Trends originate around monthly timeframes, the closer it is to the middle of the range it will try and trust outwards to the extreme within that same time period. The direction is determined by what side is price trading in relation to the 50% level. (Support/resistance)
Once it gets to the extremes (support/resistance) it will try and rotate back towards the middle. When the new monthly timeframe begins new levels are formed and this pushes the dynamics of the next timeframe higher or lower than the previous (Dilernia Model)
GBP/USD:- Thus when looking that the above chart, the support in December isn’t valid because time has shifted it lower in January. Therefore we have forward-modelled that GBP could make lower lows during this monthly timeframe, because the monthly timeframe is projecting lower lows.
Look at US index markets and the sell downs last Week:- as mentioned in the US weekly report on 30th December, that US markets would sell off because of where price was trading in relation to the January 50% levels:- below and in the middle of the Monthly timeframe and high probability of heading down.
Next Step:-
Have a look at any Weekly timeframe chart, it can be any chart of any index or commodity….. What do you notice?
There is a high probability that price will close away from the open during the 5-days. Therefore we have bottom-to-top or top-to-bottom trading Weeks on most occasions.
Whenever the market closes at its extremes on Friday, it normally will try and rotate back towards the middle of the 5-day range the following week before resuming the overall trend of the market…
As traders we want to look at Trends, but also look for high probability patterns in the markets so we can maximise reward and minimise Risk:- ( hold the trade as long as possible). We need Generic patterns that everyone can use even though there are hundreds of methods traders use to make trading decisions.
Let’s use an example of a lower Weekly close:- therefore next week we have an expectation that price will try and rotate back towards the middle of the 5-day range.
What happens when it gets there? Because there is an expectation that price is trying to move lower towards January lows…. will the market reverse and follow the overall trend down?
That depends on the past 3-days of trading:- if the past 3-day range is greater than the 5-day 50% level, then the high probability pattern is that price will resume the overall trend DOWN.
If the past 3-day range (high) matches the 5-day 50% level, then there is a greater probability that price will breakout above the range, and the Trading week ends up being a bottom-to-top week, closing higher on Friday….
Trading is simply about support and resistance, and where the trend is trying to take PRICE over TIME.
There are Day-traders, Swing traders, position traders, system traders, discretionary traders, breakout and momentum traders…you name it and there is a trader who fits the bill. But regardless of what trader you are…you are only as good as the method you have developed in relation to the current market conditions. As long as the market remains stable, then traders make money. Once market conditions change the trader begins to experience draw-downs.
That is why I optimise my own trading everyday to factor in changing market conditions everyday, and waiting for the most high probability patterns during the trading week. Even though this is based on GBP, you apply the same with all markets.
Therefore when analysing GBP:- the overall trend is to head down lower during January, but with a lower Weekly open next week, this might not be the case. The Weekly trend has a higher probability of rotating upwards during the first 3-days of the Week before resuming the trend. (Conflicting timeframe pattern)
Matching Timeframe pattern: - is when the monthly trend is defined to move to the extremes, and the Weekly timeframe open is opposite to the Trend: - For example a monthly down trend but the previous Week closes higher, so traders are using the higher open of the Weekly timeframe to trade the 2 day reversal back into the 5-day 50% level, but the Weekly trend continues down into Friday, as it follows the overall down trend.
So as a trader, whatever method we use, the early part of next week is going to favour intra-day traders trading daily dynamic support, it’s not going to favour breakout traders, that might take another 3-days before the next breakout is going to form (break of the 3-day highs or lows). Trend traders might have to wait until price swings upwards to get back into the "down- trend", because selling a lower Weekly open is open to RISK…..
Day traders want to be trading daily as close to daily support as possible, because it is closest to your stop loss point. Even if you are wrong Risk is minimised… (BUYING support)
Even if you use shorter methods of lagging price indicators that many traders use, the method will work best when price is rising upwards off support, as was the case around each dynamic low.
Or Shorting down from resistance:- Daily dynamic highs or 5-day 50% levels.
EUR/USDAbove is the EUR/USD Daily chart on the left and intra-day chart on the right.
The price action is opposite to the GBP, it has moved into a trending weekly timeframe closing on its highs as it chases the Weekly ranges, whilst the trend is defined by the 5-day 50% level.
Each trading day rises upwards, but is mostly ‘capped’ around each daily dynamic high range.
A higher Weekly open, supports a rotation back down or into a 2-day stall, however once again the 5-day 50% level will be the trend guide and a breakout of the channel lows and expectation is that price is rotating back down into the Weekly 50% level @ 1.46250….
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