Lesson 21: Identifying important thresholds and choosing objectives

It is certainly very important to know how to study trends and get trading signals, but it can be equally important to know how to position your objectives.

To do this, it can be very useful to be able to "tag" your graphics with potentially important thresholds, which are as many points of turning or friction (pause) possible.

Identifying the important levels is indeed the indispensable prerequisite for the positioning of the objectives, and it is therefore a skill that a trader worthy of the name can not happen.

There are a number of techniques to identify important levels, and you already know the first two: Supports and resistances and moving averages.

As we have seen, these tools can, among other things, serve to define objectives, but we will summarize here the principles already seen, which we will complement with two tools that are also very useful in identifying important thresholds: Fibonacci retracements and points pivots.

Supports and resistors

Since supports and resistors tend to stop or slow down movements, they can logically be good tools to position their goals.

-If you follow a buying position and a resistance is on our way, it may be wise to place its limit (its lens) just before the resistance.

-On the other hand, if you follow a selling position and a support is in the line of sight, you can place the lens just before this support, in order to avoid starting the gains in case of rebound from the support.

Moving averages

As with supports and resistors, moving averages can constitute "points of friction" and can therefore also be used to position targets.

-When we follow a position and a significant moving average is on our way, it may be wise to set its limit (target) just before the moving average.

The retracements of Fibonacci

Fibonacci retracements follow from the Fibonacci series, a famous numerical sequence developed by an Italian mathematician of the 13th century.

Often applied in the sciences and especially in biology, trading techniques based on this suite have also been developed.

Regardless of the underlying mathematics of this method, the important thing is that many traders use it, and that the levels it finds will therefore be significant for many people.

Concretely, it is a question of "cutting out" a finished trend, in order to deduce significant levels for the trend following the finished trend.

In practice, you have almost nothing to do but drag your mouse from the highest point to the lowest point if you retrace a bearish trend, and from bottom to top if you trace a bullish trend .

As can be seen in this example, Fibonnacci levels often correspond to turning points, and sometimes serve as supports or resistances. This does not work at all times, nor with extreme precision, but we can confirm the levels marked with the supports or resistances, or with the pivot points, technique that we will study below.

The pivot points

The technique of pivot points allows to identify 9 important levels (1 pivot point, and 4 supports and 4 resistances) automatically calculated by the trading platforms. Again, we will ignore the calculation, which has no interest, to focus on using in trading.

Of the 9 levels calculated, the most important is the Pivot Point (the middle one).

The rule of use is very simple:

Overall, if prices move above the pivot point, the trend will be considered positive. Conversely, if prices fall below the pivot point, the trend will be analyzed as a bearish trend.

If a decrease is made, then levels below the central pivot point can be used as targets.

Conversely, as part of a purchasing operation, targets above the central pivot point may be targeted.

The last major peaks and troughs

The last major peaks and troughs are also to be considered as important thresholds. They can be the last peaks and troughs of a trend, the limits of a channel (graphic thresholds), or the maximum rates reached over a given period (numerical thresholds), for example:

* Highest / Lowest over 52 weeks (1 year) 
* Highest / Lowest annual, monthly, weekly, daily

The psychological thresholds

Psychological thresholds are the most important and objective thresholds that are the easiest to identify. These are essentially round thresholds, and at this level there is an immutable rule: The more zeros there are, the more psychological the threshold!

The more zeros, the better!

The round threshold par excellence is therefore the parity, that a currency has a value also to the currency in front of which it is quoted, ie the price is equal to 1.0000.

Apart from parities, there are the psychological thresholds at "three zeros", 0.8000, 0.9000, 1.2000, 1.3000, 1.4000 are some examples. As you will have understood, these major psychological thresholds are found every 1000 pips.

There are then the psychological thresholds to "two zeros", every 100 pips therefore, and one can go lower, with courses ending at 20, 50 and 80, which are also often useful psychological thresholds in the short term

Lens Positioning Method

You therefore have at your disposal various tools to identify important thresholds thanks to various techniques and principles. As often in forex trading, the rest of the work therefore consists of finding confirmation.

Indeed, if several different techniques point to the same (or nearly) important threshold, the importance of this threshold will be reinforced.

The ideal is to take the time to locate ALL the important thresholds on your graphics, to finally keep only the most confirmed ones.

And to position your objectives, it will be enough to "draw" your stop and your limit among the important thresholds of your graphs, taking care not to take into account the notions of risk management!