Monday, June 27, 2011

Converging Factors: Increasing the Odds

Those who follow my charts know that I only make note of the most important technical factors. However, I never make trades based on any single level. Before putting money on the line, I need to see multiple factors converge.

Some of you may remember when I shorted the TSX60 index in late May. It was a great trade that lead to an almost 70 point decline on the markets. The reason I took this trade is simple--there were 5 resistance levels. 875-880 coincided with 2 trend-lines, the 50 moving average, a previous pivot low and the 61.8% Fibonacci retracement level. No two factors were at exactly the same level, but all came close to converging and indicated that the price would have a very difficult time going higher. You may also notice the bear wedge pattern created by trading up into these levels after the down move in early may--another reason to expect lower prices.

Five factors lead to a big move down
This was clearly an ideal trade setup that's unlikely to repeat itself very often, but using multiple support and resistance levels at once is an easy way to increase the odds of a successful trade

So, the next time you're torn between two trades, make the decision simple and choose the one with the most support or resistance levels in your favour.

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