The three principles: PA, S/R and balance

Introduction
Hi!

First of all i going to give you an introduction to the concepts i use. After that we are going to look at some picture examples of these principles in action. This is a systematic way to understand price, in particular EUR/USD, but it is a very general approach to understanding the price movements of currency pairs. This way of thinking about price consists of three principles: price action, support and resistance and price balance and three timeframes: D1, H1 and M1.

Price action
Most important and the principle from which the other two derives is price action. I choose to define "price action" as the pattern of the recent historical candles. The price action tells us how fast price is changing, in what direction and it also defines the trend.

Support and resistance
The second principle is support and resistance. The price action tells us also about the existence of support and resistance. Support and resistance is orders of relevant total volume that are being filled at a particular level of price.

Price balance
The third principle is the balance of price. Every time price touches or gets very close to a certain level that i define as the daily exponential average. Of the avaliable timeframes, this is most clearly defined on M1 and it is the period 1440 exponential moving average.

To analyze price i use D1, H1 and M1 timeframes for various good reasons.

D1
D1 is used to determine the general price bias. What this is ment to do is to determine if it is easier, safer and more profitable to sell or to buy. D1 is ment to do this and not anything else. In analyzing this there is ALWAYS a bias, and this is its main purpose.

H1
H1 is used to determine current intraday trend and most other things. H1 should be enough to trade alone without the other timeframes, but the other two has their advantages. Perhaps to a beginner, it is best only to focus on H1 if it seems to much information to analyze to use all three.

M1
M1 is used to define support and resistance and to define the exact, best entries and exits.

This way of thinking and analyzing price is flexible, and perhaps not so good for beginners in forex. There are no fixed and certain ways to enter or exit. There are not exact stoploss and no exact take profits. Why? Because these things depend personal preference and the way in which you are most comfortable to trade. There is no ONE correct way to trade. This is simply something you have to find out for yourself.

Personally i dont use stoplosses and i very seldom use the take profits i set. Instead i use small lots and i trade every day, so mostly i monitor my trades all day during London open. This is because as price changes, i must adapt to its changes to be profitable. If price seem to stall near my take profits, i close it in less profit then otherwise. Sometimes i close an open position in a loss if i see that i was totally wrong. I dont have any fixed numbers to determine this, those actions are based on the current changes of price.

Rules of this thread
Only post in this thread if you have a question about something you dont understand or if you have a suggestion of a improvment. Just saying "Hi!" or anything in that manner you can do on another thread or send me a PM. The reason for this is that i dont want to clutter the thread with general banther. I want to keep it short and sweet and to the point. I want it to be easy to read and easy to understand for as many people as possible.

Graphical introductory example and templates


As you can see, this is not a indicator heavy approach. D1 contains an ATR that i sometimes use and two averages. H1 the same averages, and M1 contains an envelope and three averages. The reason for this is that nothing else is important. There really are no indicators that will tell you anything that you cant tell yourself through analysis, if you at least got price.

D1, how to determine bias

The dashed moving average is exponential moving average period 21 (EMA 21), and the green thicker line is EMA 24. This two is what constitutes and defines price balance, in this approach to thinking and analyzing price. If price detaches from these and is not touching it in any way, we have a clear bias and a strong trend that transcends the intraday trend. If price is above we have a buy trend and vice versa. So you see, determining if it is better to sell or to buy is quite easy.

Of course there are the iffy situations: If price is near or touching the MAs. What does this mean? Well if price spent much time below or above right before, we can assume most of that bias is still left in the mind of the market participants. So in general, if we look at this picture from October, it is still a sell trend, even though its sort of iffy.

If instead we go back for a bit and have a look at this summer:

We can see that from about the 8th of May we have had pretty much a clear sell trend, with a slight pause in middle of June until early July.
Now that this is quite clear lets move on to analyzing the particular candles and their pattern, price action as it is called.

D1 price action analysis
What i write here is not just for D1 and not just for E/U price. If you understand this, you will be able, or are already able to use this on any price and any timeframe.

For a beginner, all charts and all pairs look the same. Thats not really true. The candles of E/U D1 is much more uniform then on M1. Meaning the relative size of the candles on D1 do not vary as much as on M1. This and things like it is very important to trading profitably. So, lets go back to the first D1 picture:

Study this picture for a while. Maybe you see something important, maybe you dont. I choose this particular point in time of this price, not because it is easy to talk about, but because it is difficult. When trying to understand price, dont do what is easy, do what is difficult, because you are going to get into some really difficult and hard situations if you havent already.

I numbered the candles so you can follow my logic easier and i hope you can read and understand which candle has which number. One important thing is to think about how much of the new candle that is inside the former candle. This alone is actually something you can trade if you start looking at the sizes and portions of the candles that are inside the candles before.

In a strong and clear downtrend, IF there is a bull candle, chances are quite great that the new candle will at least 50% of it inside the candle before it. If you also know the size of the candles are for instance 100 pip, that in itself will give you an indication of an entry, if you apply thinking power somewhat: The highest point of candle 1 is a possible entry for a sell position of about 50 pip take profit, if the average candle size is 100 pip. The same can be used for candle 3, even though it eventually developed into a bull candle, which in this case is really good. I use this way of thinking every day. It is a way to build small, carefully planned positions over a course of a few days. As we can see on the 4th candle, all these possible positions would do very good and you could close them all in good profits on the fourth day, or in steps during the whole time.

Continuing on, in the 5th day, selling on the high point of the 4th candle also proves to be a good position during the 6th day. And if you sold on the 7th day in the high point of the 6th day, still you would get a very good profit. This way of thinking and carefull planning could possibly be enough to trade very profitably. But this is far from the whole extent of the principles presented here, it is only the beginning, but a very important beginning. Furthermore, as we can see in the 11th day as we go past the high of the 10th day, selling there on the 11th day is an extremely profitable position during the 12th and 13th days.

If the same is used during the 13th, 14th. 15th, and 16th day we can see that there is little volatility and small candles, but it is still a sound and logical way to enter positions. But, like i said in the beginning, as price changes, the trader must adapt to be profitable. Since these days has little volatility, the take profits are relatively small. Like Einstein noted, there are no absolute measures of space and time. If however, these positions are held a few days, the take profits are extremely good during the 17th, 18th and 19th days.

In analyzing H1 and M1, this logic is still very relevant, so do not let youre mind let go of it. If this seems unclear in any way, go over what i explained again. I think it will become clear and understandable. It is not difficult and do not defy normal logic.

One thing to note before we go on, is that it is really not so important at what price a new day begins and when it ends, but instead the highs and lows are of chief importance. Time is not divided into frames and not divided into units such as minutes, hours and days. Minutes, hours and days are human constructions, and humans did not construct the universal change. Change is the universe. Everything changes. All the time.

Do not trade on what you hope to happen. Do not trade on what you would want to happen. Trade logically and strategically.

H1 Price action trend analysis and the balance of price

This is a H1 chart. The EMAs are the same, but their purpose is different. In this EMA 21 is a very general thing, it does not affect price so much, it is simply a thing im used to looking at. EMA 24 on the other hand is the balance point of price. In this picture candles 1 to 9 constitute a sell trend. This is so because they are below EMA 24, and because their highest points come lower, all of them. However, it is not until the 6th candle that a new low is broken, meaning we have not in this time seen a lower point until the 6th candle has formed. To me as long as the highs are coming lower, we are in a sell trend. If the lows ALSO come lower, we are in a very CLEAR sell trend.

When the 10th candle has formed, we see the first price action defenition of a break in this sell trend, since the high comes higher and so does the low of this candle. This means that the 10th, 11th and 12th candles constitute a buy trend. But on the 13th candle there is a change to sell trend in this manner, even though a very slight such trend change of only a few pips with its lower low and lower high. When the 17th candle has formed we see a slight change and a new buy trend begins.

On the 22nd candle and until the 25th candle we see something that i find interesting: Price reacts to EMA 24. My interpretation of this is that price has in general been in a sell trend, and when we get to EMA 24 it is "balanced". What happens next is a deciding factor. In general, if we have assumed there was a sell trend, this will continue somewhat when price "balances" as it touches EMA 24. However, EMA 24 on H1 is not so exact, EMA 1440 on M1 is much more exact, and in general, instead this is what we will use, and thats one of the reasons i use M1. But to continue this example and show you what H1 is good for, have a look again at what happens as price reaches EMA 24 on the 22nd candle and the subsequent 23rd, 24th, and 25th candles. It resumes its down trend. That means this, if you understood this, could have sold as price reached EMA 24. If you did, you could have closed on good profit in the coming hours. And i did.

All of these things that i am telling you now is the way that i trade. Im not just talking, this is what i do every day. Its not simple, its not mechanical, i dont always do the same thing over and over again, but these are the thinking and the principles that i use every bank day.

The reason why im not using say, M30, M15 or M5 to define the trend is that they contain more information then is needed. I choose H1 for this, because it is ENOUGH information. To determine the intraday trend in this way, more information is just too much. It is not needed.

M1 S/R defenition and the moving S/R that the algorithmic EAs create
After i had traded for a few months, i focused only on M1. This was foolish. It was not enough. But i learned a lot and i found out about somet things that i still use, every day.

The reason for this template and the things in it is that i have found that this is what works for me, and has done so for many years. Those few things to see and understand in this is, to me, very important. Now i will explain in what way.

The EMA 1440 i already mentioned, it is the balance of price. If price touches this and goes off again, then we have a strong trend that continues. It is almost equivalent to EMA 24 on H1 (1440 minutes is 24 hours). If you make the analysis that price will continue on its trend, then act and enter youre trade when price touches or is very near to this EMA.

EMA 21 is the quickest relevant moving S/R of this whole market. Using a quicker MA or such is meaningless, or it means so little that there is no point in using it. EMA 21 to me is very personal. It is a big part of how i perceive price. It is difficult to put into words exactly what it means. I suggest you use it on a chart and go back and try to understand how it affects price. Sometimes it doesnt affect price at all, sometimes it does. I dont know exactly why this is important, but to me, it seems it is. However, it is not something to trade on alone. But it is a measurment of when you might want to close an open position sometimes.

EMA 89 is a quick, moving S/R. It does not always affect price, but often it does. And the same goes as with EMA 21, it is very personal. It is a part of how i view price. I dont know if there is any point in you using it or not. I suggest you have a look at if you think it affects price or not.

The dashed line is a moving S/R. It often affects price, slows it down. When you have planned to sell, a good place to do it is often the upper envelope and vice versa. Also for this i suggest you go back and look at the charts how it affects price. But as you can see in this picture, it seems to have some form of effect. When things really start to happen and happen fast, price will blow through this like nothing. It all depends on how big the volumes are of course. My guess is that there are very quick, very expensive, very precise EAs of hedgefunds and such that uses math that resembles these envelopes position. I dont know if that is true or if they are a built in, subconsious element of this market. However i find it very usefull and have been doing so for many years.

Like i said, it is not so simple that all you need is this M1 template and these indicators. To me they are a part of this grand puzzle i am trying, and may i say, succeeding in trying to figure out. Otherwise i wouldnt be here writing this.

Questions and suggestions
Now i am opening this thread to questions and suggestions from and to all and everyone regardless of experience. If anyone asks questions in a post that i think can be usefull for others to find out how i answered, they will remain. If anyone posts a suggestion in a post that i think can be usefull for others to find out about and for us to discuss, it will remain. If anyone asks a question in a post that i think already is answered in the material, i will remove the question and PM the user with the answer. If anyone posts a suggestion that i think has nothing to do with these principles, then i will remove the post and PM the user about it.

I think there are no stupid questions, only people acting stupid by not asking questions.

The difficult art of discrete S/R placing
For this we will use M1. Study these S/R lines that i placed.

Attached Image (click to enlarge)

The theory is that at these levels, big players with A LOT of money is placing orders. Sometimes we fool ourselves, sometimes we a correct. There are no fixed, tried and true ways of determining this. Even if you could see all the buy and sell limits of all the brokers, new orders can be placed. It is a very difficult art, but one that is crucial to being profitable in this "game". But remember the big picture:

What an interesting concept for a thread.. so much information all ready I look forward to going throu it in much detail..sure is a big body of work all ready.. Thank You.. I am mainly a scalper so here is my small contribution it is not much but in conjunction with some sort of indicator like a CCI.. or RSI.. or Stochastic.. or what ever I find it very usefull.. and that is the 20 EMA used on all time frames as support or resistance area.. keep in mind I talk abour short term stuff only..Here is a picture of the day Cable.. like I said simple and only a small contribution.. not rocket science stuff..

Here is one Cable again 4 hr..picture I caught this one..I find the 4 hr very helpful..

Hi yaed,

you pointed to an important point here. For some its hard and for some its impossible, like me.
Thats why I turned away from subjectivity of S/R in a chart and turned towards an objective algorithmic approach of locating S/R.
A picture paints a thousand words and numbers paint a thousand pictures.

Anyway, nice thread, like the simplicity.

The journal & the three principals explorer
Ok people, nice to see this seems interesting to someone.
Here is my new journal for this kind of trading.
http://www.forexfactory.com/showthre...16#post7877016
I separate the talk of why and how exactly so as not to clutter this thread and make it easier to find the educational material.
If i find out i need to make some kind of change to the way i think when trading i will post about it here. But as long as it sort of remains this way, all is well.
I also created an explorer with only trades based on this kind of thinking. It is linked in the journal. I put my money where my mouth is.

Letting go of trying to prove something
I think there is something a lot of traders has against them: Themselves. They spend so much time arguing and trying to prove their worth, trying to prove they are right. It would seem many traders spend more time trying to prove something to others, then they do trading and those activities ascociated with trading. It is a never ending spiral of egoistic thoughts and behaviour, to try to prove things like this to the world. Thats part of the reasons why i dont ever talk about money. Money is important in a way, its why we do this. But money itself means nothing. I think money is just one way to do things, and i need it to do the things i think is smart to do. The moment you start talking about money, almost everybody will just think about money.

Intraday take profit
There is a trick i forgot to mention, a way to get a measure for intraday take profits: Close on touch or near vicinity of the daily exponential average (EMA 24 or H1, EMA 1440 on M1). That is pretty good most of the time, since price balances out there, and if its going to shoot of, which it often does after a touch there, you are not going to incur losses. Well probably depends on where you placed the trades of course. This is an important part of thinking in intraday terms. Though often good trades need to be given some more time then just 24 hours. Time is a continous flow.

This is a H1 chart example

Thanks for the good system. Can you please tell me how your enter the trade and exit.
Tq

A question of entry and exits



Like i was saying, it depends on how price changes. All the tools to answer youre question is there. My trades are seen live, their exits, the entries, all of it in my explorer.
What i do is based on decisions, not some formula like "If x happens i will always to Y". I think if you understand what i write here and if you study the trades, you will have youre answer, or at least get closer to it.

I think that if you understand the three principles, you will be able to follow my logic in how i enter and how i exit. Lets take a look at my most recent trades that you can find in my explorer:

As you can see, there a trade of 1 minute duration and there are trades of 3 days duration. Sometimes a minute is enough, sometimes 3 days are enough. It depends on whats going on. I adapt to whats going on, or at least i try too.

The two losses stalled very close to S/R that i placed. So i closed it in losses. A while later i could have closed them in profit, but of course i didnt know that. I adapted to the situation. Its impossible to use fixed stop losses and fixed take profits, we need to take into account discrete S/R. Or at least thats how i do it.

I understand this answer is not as simple as the one you where looking for. If i had a simple answer i would give it to you. But i dont. Trading just isnt simple like "When RSI 14 is overbought you sell and vice versa, take profit 30 pips, stop loss 20 pips" If i had found out it WAS that simple, i would do that. But the hedgefunds would too. And all of a sudden it would stop working like that. Maybe still there is such a simple way to do it, but i dont know of any so simple way.

Like i was writing about placing discrete S/R, thats a form of art to me. Im not sure how im doing it, i look at the candle sticks and i sort of try to identify a place where it seem not likely to remain beyond, and i place my line there. It is crucial, essential and a part of trading that MUST be there, otherwise i think its impossible. But its a decision, its requires some form of intelligence it seems very hard to program a computer to do. Or so i must assume.

I think one key element to understand how i do this, is that i monitor all my trades pretty much ALL the time during London open. I wish there was a much more simple way to do it, but i dont know of such a way. If i did i would use it.



I feel somewhat humbled by the fact that you choose my thread when thinking about the fact that you made 6 thread replies the last 8 years
Good luck! And may Angrboda be with you

Drawdown, to me the most important money management statistic

Keeping this sort of low is my main goal when it comes to money management thinking.
If it never goes above what i make in a day, thats SUPER great.
If it is 2%, thats OK
If it is 5%, im not doing that great.
10% is getting crappy.
30% is horrible, average trader statistic.

Its OK if my average win position is only 1 pip, as long as my drawdown dont get high. Pretty much everything is OK as long as i sort of make a profit long term and NOT let drawdown go very high.

....Nice thread yaed, very explicit and interesting.......

Thanks my friend, i try as best i can.