By Don Dawson, Online Trading Academy Commodity Futures Instructor
Recently I wrote about what style of trader you may be, such as a Position, Swing or Day trader. Knowing there are many different styles of traders will help you understand what I am going to explain. Just as there are different styles of traders, these same groups of traders usually have a favorite "trading technique" they like to use. For example, some of the techniques include Fibonacci, Support/Resistance, Fundamentals, Indicators built into our charting packages and the list goes on.
I am going to discuss using Fibonacci, Moving Averages, and Support/Resistance levels. Below is a chart of the E-mini S&P.
Figure 1
Notice how I placed a Fibonacci High to Low swing on the chart. The software automatically calculates the 3 support levels (38%, 50% and 61.8%). Now the question becomes, which level do I use to enter the market? This is the problem with using just one strategy like this. Some people may have a "favorite" Fibonacci level they like. I prefer to tie these levels in with other strategies to help identify which level will have a better chance of holding the price on the retracement.
Let's look at another chart bringing in a Moving Average using Fibonacci levels as well. Notice how the Moving Average lines up with the 38% retracement level (blue ellipse), on the "first" retracement back to Resistance. Sometimes you have to go back up to the 50 or 61.8% level to get the Moving Average to be in the same vicinity. This is how I select which Fibonacci level to use. I let the market tell me. What we are starting to see here is known as "confluence;" multiple strategies coming together in the same "vicinity." I used the word "vicinity" because we are not looking for absolute levels.
Figure 2
In the next chart I would like to bring in Support/Resistance levels with the Moving Average and Fibonacci levels together. In this case, the Support level has reversed roles. A very common event in the markets, Support often becomes Resistance once broken and vice versa for Resistance becoming Support once it is broken. In the yellow ellipse you will see where previous Support was and will now become Resistance since being broken.
Figure 3
As I mentioned in the opening paragraph, there are different styles of traders and each brings a different, favorite strategy to the market when they trade. In the example of the chart above, we can see where three distinct different trading strategies all come together in the same approximate vicinity of price (818.25 – 818.50). Each of the groups using these strategies also brings Supply and Demand to the market. For example, everybody using Fibonacci at the 38% level has contracts to sell (supply). People using the Moving Average as Resistance also bring contracts to sell (yet more supply). Then people who trade using just Support/Resistance levels inject even more contracts to sell (supply-supply-supply).
In the end, we have the same price vicinity to sell at but for completely different reasons. The Futures markets are very technically driven. This allows for having the same viewpoint on market direction but different ways of going about selecting your entry price.
Wrapping up how this strategy may be applied to the markets:
- Determine the Trend first
- Then identify your most recent price swing in direction of the trend
- Place your Fibonacci levels on that swing
- Have your Moving Average on the chart
- Look to the left of price action on your chart and identify the Support/Resistance level that the market may move to
- Once these are on your chart, look for price vicinities where all three studies are in confluence
- After you find the confluence you have a high probability of entering the market at a turning point
"Great things are not done by impulse, but by a series of small things brought together."
Vincent Van Gogh
Have a wonderful week,
- Don Dawson
|
