Touch Trade
Sell instant execution at the BEEDT internal SEC UNC WR as anticipated through our analysis.
Trade Plan
If our analysis is correct and price move south then we will move SL at entry.
Daily BEOC
Analysis
- Good location with plethora of confluence of dynamic and static resistance levels.
- Good close below the close price of the previous 8 candles.
- We will trade it as a breakout PA setup of the Daily CB as well as the Complex H&S.
- This is a counter trend of the Monthly trend.
- We will utilize its internal weaknesses to trade it aggressively.
Trade Plan
If our sell limit will be executed and our analysis turns to be correct then we will move SL at BE as soon as price breaks the low of the BEOC.
SPA Price Action Definition
Price action is the fluctuation behavior of a specific financial instrument over a specified period of time. Price action by itself is just another tool in the vast trading toolbox. Price action at support or resistance is what the SPA trading method refers to and focuses on.
The outcome of the market participant’s collective behavior through price action, forms support and resistance zones in the process. These usually take the shape of dynamic and static levels, as well as any other complex support/resistance stories like a chart patterns. At the same time, significant support and resistance levels initiate and give “birth” to significant price action formations. These great price action formations at great levels of confluence give great price movements that we as traders are seeking to exploit. At the chart below we can clearly evidence these price fluctuations between great support and resistance levels. The price was consolidating above a cluster of support levels where it was rejected to the higher cluster of resistance levels. At the resistance level price was rejected again with the possibility to retest the old support level.
Price action is not the whole story but only a part of a story. If we understand this then we can see the market as a whole and try to exploit it. SPA is a complete method of monitoring price action at support and resistance levels. We must know why these levels exist and why they are where they are.
A support or resistance level is where buyers or sellers have gained control at some point in the past. A virtual battle fought at each of those levels was either won by buyers “supporting” low prices or sellers “resisting” high prices. These levels are created by supply and demand forces during specific socioeconomic conditions. What was once a significant support level under a certain economic scenario may not be as important in a different economic situation, thus making the former support level not anymore relevant at that point in time.
Price action is the historical trace of supply and demand forces in a market (order flow), that reveals the expectations and beliefs of all market participants through a chart. Highly liquid investors and market participants which have the power to move an instrument, obviously leave noticeable footprints on our charts. Being in a position to properly identify and analyze these obvious and protrude footprints, requires knowledge and experience, which leads to high probability estimates as to what the market participants are doing. Tracking an animal by its snow footprints in order to guess its direction is a realistic metaphor.
Price action trading can take different forms and includes several types of techniques. However, the primary focus is always kept on the historical and current movement of price fluctuations; in other words: price action. This is given priority over what any (lagging) indicators or oscillators show.
TDE forecasts 6 days in trend mode meaning we will be looking to exit the trade next Thursday. Also, see on the chart the UNC S levels as potential targets. Again simple SPA concepts when combine together can certainly give you the trading edge.
Top Down Analysis Due To The Higher Command
At this stage, it is essential to understand the importance and power of time frames. Time frames are the “workspace” through which we will extract our trading decisions. The particular choice of time frames used, represents our “comfort area”.
Traders must comprehend the “higher command” where each time frame is governed or “controlled” by the next higher time frame. SPA workspace is the daily which is controlled by the weekly and the weekly is governed by the highest time frame of the workspaces set: the monthly.
Each time frame consists of price fluctuations (price action and reaction movements, according to SPA terminology), within which lower magnitude price action movements and reactions can be found. Hence, when you look at the monthly time frame, you can see the mega swings of these price action and reaction movements. Within those mega swings are major swings and these are our weekly swings. Respectively, within the major weekly swings there are the daily minor swings swings and so forth (see last chart attached).
In conclusion, the monthly mega swings control the weekly swings and the weekly major swings govern the daily minor swings.
Top-down analysis due to the “higher command” explained above, is the proper approach when attempting to evaluate a potential trade setup. At the charts below, I identified the mega, major and minor swings where I draw fade color dotted lines different for each time frame. The aqua stands for the monthly mega swings and gold for the weekly major swings. These are my support and resistance levels and I said mine because yours could be (slightly) different due to your broker data feeds.
The Conservative Way Of Trading The Price Action Setup
The conservative way to trade a price action setup is to place a pending buy order above the high of a bullish price action setup and a pending sell order below the low of a bearish price action setup. Similarly, the stop loss must be placed above the high of a bearish price action setup and below the low of a bullish price action setup.
The idea behind using pending orders is to defend the price action setup of being invalid or “false”. We must always remember, if we enter a price action setup before it breaks, we just enter an ordinary candle or a neutral price action pattern. Forex is not a centralized market therefore candles open and close differently on different brokers. This style of defense reinforces the conservative side of trading and it is an additional guarantee that more people will have a price action breakout on their chart.
A decent breakout of a price action setup is ~10% the size of previous candle. For instance, if we have to trade a hammer with a range of 100 pips then our pending buy order should be placed ~10 pips above the high (also taking into account nearby round numbers, fibonacci levels, S/R levels, etc…)
Aggressive Sell Limit Vs. Conservative Sell Stop
A PA setup is considered unconfirmed until price breaks its low/high the next day or days. This is the main reason that we teach and advice SPA traders to use the conservative approach of placing a trade order. The aggressive approach of taking a risk on a potential PA setup is to place a limit order or to touch trade a level within its range providing that you must have a good reason to do that. Certainly, the aggressive way is more risky since you are trading an unconfirmed PA setup and you are violating vital SPA rules such as the direct trend concept. While the aggressive approach is highly risky, it offers you the benefit of tight stops and it can be very rewarding if the trade turns in your favor. Nevertheless, price many times does not retrace and moves directly away from a PA setup. Look the BEEOC at the second chart below on the top left corner, where price had a minimum retrace and then accelerated south. Finally, a trader can always combine both tactics of placing trade orders.
Static & Dynamic Levels
General Definition of Support & Resistance Levels
A support level is the area at which demand forces (buyers) exceed supply forces (sellers) by a sufficient amount to take control. As a result price is rising, supporting the perception that it is unlikely to drop further in the immediate future, thus creating a support level. Similarly, a resistance level is the area at which supply forces (sellers) enter the market in sufficient amounts to take control from demand forces (buyers). As a result price is falling, leading to the perception that higher prices are not likely to be seen any time soon, thus creating a resistance level.
By now you must be wondering what is exactly the difference between “static” and “dynamic” support and resistance levels. The answer is simple and straightforward. Static levels refer to horizontal, fixed levels which have acted as support or resistance in the past, and therefore have the potential to act in a similar way in the future. Dynamic levels refer to support and resistance areas which are governed by a variable condition. This could e.g. be an inclined trendline, a moving average, etc. Since the “rule” which governs the support or resistance level changes over time, the relevant support or resistance zone dynamically changes too, following the “trigger”, whatever that might be…
Support and resistance are proven levels in the past where Bulls (buyers) won a battle agains the Bears (sellers) and vice versa. The market participants remember these levels. There is nothing chaotic in the market, on the contrary a market is controlled and structured. Therefore, supply and demand market forces will drive price to these historically established support and resistance levels where according to the current market sentiment based on socioeconomic and political conditions, will either support or resist the price. Moreover, new support and resistance levels will be formed in the process, reflecting the different conditions at each point in time. For example, a house’s price might have been perceived as “cheap” in 2007 but considered as “expensive” in 2012. The same applies to the opposite scenario, where the same house might have been considered as “expensive” in 2003 and “cheap” in 2007…
SPA Static Support & Resistance Levels
At this stage you must be familiar with the concept of the “higher command” where each time frame is governed or “controlled” by the next higher time frame. Also, you must know that SPA is a multiple timeframe trading methodology that includes 3 workspaces, the daily which receives directions from the weekly and subsequently the weekly that is directed by the monthly. Based on this, SPA utilizes the monthly mega, weekly major and daily minor swings to identify the support and resistance levels. These mega, major and minor swings reveal the loss or win of control between buyers and sellers at the relevant timeframe. These are the SPA monthly, weekly and daily support or resistance levels.
Furthermore, SPA utilizes the close of a candle when identifying the monthly, weekly and daily support or resistance levels. The close is the most influential of all four parameters of a candle; however the open, high and low of a candle have their usage in SPA methodology, too.
Additionally, when drawing our support and resistance levels on the chart, it is recommended to use faint dotted lines and certainly not bold for two reasons: a) we can see the price clearly on the chart without the support and resistance lines obstructing our view and b) these lines should not be treated as fixed and certain boundaries, since they may influence our bias and perception when drawn solid and bold. What you need to remember is the fact that a support/resistance level is not a fixed price, but rather an area, a level, a zone, at which we watch closely for the potential footprints of buyers/sellers respectively.
The time factor is an element that SPA absolutely ignores. Price is what matters.
At this stage you should understand that the Monthly S/R levels are those within which the Weekly fluctuates. Consequently, the Weekly S/R levels are the ones that the Daily fluctuates between. This will help you realize why you cannot use information from a lower time frame to trade the higher time frame. For instance, you can’t use the H4 S/R levels to trade the Daily. Lower time-frames help us fine-tune our entry point and manage the trade, as long as our higher time-frame analysis supports such a trade.
There is unquestionably no magic in the reaction of price to S/R levels. Our focus should be directed towards correctly identifying active S/R levels. SPA simply utilizes the S/R levels where price changed direction in the recent past. Based on this information, we can identify strong S/R levels where several Monthly and Weekly S/R levels coincide.
Naive traders or beginner technical analysis enthusiasts (been there - done that…), have a false impression about what support and resistance means. They tend to think that price has to and will reverse once such a level is reached. Even worse, they pre-emptively enter positions in anticipation of a reversal…
I think it’s time to set things straight. Every S/R level is only an area in which price will potentially do something important. A simple S/R level doesn’t really mean anything, unless price actually reacts to it. Trading experience (and pure logic, too…) suggest that price always respects the pre-defined S/R levels in one of the following three ways:
Price will bounce at the S/R and reverse
Price will break through the S/R
Price will consolidate around S/R and then either break through or reverse
I can already hear your next question coming in:
"How exactly is price “respecting” a support/resistance level if it simply breaks and cuts through it like a hot knife through butter?"
Well, the answer is, frankly, quite simple. Price will do whatever she wants. Just because the overall market conditions at the time did not favour a reaction to that level, which lead to a subsequent penetration of the S/R, it doesn’t mean that price does not respect it. Price cutting through support or resistance is by itself a message. Price wants to tell us something, and this message goes something like this:
“Dear market participant, at the current moment in time, taking into account the overall market conditions, I am obliged to penetrate this level simply because the supply and demand forces say so. If you want to close your eyes and pretend that this level is still valid, feel free to do so, but I promise to keep going the other way until you are either broke, or become convinced to eventually close/reverse your position.”
Simply put, the penetration of a prior support or resistance level is of utmost importance, since it shakes our prior “beliefs” with new facts on the chart. The ones mentally flexible enough to quickly re-examine their strategy and positioning are the ones who survive to see another day in this serious business. On the contrary, traders who become emotionally attached and obsessed with their ego, their own opinion, their beliefs or open positions, will see their account torn into pieces over time.
Take this little piece of advice not only in your trading endeavours, but also in life as a whole…
“The more agile we are in constantly changing conditions, evolving according to our environment’s changes, the higher our chances of survival.”
Complete SPA Analysis
There are two ways to use SPA:
The first approach is to wait for a price action setup to form and then evaluate it according to the SPA criteria. In practical terms, this means scanning the pairs on your watch list once a day (after the Daily candle close), once a week (after the Weekly candle close) and once a month (after the Monthly candle close) and examine their validity.
The second approach is to use the SPA concepts/tools in order to identify potential levels where price action setup might appear. If this is the case and a price action setup appears at an anticipated level then we must evaluate it anyway based on the SPA criteria.
The existing example of EURUSD is giving us the chance to explain and clarify both SPA approaches of identifying trading opportunities.
We can see the “almost” Hammer on the Weekly timeframe (see second chart) after scanning the Weekly candles of the pairs on our watch list at the end of the week (1st approach). This is an easy pass meaning is not tradable according to SPA criteria. This is the situation that most traders lose money and this is the result of price action setup being trapped between unconfirmed S/R. I will not elaborate on the first approach since it is straightforward. Nevertheless, I will explain in depth the second approach with this post.
We start our analysis using the “top -down” approach.
The Monthly chart determines the direction of the trend as well as the Monthly S/R. See the first chart attached below: The trend reversed with a failure swing top and is trending down since then, recording Lower Highs and Lower Lows in the process.
We then drop down to the Weekly chart to examine the validity of the Monthly S/R. You can see on the second chart below an UNC MS at 1.26788 and an UNC MR at 1.33846 were identified
At the third chart we determine the direction of the Weekly trend relative to the Monthly. As you can see, the Weekly is at a Range with bias to a non-failure swing top. We also identify the Weekly S/R
We then drop down to the Daily chart to examine the validity of the Weekly S/R. See the last chart attached, the UNC Weekly S/R were acknowledged
Now let’s put the puzzle together. The Monthly trend is BEARISH, the Weekly trend is at a RANGE with bias to become BEARISH if a new Lower High occurs. We identified an UNC MR at 1.33846 and an UNC WR at 1.34465. These are the levels where we must wait to see a VALID, based on SPA checklist, BEARISH price action setup, on the Daily timeframe. This is where we time and initiate our trades.
Weekly Hammer
Analysis
- Monthly trend BEARISH.
- Weekly trend BEARISH.
- Monthly CNF BEOC controlling candle.
- Price is trapped in a “dead zone”.
- FCL too close to manage the trade.
The Weekly Hammer is invalid for SPA traders. We will leave others to trade it.
Weekly Hammer
Analysis
- CNF Monthly 2 period Shooting Star as controlling candle.
- 2 PRI UNC MS below and none above to utilize as potential targets.
The Weekly Hammer is invalid even though its location is great.
Weekly H (2)
Analysis
- Weekly trend BEARISH.
- Weak close below UNC WR.
- Fighting the 4 weak CB directly ahead.
- FCL too close in the possibility of the PA confirmation.
PASS.
Trade Update
The closing of Friday’S candle above the WS at 0.9779 is not the best for our stress free trade. We will monitor the price action at the 0.9802 WR to see if price will confirm it as R and reject price to lower levels.
Daily BEEDT
Analysis
- Good size and shape.
- There is traffic to the left and it is not at swing high but it could be traded as a breakout PA setup.
- Descending triangle with a target an uncharted territory or probably the pair’s lowest ever.
- All the R levels above the setup are confirmed. Plethora of unconfirmed S below.
- All the trends with the conservative trading approach are BEARISH.
- FCL the MBRN 77.50
- We have a doubt concerning the BEEDT weak close JUST above the WS at 78.24 and it is more than enough to avoid this almost perfect PA setup.
