue this journey.

Support and resistance are areas in the market that cause price to pause and potentially reverse. This occurs because of the mass psychology of individuals trading in the stock market taking profits (resistance in an up trend) or buying (support in an up trend) at these levels. Support and resistance can come in many fashions. Todays topic will be horizontal support and resistance.


Horizontal Lines Support and Resistance

Prior highs and lows can provide support and resistance. Resistance remains until broken. Once broken it can become support. Notice on this S&P500 weekly chart the white horizontal line. It is support for more than six months until it was finally broken. Then it became resistance for six months until the trend continues.

This occurs in the opposite direction also.

Prior price areas can become support or resistance years in the future. You must always look to the left to find areas of support and resistance so you understand what is occurring now. Look at the following chart. This is a monthly chart of the S&P500. The first circle is in 1998. The last circle is in 2010. All of the red circles show where price reacted in a similar area.

See the attached charts for examples on higher time frames. The next post will show examples on many different lower timeframes with many different bar types.

Andrew

Attached Thumbnails
AR01 Market Structure Basics-horizontal-support-01.png   AR01 Market Structure Basics-horizontal-support-02.png   AR01 Market Structure Basics-horizontal-support-03.png  
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Support and Resistance-Horizontal Lines from today_1


Attached are some examples form the 6E (EURUSD Futures) from today. I have a 5 minute chart and a 6Range chart. It doesn't matter the type of bar that you use. Support and resistance is about price action and bars are representations of price action.

Andrew

Attached Thumbnails
AR01 Market Structure Basics-20110209-eurusd-5min.png   AR01 Market Structure Basics-20110209-eurusd-5min_2.png   AR01 Market Structure Basics-20110209-eurusd-6range.png   AR01 Market Structure Basics-20110209-eurusd-6range_2.png  
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