I don’t think there are always textbook examples of trades in the live market. Sure we have a methodology and rules and tools, but often we must be able to make some determinations about which support or resistance level to use and how to use it.
I’m still in “teacher” mode right now after having visited Korea – teaching traders there – for the past two weeks. I’ll definitely get back to more proactive market set ups as I typically do later this week, I’m still playing a bit of catch-up from my time away from my home office.
First, let’s begin with the market cycle assessment. Start from the market memory or “lookback” setting for the four our chart. It’s a minimum of four weeks and can extend to six weeks. These settings are not rigid because different charting platforms will scale the horizontal axis of your charts in slightly different ways.
Here the lookback reflects one month as the far left shows a date of Decemeber 31st. This lookback ensures that I am focusing on the most relevant price action, seeing the recent rallies and declines, as well as keeping my 34ema Wave in the proper perspective for clock angle readings.
The market cycle is not a strong downtrend as the recent angle of the Wave is starting to level out however it is still maintaining a slight downtrend with a four o’clock angle reading. This step, the identification of the market cycle, is the most important step of any set up. The market cycle dictates the potential entry strategy and therefore what will be done at the support and resistance levels on the chart.
The two levels I am watching are the downtrend line of the Falling Wedge pattern (this is automatically drawn on my charts by my Autochartist MT4 plug-in) and the 34ema low which is the bottom line of my Wave. The wedge downtrend line would represent a more aggressive entry short as prices reach the resistance of the pattern. The 34ema low would then be the more conservative entry since prices would have to rally higher to the 1.3972 level.
Both are valid, however the question is which is a better fit not only for the current “mood” of the market and your individual risk tolerance. The trendline short entails more risk since the validity of the trade extends up to the 34ema high (green moving average). But consider that waiting for the 34ema low to trigger prices would have to rally further and thus makes for the very real possibility of no trade trigger at all. There’s always a choice to make and it’s not necessarily a question of right or wrong.
In fact since both entries are valid in their own right, many traders will consider both levels trade-able and short both if the opportunity presents itself.