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Futures Trade Desk- Trend-line and Retracement Opportunities

Trade Desk Client Note

Global Futures Market Review

Trend-line and Retracement Opportunities

When fundamental outlooks and news headlines dominate the trading environment to the extreme they are doing in the near-term one of the most reliable, yet simplistic, Futures chart patterns can be found on a 4-hour chart. Linear trend-lines and channels easily reveal price action support and resistance areas and mid-term potential swing and reversal points.

An issue arises in how trend-lines are drawn, and more importantly what the trend-line analysis is able to achieve on a consistent basis. Linear trend lines are designed to reveal the support and resistance areas that for whatever fundamental reason are important to the market in that particular time-frame. 

Technical trend-line drawing on bar charts making use of candles wicks creates a clear view of where fair value can be found on mid-term charts.

When drawing trend-lines always start from a previous support or resistance areas as far back as the standard 4-hour time-frame chart allows and then work forward. Working from the current time-frame and going backwards tends to slant the data and creates patterns that a trader wants to see, rather than patterns that are of most importance.

Tenured technical traders are not looking for complex patterns when trading Futures and Forex; global commodities are a market of need with a high level of reactionary price action that will not always have time to allow complex patterns to complete. Futures and Forex charts really should be very clean and free of clutter.

Futures markets are moving as much in any given day as they do in a week in the current Black-Swan environment, and momentum breaks may not be able to form, signal, and complete while fundamental headlines dominate proceedings. A Futures swing trade tends to be a 2-3 day affair, compared to 2-3 weeks in equity trade.

TheLFB DXY 4-Hour

TheLFB DXY 4-Hour Chart

Properly drawn linear trend-lines on a 4-hour chart will pick up the wicks of the farthest (oldest) candles and then find two connecting price points that form the trend line. A solid trend-line then reveals the potential third point, which can be plotted as a swing point to bounce from, or break through. Trend-lines create price areas to work from and are best used as the anchor that supports near-term trade signal analysis.

The analysis above is looking for the third price point to confirm the line already in place either as support or resistance is justifiable and relevant. Once a third price point is discovered the chart analysis should stay in place and be monitored for a reaction as the price point is hit. 

TheLFB DXY 4-Hour

TheLFB DXY 4-Hour Chart

Once the trend-line has been initially tested and held in place a Fibonacci study can be run from the first point of the trend-line with a link to the high or low of what can be seen as major support or resistance on the chart. Trend-lines and Fibonacci studies work as well going long as they do going short. 

If the second or third point on the trend-line is also a Fibonacci retracement area of 23%, 38%, or 50%, traders have a very good confirmation that the price point will create a reaction when hit. 

Automated market algorithm programs are likely to have also found a similar price point; technical trading comes down to mathematics in its basic form. Disciplined trend-line and Fibonacci drawing create a simple way to get a big-picture view of overall sentiment.

When using trend-lines to work an Entry or Stop from it is important to allow the time-frame (4-hours in this example) to complete and the candle to have closed before acting. On most occasions the wait will allow a clear picture to form, other technical or fundamental analysis to be absorbed, and confidence to build that the price area is relevant.

TheLFB DXY 4-Hour

TheLFB DXY 4-Hour Chart

As shown above, the trend-line Point 3 is also a 4-hour Fibonacci reversal area, which offers secondary confirmation of the trend line potential. In review, traders are looking at 4-hour charts, finding three points, getting Fibonacci confirmation, and then having the patience to set the line and let it complete. When used as a tool to compliment other technical and fundamental analysis, 4-hour trend lines when properly drawn are very reliable.