13 September 2010

Methods for Avoiding Support/Resistance Traps

A question I asked myself in 2007 was how do Elliott Wave structures in forex come from high, clean falls off RSI extremes. There is some evidence for this. To avoid selling at support, this is one good way not to do it. I look for the spurt as a functional indicator of such a wave. Why, because it is hard to see structure until it has formed, but a spurt is nice and clear.

There are usually two spurts at the end of one of these forex waves, depending on where one is on its time-line, one can maybe get a quick scalp, but with care. Remember this wave is essentially rescaling the market, thus one can get caught at the re-scaled bottom, if one wants to scalp a short on it (the third spurt tends to be the rescaled one, where many are still entering short).

There is an asymmetry between long and short in forex, though there should not be, in theory, but this blog has explored this concept to an extent. Remember the importance of texture in this market (like an imposition of a conceptual view of currencies on a highly liquid market). But these comments apply to moves down particularly for EUR/USD. Other pairs have different behavioral characteristics, which would not be unexpected.

Elliott Waves seem contingent on chaos, thus another suggestion might be that they are windows onto the infusion of the equity market into forex. One could even test to see if the equity market is returning to its core computational form this way, or perhaps get a feel for this.

Another filter I use it to see where the bounce in the 'Dave Wave' occurs if one is using the 'Trading Chaos' Alligator. If it does bounce it can still indicate a turn, depending on where it bounces. This filter is really a test to see if one is actually near resistance or support.

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