If an upward trend is repeatedly forced to reverse at the same resistance, this means that the ratio between the buyers and the sellers suddenly tips over. Not only do all buyers withdraw at once, but the sellers immediately dominate the market activity when they start the new downward trend. Naturally, support and resistance do not always stop the price from continuing a trend.
Breakouts can provide high probability trading signals as well. The conventional technical analysis says: The more often the price reaches a certain level of support or resistance, the stronger it becomes.
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However, I cannot fully agree with this. Every time the price reaches a support or resistance level, the balance between the buyers and the sellers changes. Whenever the price reaches resistance during an upward trend, more sellers will enter the market and enter their sell trades. If the price reaches the same resistance level again, fewer sellers will wait there.
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This phenomenon is also called order absorption. The resistance is gradually weakened until the buyers no longer encounter resistance and the price can break out upward and continue the upward trend. We can observe this phenomenon when the rejections from a resistance become increasingly weaker and the price can return to the resistance level more quickly in each case. Formations such as triangles or the Cup and Handle are based on the concept of order absorption as well. The figure below shows such an example. The Silver price returns sooner and sooner to the same resistance level, as the arrows indicate.
This suggests that fewer sellers are interested in selling at the resistance level each time. In this case, the resistance level becomes increasingly weaker. Furthermore, just before the breakout occurred, the trend was accelerating upwards as the dotted arrow indicates. Eventually, the price broke through the resistance level and an extended upward trend emerged when no selling interest was left. This may sound simple, but as we have already seen during the candlestick analysis , we can quickly acquire comprehensive knowledge when we break down complex facts into its single components.
If the price rises over a period, it is called a rally, a bull market or just an upward trend. If the price falls continuously, it is called a bear market, a sell-off or a downward trend. Different trends can have varied degrees of intensity.
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In the next section, we will learn the individual facets of trend analysis. Our new price action course. Corrections are short price movements against the prevailing trend direction. During an upward trend, corrections are short-term phases in which the price falls. As we will see, the price does not always move in a straight line in one direction during trend phases, but constantly moves up and down in so-called price waves.
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Consolidations are sideways phases. During a sideways phase, the price moves sideways in a usually clearly defined price corridor and there are no impulses to start a trend. The buyers and the sellers are in equilibrium during a sideways phase. If the strength ratio between the buyers and the sellers changes during consolidations and one side of the market players wins the majority, a breakout occurs from such a sideways phase.
The price then starts a new trend. Breakouts are, therefore, a link between consolidations and new trends.
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If a correction continues for a long time and if its intensity increases, a correction can also lead to a complete trend reversal and initiate a new trend. Like breakouts, trend reversal scenarios, thus, signal a transition in prices from one market phase to the next. The chart phases can be universally observed since they represent the battle between the buyers and the sellers. This concept is timeless and it describes the mechanism that causes all price movements.
The trend phase pushes the price upwards, indicating the buyer overhang. The consolidations mark temporary trend pauses; however, a trend is continued until the price does not reach a new high during an upward trend. Corrections show the short-term increase of the opposition. If these are fended off, the trend continues its movement.
On the other hand, long correction phases eventually develop into new trends when the strength ratio shifts completely. Although the sequence and strength of individual chart phases can vary greatly, any chart contains only these phases. If we understand them comprehensively, price analysis becomes relatively simple.
Now, we are going even more granular. After seeing that any chart can only be made up of the various chart phases, which are made up of price waves themselves, we will explore the four different elements of wave analysis. Those conclude our foundational work. Every following chart formation, and any chart in general, can then be explained and understood with the previously learned building blocks. The length of the individual trend waves is the most important factor for assessing the strength of a price movement.
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During an upward trend, long rising trend waves that are not interrupted by correction waves show that buyers have the majority. On the other hand, smaller trend waves or slowing trend waves show that a trend is not strong or is losing its strength. The figure below shows that the trending phases are clearly described by long price waves into the underlying trend direction.
Left: Long trend waves confirm the high trend strength. The trend comes to a standstill as soon as the waves shorten. Right: The downward trend is characterized by long falling trend waves. However, the length decreases downwards and the trend reverses shortly thereafter. The rate with which the price rises during a trend is also of great importance. In general terms, moderate trends have a longer life span and a sudden increase in price usually indicates a less sustainable trend. We can often observe this phenomenon during so-called price bubbles, wherein the price falls again just as quickly after an explosive rise.
The development of the steepness of trends and price waves, compared to the overall chart context, is also important: Accelerating or weakening price waves might show that a trend is picking up speed or is slowly coming to a standstill. Interesting correlations can be made together with the concept of length: A trend is intact if we find long trend waves or trend waves that become longer with a moderate or increasing angle. On the other hand, a trend with trend waves that become increasingly shorter, and which is simultaneously losing its steepness, indicates a possible imminent end.
Both signals above offered incredibly favorable risk to reward ratios. Notice how long the wicks are compared to the surrounding price action. Although different in shape, the engulfing signal is similar to the pin bar in that it suggests an increase in supply or demand. There is some controversy as to whether the body of the engulfing bar must completely engulf the previous candle. I have been trading these patterns for more than seven years, and in my experience, it makes no difference.
If you were to combine the engulfing bar and preceding candlestick in the AUDUSD chart, you would get a shape that looks like a pin bar. I often see traders discussing various momentum indicators. These individuals are looking for a way to spot trends and reversals. Simple price action is all you need.
Those momentum indicators give off a lot of false positives. In other words, they will signal that a market is changing direction when it actually has no intention of doing so. This is where you can use Forex price action to evaluate the momentum. The amount of time between these points can range from a few weeks to a few months. Once complete, you will begin to see a pattern.
These swing highs and lows often form a trend line. When they do, spotting reversals in the trend becomes almost effortless. Even for those of you who already know this stuff, the simplicity illustrated by the charts above is a good refresher.