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While discussing candlestick patterns, we had learnt about the entry and the stoploss points, however the target price was not discussed.
We will discuss the same in this chapter. The best way to identify the target price is to identify the support and the resistance points. The support price is a price at which one can expect more buyers than sellers. Likewise the resistance price is a price at which one can expect more sellers than buyers.
As the name suggests, resistance is something which stops the price from rising further. The resistance level is always above the current market price. The likely hood of the price rising up to the resistance level, consolidating, absorbing all the supply, and then declining is high.
The resistance is one of the critical technical analysis tool which market participants look at in a rising market. The resistance often acts as a trigger to sell. Here is the chart of Ambuja Cements Limited. The horizontal line coinciding at Rs. I have deliberately compressed the chart to include more data points, the reasons for which I will shortly explain.
But before that there are two things that you need to pay attention to while looking at the above chart:. For a moment let us imagine Ambuja cements at Rs. We know this is a signal to initiate a long trade, and we also know that the stoploss for this trade is at With the new found knowledge on resistance, we now know that we can set as a possible target for this trade!
Hence for reasons stated above, when a trader is long he can look at resistance points to set targets and to set exit points for the trade. Also, with the identification of the resistance the long trade can now be completely designed as follows:. The next obvious question is how do we identify the resistance level?
Identifying price points as either a support or resistance is extremely simple. The identification process is the same for both support and resistance. If the current market price is below the identified point, it is called a resistance point; else it is called a support point.
Having learnt about resistance, understanding the support level should be quite simple and intuitive. As the name suggests, the support is something that prevents the price from falling further. Whenever the price falls to the support line, it is likely to bounce back. The support level is always below the current market price. There is a maximum likely hood that the price could fall till the support, consolidate, absorb all the demand, and then start to move upwards. The support is one of the critical technical level market participants look for in a falling market.
The support often acts as a trigger to buy. Here is the chart of Cipla Limited. The horizontal line coinciding at on chart marks the support level for Cipla. Like we did while understanding resistance, let us imagine a bearish pattern formation — perhaps a shooting star at with a high of Since we know the immediate support, we can set the target at Hence for the reasons stated above, when a trader is short, he can look at support points to set targets and to set exit points for the trade.
Here is a 4 step guide to help you understand how to identify and construct the support and the resistance line. When you load many data points, the chart looks compressed. This also explains why the above two charts looks squeezed. In the chart below, the encircled points indicate the price hesitating to move up further after a brief up move:.
In the chart below, the encircled points indicate the price hesitating to move down further after a brief down move:. Step 3 Align the price action zones — When you look at a 12 month chart, it is common to spot many price action zones. But the trick is to identify at least 3 price action zones that are at the same price level. For example here is a chart where two price action zones are identified but they are not at the same price point. Look at the following chart, I have encircled 3 price action zones that are around the same price points:.
A very important point to note while identifying these price action zones is to make sure these price zone are well spaced in time. Meaning, if the 1 st price action zone is identified on 2 nd week on May, then it will be meaningful to identify the 2 nd price action zone at any point after 4 th week of May well spaced in time.
Step 4 Fit a horizontal line — Connect the three price action zones with a horizontal line. Based on where this line fits in with respect to the current market price, it either becomes a support or resistance.
In the above chart all the 4 price action zones are around the same price points i. Clearly, the horizontal line is below the current market price of Hence always give room for error. The price level is usually depicted in a range and not at a single price point. It is actually a zone or an area that acts as support or resistance.
So going by the above logic, I would be happy to consider a price range around to as a support region for Cipla. There is no specific rule for this range, I just subtracted and added 3 points to to get my price range for support! The current price of Ambuja is So if one were to short Ambuja at , the target, based on support can be at Probably this would be a good intraday trade.
For a trader going long at , can be a reasonable target expectation based on resistance. Notice in both the support and the resistance level, there at least 3 price action zone identified at the price level, all of which are well spaced in time.
The support and resistance lines are only indicative of a possible reversal of prices. They by no means should be taken for as certain. Like anything else in technical analysis, one should weigh the possibility of an event occurring based on patterns in terms of probability.
The expectation here is that if at all Ambuja cements starts to move up it is likely to face a resistance at Meaning, at sellers could emerge who can potentially drag the prices lower.
What is the guarantee that the sellers would come in at ? In other words, what is dependence of the resistance line? Honestly, your guess is as good as mine. However, historically it can be seen that whenever Ambuja reached , it reacted in a peculiar way leading to the formation of a price action zone. The comforting factor here is that the price action zone is well spaced in time.
This mean stands as a time tested price action zone. Therefore keeping the very first rule of technical analysis in perspective i. Perhaps, we are now at the most important juncture in this module. We will start discovering few optimization techniques which will help us identify high quality trades.
Remember, when you seek quality, quantity is always compromised, but this is a compromise that is worth making. The idea is to identify quality trading signals as opposed to identifying plenty, but worthless trades. The process in this context is about identifying trades. Let us go back to candlesticks patterns, maybe to the very first we learnt — bullish marubuzo.
A bullish marubuzo suggests a long trade near the close of the marubuzo, with the low of the marubuzo acting as the stoploss.
Now what if the low of the marubuzo also coincides with a good time tested support? Do you see a remarkable confluence of two technical theories here? While dealing with a fairly random environment such as the markets, what a trader really needs is a well crafted trade setup. This leads us to an important idea.
What if we had a checklist call it a framework if you like for every trade that we consider? The checklist would act as a guiding principle before initiating a trade. The trade should comply to the conditions specified in the checklist. If it does, we take the trade; else we just drop it and look for another trade opportunity that complies with the checklist. The checklist in my opinion forces you to be disciplined; it helps you avoid taking abrupt and reckless trading decision.
Going forward in this module, as and when we learn new TA concepts, we will build this checklist. But just to quench your curiosity, the final checklist will have 6 checklist points. In fact when we have the grand 6 checklist points, we will weigh down each one of them.
For example, checklist point number 4 may not be as important as point number 1, but nevertheless it is more important than other factors that distract the trader. Sir, I have read almost all the chapters and its really useful. Can you plz tell how to use trailing stop loss, should it be based on any indicator or manual stop loss.
For both intra day and positional it may not be a great idea to base your trailing stop loss based on a typical indicator. It should preferable be based on a preset condition. In fact both Manual stoploss and trainling stoploss are manual….
In manual you set a price as your SL. For example if you buy a stock at and you are willing to lose Rs.