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Confirming Signals

02 May Posted by in Techical Analysis | Comments
Confirming Signals
 

 

Whenever we look at a possible signal on whatever trading system or methodology you use, it’s always best to add confirming “sub-signals”. These smaller minor signals reinforce the original signal and make the trade much more reliable. I call these “Supporting Structures”.

I use primarily a basic bar chart to read trend direction and strength starting with what I call the “Dominant Structure”. I will consider a trend to be strong if the retracement at point C is less than 50% deep. The shallower the retracement, the stronger the trend. This rule applies to both bullish and bearish trends in all time interval charts.

Let’s say you see a bullish Measured Move pattern such as the daily chart of June Gold. See Chart 1 below. The main concern as price action makes a higher high near the end of March when price hit $1,450 an ounce is: can it go further up or has it topped out?

Even successful breakout trades can lead to temporary “heat” as price moves against your position before resuming the trend. To minimize getting caught in any sizable pullback, I use “Supporting Structures” to increase my confidence as well as to reduce the probability of a pullback. In order words, I want the trade to go immediately my way.

The next Measured Moves shown is Charts 2 and 3 will support the previous Dominant Measured Move’s bullish tendencies if their retracements are also shallow and therefore suggest continuing bullishness.

Notice how the retracement at point C shown in Chart 2 is deeper than 50%. Then later in Chart 3, the retracement at point C is slightly shallow again. After this third pattern, a breakout long trade just above point B will likely have a sustainable follow through to the upside with very little pullback (or “heat”) against the trade.

There are other factors to confirm the original notion of going long. Supporting Structures on smaller time interval charts can contribute tremendously to the accuracy and reliability of the trade. The idea of layering in these Supporting Structures can be used in applying Fibonacci ratios with the same powerful effect. I will discuss this in my next article.

I pile on as many Supporting Structures as I can find to help confirm and strengthen my Dominant Structure to arrive at a Superstructure trade. For more information on my upcoming free webinar, please leave a comment and your contact information.

 

Please click on the charts below to make them full screen.
June Gold Daily Chart 1

 

June Gold Daily Chart 2

 

June Gold Daily Chart 3

 

 

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