Fresh look at charts

3 ways for a fresh look at the charts

As traders, we create and settle in trading routines. They help us with building good trading practices and let us focus on the process, rather than the outcome. Of course, this is a good thing but often, this also means that we use the same way to look at the charts. We look for the same patterns. We do the same thing over and over again in order to get the right results.

 

But what if you don’t get the results you want?

 

Of course, this can have a multitude of reasons: bad risk management, FOMO, no discipline, not cutting losses, etc. Or how about this: maybe the patterns you look for are just not working? Maybe you need a fresh way to look at charts.

 

Perspective

 

By using a different point of view, you might be inspired to find new ways to gain an edge in the market and come out on top. In this article, I want to show 3 ways to flip things around and gain a different perspective on the markets.

 

 

1. Trade Into Instead Of Away From A Level

 

Often, we will wait for a level or zone to be broken or to hold to get into trades. Breakout traders will wait until the price breaks through a level and the candle closes on the opposite side. On the other hand, reversal traders will look for the level to hold and see if the price starts to reverse in the opposite direction.

 

This level becomes our way of determining if a trade has a higher likelihood of succeeding. And indeed, the break or bounce of a level is often a good way to maximise your potential R:R. You can have a relatively small stop loss and the profit target can be much further away. Most traders will trade like this, but what if you look at it another way?

 

Break and retest

 

In the above example, we have a support level that has recently been broken (the horizontal rectangle). Apart from this, we can use our reversal trading skills to see that the current downtrend has flattened out, we have made a higher low and – to top it off – we can see a pin and drive pattern. Now my question to you is: what are the chances that the support-turned-resistance level will be revisited? Will this level attract the price with a reasonable certainty?

 

break and retest result

 

Yes, it will. Some levels will attract the price. Traders are eyeing these levels and often, institutional players want the price to return to specific levels in order to either get rid of a position or add to it. A lot of the supply and demand methods are based on this theory. Break and retest patterns are some of the easiest to trade this way, see the example above. Weekend gaps often want to be filled.

 

So how about, instead of trading the break or bounce off a level, you trade the possibility for the price to move into the level? It’s a different way of looking at the charts because, instead of looking at levels as the area where you enter a trade, you start with finding levels where you can take profits.

 

There is a key difference in using this approach: most traders look for entries and then go looking for a profit level. But when you trade into a level, you will first determine your exit level and only then look for an entry level that gives you the right conditions, such as a good enough risk to reward, for the trade to be worth it. Taking this approach to trading can completely change the way how you look at the markets and there are many traders who take this approach, even though it’s not usually well known in traditional trading education.

 

 

Interesting Levels

 

This leaves us with the question: what levels should we look at? The level can be a multitude of things and while you might notice that some work better than others, it basically depends on your trading strategy as a whole to see what works and what doesn’t. To get you started, here’s an overview of some levels that you can use as target zones for your trading:

 

 

Weekend Gaps

 

It’s said that “gaps want to be filled”. You’ll see that if a currency pair shows a weekend gap on the Monday open, you’ll often see that the price will cover the space in between the gap. Sometimes, the price then just continues in that direction, but often, the price will reverse again and continue in the direction of the gap.

 

weekend gaps

 

This makes the price levels created by the extremes of the gap excellent candidates to use as price targets. In the above example, we have a Monday opening that is much lower than the Friday close, which gives us a gap down. As you can see, the price moves back up, closing the gap, before continuing downwards.

 

 

Support and Resistance

 

Of course, this is probably the most common one. Support is an area that has before acted as a floor, meaning that the price first moved down into it and in some degree, has bounced back up. Resistance is an area that has before acted as a ceiling, meaning that the price has moved into it and bounced back down.

 

Support and resistance (or S&R in short) can be horizontal or vertical zones. They can be fixed price areas or can be dynamic, for example in case of the support offered by the 200 moving average.

 

SR example

 

The bigger levels will act as natural magnets and if the price moves close enough towards it, you’ll see that it often has no problem trading completely into it. In my experience, the horizontal levels are the most reliable.

 

Additionally, there are some dynamic S&R levels (for example the 200 moving average) that are often watched in stocks and indexes like the SPX:

 

SPX SMA200 bounce

 

Finally, if you see that such an S&R level breaks, you can often look for a retest from the opposite side of this level. This break-and-retest pattern is a very common and highly effective trading strategy. If you’re still looking for a strategy, this is absolutely one of the patterns you could look at and study.

 

 

Supply and Demand

 

Supply and Demand is another way of using levels to trade into. Slightly different from support and resistance and unfortunately, often confused with it. Supply and demand levels are more about the buyers and sellers in the market and the influence they have on the price, especially with relationship to drives (or larger price moves) and their origin. Even when you might not realize it, supply and demand always plays a role as it’s one of the fundamental drivers of price.

 

Supply and Demand

 

An easy way to look for supply and demand zones is to find the areas of consolidation that precede a large price move. If the price then moves down, you might’ve found a supply zone and if the price moves up, this might be a demand zone.

 

Often, these areas will be revisited as, due to the sudden price moves, not all the market participants have been able to put in orders. Institutional players will sometimes move the market and drive the price back into these supply and demand zones. This makes supply and demand natural attraction points for the price.

 

 

Fibonacci Extensions

 

Fibonacci extensions can be a great tool to measure how overextended a trend is. At the same time, it can be used to set targets that the price can move towards to. In a trending market, you’ll often see the price go to at least the 161.80% or even the 200% Fibonacci extension, so using these levels as price targets can be a valid part of your trading strategy.

 

Fibonacci extension

 

In the chart above, you can see that the price initially makes a low, followed by the first leg up (1). After reaching that point, which is the 100% Fibonacci level, it retraces to the 38.2% Fibonacci level (2). After this, we can see a rally up to the 200% Fibonacci level (3), after which the price sells off again and goes down. In this scenario, you’re using the 161.8% or even the 200% Fibonacci level as the price target.

 

What you do need to figure out is a good time to enter, which could be anything from a breakout high/low to a trend retracement (maybe using Fibonacci retracements), followed by a momentum driven pattern such as an engulfing bar. The entry method is really up to you, but for setting targets, Fibonacci extensions are definitely worth considering.

 

 

Others

 

Of course, there are much more approaches to define levels. Describing all of them would justify an article in itself, so instead let me just name a few other ways you can define levels to use as price targets. As an exercise, try to look at some charts and for each of the levels below, see if you can come up with a way to build a strategy around it that involves using these levels as targets:

 

  • Pivot Points
  • Daily Highs / Lows
  • Round Numbers
  • The nose of  WhaM setups

 

 

2. WWOTD (a.k.a. What Would Other Traders Do?)

 

Usually, traders will have a look at the charts and then think: what would the price do? While that’s a perfectly valid question to ask yourself, it leaves a couple of market participants out of the picture. A good habit to have is that you start thinking what other traders would do and how other market participants (such as institutional traders and banks) think.

 

Many traders are a pretty predictable bunch. Nearly everyone will set their stop loss just above that clean resistance level, above that candlestick formation or just below that breakout. And then, they’re surprised when their stops are hit, screaming that their brokers are doing a stop run.

 

No, they’re not.

 

You just put your stop loss in the most predictable place ever. Let’s consider the following example, where we have a retracement on an uptrend. For many traders, this is the ideal moment to buy again, hoping the rally will continue. The stops are usually placed just below the last low, which is marked on the chart:

 

stop placement

 

Now, what do you think will happen? Will the price move up in a straight line? It hardly ever does. Instead, the intermediate low gets tested again. The price dips a little lower than the previous low and then takes off to continue the rally.

 

All amateur traders are screaming “stop run” and blaming their brokers and the markets and everyone – except themselves. If only they realised they are too predictable.

 

stop run

 

 

By recognizing that you are not alone in the markets, you can already be ahead of most traders. Know that the best setups are often the ones where things are looking a bit messy. Use some margin on those stops or put them in slightly more unusual places. Before every trade, think WWOTD.

 

 

Oanda’s Forex Order Book

 

In order to get a feel of what other traders are doing and planning to do, I do find this tool provided by Oanda quite useful. It shows a real-time overview of the fx order book of the clients of Oanda, split up in the open orders and open positions for each of the currency pairs.

 

oanda order book fx

 

You can select the currency pair you want to have a look at and then it shows the open orders and the open positions for Oanda’s clients. This can be a useful tool to find out where the orders are placed and basically have an insight into what other traders are currently doing.

 

The most important information you can get out of this tool is to see at which price levels traders are placing more orders than other price levels. In the screenshot above you can, for example, see that there are quite some pending buy orders placed at the 1.1500 level. This could give you some information as to where buyers think the price will reverse and you can use this information in your decision-making process.

 

 

3. Use More Than Charts

 

Charts are just one of the tools in the toolbox of a pro trader. While it’s perfectly possible to trade by only using charts, why don’t you have a look at some ways you can combine chart trading with other techniques and data sources that might be able to give you the edge in the markets.

 

Of course, there are much more data sources available than just the ones here, but the 3 I’m listing below can definitely give you some ideas for strategies that involve more than just reading charts.

 

 

1. Volume

 

In stock trading, the volume is indispensable in determining the validity of certain moves. Volume tells you part of the backstory of price action. You see a large move on super low volume? You should keep that into account when making decisions.

 

In forex trading, volume is much less commonly used. And with good reason, because the forex market is decentralized, which means that reliable volume data is very hard to come by. The best thing you would usually get is the volume of your specific broker. This is a skewed representation of the total fx volume and might not always be accurate.

 

euro futures volume

 

Instead, my recommendation would be to check the equivalent futures volume for the currency you’re trading. In contrast to forex volume, fx futures volume is going through a central exchange, which makes the volume you see there much more reliable. Here’s a list of the most well-known currency futures:

 

 

A lot more futures contracts exist so for more information, please have a look at the ones listed on the CME website.

 

 

2. Time

 

Time is another often-overlooked parameter to trading. When used properly, it can give you many opportunities in the market. I’m going to discuss two ways to incorporate time in your trading but of course, there are much more ways to do this.

 

Opening Range Breakout (ORB)

 

The most well-known use of time as a part of a trading strategy is probably the opening range breakout. In an opening range breakout, you define a time period where you want something to happen (for example the first hour of the London or NYC open), then you define a range (the area between the high and the low during the time period) and finally, a breakout.

 

DAX ORB

 

Here’s an example of the opening range breakout, applied on the 5-minute chart of the German DAX index. You first define the first trading hour. In this example, I’ve added vertical lines to mark the start and stop of this first hour. Then, we mark the range of this first hour of trading, meaning we take the high and the low and add the blue rectangle.

 

Then, we wait for a breakout. I look for a breakout that closes convincingly outside of the range and when this happens, we enter a trade in the direction of the breakout. The simplest version of this trade is to do a 1:1 risk-reward trade with the target of 1R being the size of the range. Of course, it’s perfectly possible to use different techniques such as trailing stops, 2:1 trades and other techniques.

 

There are many variations on this strategy so I suggest you google the term “opening range breakout” for more information.

 

 

 

Trade Expirations

 

Many traders will just leave their trades be until it either hits the stop loss or their profit target. However, there’s a third option as well: expire (or close) the trade if, after x amount of time, nothing substantial happened. For this, you really need to consult with your trading journal as this is the place where you will see the relationship between trade duration and outcome.

 

You might find out that 80% of the trades that are held longer than 3 days end up as a loss. In this case, it might be worth testing out if trade expirations would have given you a better result over the set of historical trades you have taken so far.

 

 

3. Depth of Market

 

Simply put, the Depth of Market (or DOM) shows you the amount of open buy or sell orders. It usually does so in a ladder-type format that displays the price levels and for each price level, the number of orders.

 

standard_dom_bid

 

Some traders are so good in interpreting this depth of market that they can trade purely off this tool alone. Just as with charts, the DOM will show you specific patterns and the more used you are to “reading” these patterns, the better trade decisions you can make. It is especially useful around economic data releases, close to support and resistance levels or round number levels to see how the traders respond to a certain event.

 

It can be an excellent tool to time your trade entries and to see where there are lots of orders stacked together. If there are a lot of sell orders at some price point, you might understand that when the price actually reaches this level, we might see some reaction.

 

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Felix

I'm a full-time, independent forex trader. I've been trading for over 10 years and specialize in price action trading, reversal trading, trading psychology and algorithmic trading. If you're determined to become a pro trader, I offer select consulting and coaching services. When I'm not trading, I'll either be travelling the world or rock climbing (likely both). Read my story here.