The nuances of trading: the method of trading "movement - reaction

In recent decades, resistance and support levels have been studied quite extensively by technical analysts. In this paper, we find a rather specific application for these levels, which in the literature is called "movement is reaction.". The peculiarity of these lines is that they work well within the horizontal price corridor.

Principle of the Movement-Reaction method of trading

Fig. 1. Schematically shows the market dynamics, which has reached resistance (movement line) in the upper left corner

Figure 1 schematically illustrates the market dynamics, which has reached resistance (move line) in the upper left corner. After the market reaches a significant resistance level, there is usually a small downward correction, which can precede the birth of an intermediate bearish trend.

First corrective movement downward spiral can be weak and fleetingNevertheless, the price chart shows an intermediate minimum, through which we draw a horizontal support line, which is called the center line.

Then we measure the distance between the two lines constructed (the movement line minus the center line) and subtract the obtained value from the center line. At the obtained point, we draw another support, which is usually called reaction line.

A bearish trend is explored in a similar manner, which bumps into strong support, followed by an upward price bounce and an intermediate-term rally.

What are the benefits of the Movement-Reaction method of trading

In combination with other indicators, they allow the trader to pay attention to the appearance of certain trends in the dynamics of the currency pair under study. This, in turn, allows optimize entry points and, consequently, make higher profits. In addition, there are many medium-term players who use support and resistance levels, usually formed by "movement-reaction" lines, to see if there are medium-term changes in the trend that allow them to achieve their exchange rate target.

Становится понятно, что одно из главных предназначений этих линий — это выявление не только важных уровней сопротивления и поддержки для исследуемого рынка, но и, что более важно, достаточно reliably identify future market evolution targets.

Using the Movement-Reaction Methodology

When analyzing the dynamics of currency quotes, the choice of the optimal time period in the process of constructing the "movement-reaction" lines depends largely on the fact that for what period of time the position is planned to be opened. As a rule of thumb, investors whose investment horizon is longer should choose the "movement-reaction" lines on daily or weekly sweeps.

For short-term investing purposes, hourly or two-hour time frames are more suitable. Day traders can use of the motion-response line even on a 15-minute sweep. Often the price dynamics of the market under study can indicate that, for example, a short-term target is bearish, while a long-term target is bullish.

It should be understood that there are a significant number of factors in the market that can dramatically change the dynamics of the currency quotes. Therefore, do not panic if the dynamics of some currencies is easier to analyze on the basis of the "movement-reaction" lines, while others are more difficult. In certain periods, any currencies can show changes in quotations regardless of support or resistance levels formed by "movement-reaction" lines, and this happens more often with some financial instruments, and less often with others. Finally, the difference in investment horizons, and therefore, investment goals, explains why not all traders can use these or those lines with equal success "movement is reaction.".

Of course, using these lines when developing trading tactics does not ensure the desired results in 100% cases, but they are definitely worth learning how to apply them.

Examples of the Movement-Response methodology work

Let's look at two examples.

Figure 2 shows a graph of the exchange rate USDCAD 120 minutes, on which the "movement - reaction" method is practiced. As can be seen from the dynamics of the USDCAD pair on the 120 minutes sweep, in the last decade of July 2007 we observe a strong bullish upward correction after the global decline of the US dollar in earlier periods. By July 30, the market reached an important resistance at 1.0700, which it lacked the potential to break through. Quotes reflected from this level downward. And the next day the support 1.0600 starts to be tested.

The figure shows that all attempts to break through this support and consolidate below were impossible for the market. After that, another purely technical correction upward comes, and in its rally the market pushed from the level of 1.0600 marked above.

It is through the bottom of the first downtrending wave immediately following the high of 1.0700 that the Center Line is drawn. The high is used to determine the location of the Movement Line. The Reaction Line is projected down from the Central Line by a distance equal to the distance between the Movement Line and the Central Line, i.e. 1.0700 - 1.0600 = 0.01 (100 pips). The Reaction Line at 1.05 (1.0600 - 0.01 = 1.0500) obtained in this way can be a good support level. Here we place purchase order.

As we can see from Figure 2, the price tested this reaction line on August 6, 2007, after which the market rose to the level of 1.0585, where our order for profit withdrawal was triggered (at the upper boundary of the Bollinger band).

Fig. 3. Euro/dollar exchange rate chart. 240 minutes.

The following chart belongs to the pair euro/dollar 240 min (see Figure 3). The horizontal Center Line is located at the high of the first small upward movement after the major low at 1.3730. The Movement Line is drawn horizontally through the point of the major low at 1.3620. The Reaction Line is located above the Center Line at a distance equal to the distance between the Center Line and the Movement Line, i.e. 110 pips (1.3730 - 1.3620 = 0.0110). The price is moving up and makes two important jumping highs against the Reaction Line on August 6 and August 8 at 1.3840 and 1.3830, respectively, which fits our model quite well.

This is where we have purchase orders. As can be seen from Figure 3, the model yields quite satisfactory amounts of profits with minimal risks (stop losses positioned just behind the reaction line, thus minimizing potential losses).