Trading with Market Geometry Principles

 

Hello there this is tradingpedia.com and this video deals with a concept that is very old in technical analysis. This is called market geometry and it mainly deals with previous support and resistance areas that trader use on the right side of the chart, so basically they interpret what is on the left side of the chart and interpret what is on the right side of the chart to find out where and if the market will hesitate.

In other words, the bigger the timeframe, the bigger the support and resistance and the bigger the likelihood that the market will react on such levels. Support and resistance are of two types – one is horizontal, an area where the price failed in the past and you expect for the market to fail in the future as well. Another one is a dynamic level, one that follows the price action.

Market Geometry – Example

For example, if we draw a trendline like this, we see that the EURGBP fails at this trendline multiple times. This is a dynamic resistance area and support and resistance change in time.

Market geometry principles call for looking on the bigger timeframes, find out support and resistance levels, and then you look on the lower timeframes for quick reversal patterns, like classic reversal patterns (wedges, head and shoulders, double and triple tops and bottoms, etc.) or Japanese reversal patterns (engulfings, stars, doji candlesticks, etc.). I would always favor Japanese reversal patterns because they take less time than the classic ones.

Let’s look a bit on this EURGBP chart and what can we do from a market geometry point of view. It shows the price action from 1996 to 2020, about 25 years of history. We see that the pair fell all the way to here and then bounced and made a new high.

How to Find Out the Fibonacci Ratios

The first thing to do is to mark the top and the bottom on the monthly chart with two horizontal lines. And then to use a Fibonacci Retracement tool to find out the important Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%) with the 61.8% being the most important level. So we draw a trendline and the market reaches 61.8%.

Coincidence or not, after making a new high in 2008, right during the financial crisis, the EURGBP fell, the sovereign crisis in Europe started and the market retraces to a support level, which is 61.8% of the entire move. This is one thing that traders knew in advance because we can mark the top and the bottom many months earlier before the market actually reaching the level.

Then the key is to go on the lower timeframes and to find out if there is a possible reversal pattern. We see that the market actually formed here a triple bottom – a reversal pattern on a market geometry support level, and when the market broke higher we could go for the measured move. And this is how you use one level.

This is the 61.8% level and it makes sense to mark all the levels. If the market bounced here from the 61.8% it did not do this by chance. Even back in time it hesitated more or less around the same area.

The price had a hard time breaking the area, made a new low, tried again, consolidated in a pennant formation and then popped higher. So this is a previous resistance area that turned into support.

Confluence Area

At this point in time there are two factors that reinforce the possible bounce on the EURGBP market. On the one hand we have the 61.8% retracement, on the other hand the triple bottom on the lower timeframe, and the third factor is that the previous resistance that acted from 1998 to 2007 for almost ten years, turned into support. This is called a confluence area, where more than one factor comes and support an investment thesis.

Sometimes one can add a dynamic support or a trendline that comes at the same level, and this comes to further support the idea. This is how you use market geometry, a basic example, but consider marking the top and the bottom on the bigger timeframes, find out confluence areas, at least two factors that support your theory, and then go on the lower timeframes and look for reversal patterns and trade them accordingly.

Imagine how many markets are, how many currency pairs exist, indices, commodities, and so on – market geometry works on each and every one of them and with money management and perseverance, anything is possible.

Thank you for being here. Bye bye.