One of the most important skills a trader can have is the ability to enter or exit the market effectively. You must know the tactics involved in pulling the trade on or off depending on market conditions. You have to determine the best time for entering the market so you can set yourself up for a profit plus you need to understand when it is time to exit the market in order to minimize losses. There are many tools available to help manage risk and avoid the mistakes that are commonly made by the majority of traders.
One such tool is resistance and support levels. It is essential that a trader be able to determine these levels. If support and resistance analysis is done effectively, trading consistency will increase. There are many ways to determine support and resistance areas and horizontal lines. One of the easiest way is to look at trading ranges.
Another method is using diagonal trend lines and internal lines. These will help pin-point specific prices and help you take appropriate measures to maximize income. It is recommended that you use resistance and support lines in association with price action to help inform you about changes that may occur in the near future.
Another crucial tool for successful trading is Fibonacci retracement and extension levels. It resembles the normal lines of horizontal support and resistance, but there is a special characteristic of the Fibonacci technique that differentiates it from common horizontal resistance and support levels.
The entries and exits are determined by the market’s penetration of any of the five Fibonacci retracement levels: 0%, 38%, 50%, 62% and 100%. Most trading platforms and charting software will calculate and plot these lines and numbers for you. You would be surprised how often prices retrace to the 50% level.
The Average True Range or ATR indicator is another great tool to help you determine the highs and lows of the market accurately. It is the average of the high low range for the specified period. For example, a 20 period ATR on a daily timeframe chart will be the average of the high low range for the past 20 days. This indicator is mainly used to estimate the volatility of the asset or currency pair in question.
While resistance/support and Fibonacci numbers serve as multi-purpose tools, Average True Range is designed to accomplish one task. However, you can use it as a stop loss price indicator and to help determine whether the potential of a particular trade has expired or not. That is, if price has already moved by a distance comparable to the ATR, then price may have a lower probability of going further.
Finally, any of these tools can be combined with moving averages. Moving averages are a must-have tool because they visually show the market’s momentum over several days, weeks or months. They give you an idea of the prevailing trend or market condition at a glance.
In order to be a successful trader, you need to master the craft of using these tools for analyzing exit and entry points. As you familiarize yourself with the market, you will learn to use these tools with much more efficiency.by