Reliably Finding Strong Price Levels to Trade

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Reliably Finding Strong Price Levels to Trade

The European session opened up with a decent amout of volatility on the GBP/JPY, with large wicks on the opening candles spanning over fifteen pips. The market first rose up to the daily pivot level of 172.264 although no trade set up in the way in which I approach the markets, given the close above the level.

The pivot did eventually hold and on the way down I began targeting 172.100 as a support level for call options. In the image below, you can basically observe why I had this level marked off as having trade potential. There were basically three prior instances within the past few hours that had supported 172.100 as a support level. And on all three occasions it had acted as a shelf for price to rest on.

Of course, I needed some sort of price action confirmation for me to get into a call option. I never trade just the level itself, as it’s too risky. Support and resistance by itself in isolated form isn’t a great strategy/system to trade, even if you’re targeting major levels only like pivot points and the one seen here created from previous price history. It’s important to consider the price action, as well, in addition to trend and momentum, most notably.

The 4:10(AM EST) candlestick did bounce off 172.100, as did the 4:20 candle. The case of two five-minute candles showing rejection gave me enough confidence in looking at getting into a call option on the next touch of 172.100. Oftentimes, in the case I’m considering a trade against a recent trend or bout of movement contrary to the direction of my intended trade, I’ll look at more than one rejection (confirmation) candle to help validate its robustness as a price level worthy of trading. As such, this is what I did here.

I got into a call option on the touch of 172.100 on the 4:25 candle. This trade did spend a decent amount of time against me, going two pips out of favor before rising a pip in favor. In the end, I wound up with a two-tenths of a pip winner. This is a slim margin indeed, and one could definitely say some luck was involved. Nevertheless, the general prediction that price would hold on the fourth consecutive test of 172.100 did come to fruition and price began to break higher again just after 5AM EST.

Pivot re-established itself as a resistance level on the 5:20 and 5:25 candles, neatly closing and opening at the level and rejecting further upward movement. The bearish 5:30 candle was exactly what I was looking for in terms of showing that selling movement was in play. It’s really exactly what you might want to see at a resistance level when you’re considering a put option set-up. After all, if you’re considering a put option trade, you might want to actually observe some sort of selling tendency in the market first as evidence supporting that position.

The 5:35 candle did not touch the pivot level, but the 5:40 did where I got into a put option at 172.264. This produced another rejection initially, but buying movement continued afterwards and I lost this trade by a couple pips.

The market would hang around pivot until around 7AM, although no real call option opportunities emerged. Given the uptrend all the way from 172.100 and through the pivot, it wasn’t entirely surprising that resistance 1 (172.435) was the next level in sight.

And like the pivot level in the previous trade set-up, the price action around resistance 1 was similar. Price rejected 172.435 on the 7:25 candle, held below on the 7:30 (reaching five pips below resistance 1 at one point), before coming up to reject again on the 7:35. Like previously, I waited for this second rejection of the level to help validate that price as a solid area for reversal, given I was up against an uptrend.

After the second rejection, I looked to get into a put option on the next touch of 172.435, which occurred on the 7:40 candle. This trade spent a little time out-of-the-money, but by no more than a pip or so, before going up to five pips in favor, before closing as a three-pip winner. This level did hold, so I could also feel good about the overall idea behind the trade and my reading behind the market.

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AlphaEconomics

International trade and lower prices

International Trade leads to lower prices:

Another common argument put forward to support international trade is that it lowers the price of goods and services.

There are a number of reasons why international trade may lower prices:

1- International trade allows firms to take advantage of larger markets which means they can take advantage of greater economies of scale. These economies of scale allow firms to lower their costs which they can pass onto the consumer in the form of lower prices.

2- International trade also means firms face greater competition. This forces firms to improve their game; being more efficient, lowering costs, improving products and lowering prices. Prices should therefore be competed down.

3- The theory of comparative advantage and absolute advantage state that countries will increasingly specialize in those products that are most suitable to their resources endowments. What this basically means is that each country does what it is most suited to and this again leads to more efficiency and potentially lower prices.

If you combine all of the above you have some pretty strong forces working to bring prices down. So is there any reason why prices might stay high or even go up.

Counter arguments:

The above really depends on firms passing on the cost savings resulting from more specialization and economies of scale. Consumers will only experience the lower prices if these cost savings are past on and firms are only likely to pass these savings on if there is competition forcing them to do so.

If there are barriers to entry, monopoly power, collusion, or government intervention to restrict competition then firms will have little incentive to lower prices.

Free market economists tend to argue that competition will exist, or at least the threat of it will (contestable markets), and therefore firms will pass on their saving in lower prices.

Others will argue that the most likely outcome is that certain firms will start to gain monopoly power and just absorb the cost savings in the form of higher profits and consumer will see little or no benefit. Indeed if the monopoly power is significant then prices might go up.

I think the truth is somewhere in between these two views. Certain products certainly seem to get cheaper – electronics and clothes being two obvious examples. But at the same time they are not as cheap as they could be. Take this example of smart phones:

If you think about what you get for your money smartphones and the like are very cheap. But the evolution of the industry neatly exemplifies the upward and downward pressures on prices as a result of trade.

Firstly, international trade allows Apple to make the Ipad cheaply:

But the industry has quickly moved toward monopoly power which allows firms to keep price high:

And, while smartphones are incredibly cheap when you compare them to what you would have got for the same money 10 yrs ago, prices could certainly be lower: http://www.guardian.co.uk/technology/2020/apr/23/bad-apple-employ-more-us-workers

While obviously this is only one industry it is a good example.

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One thought on “ International trade and lower prices ”

I think this is a great of example of theory vs. reality.

Theory is correct that through comparative and absolute advantage nations will specialize in what they are good at and therefore global prices fall. Real life backs this up; Apple designs in California, making use of the immense skill base in silicone valley, and china build the product making use of the cheap labor.

However, I would argue ‘third’ party factors come to play stopping the theory playing out as it should.

You make the point of government intervention, but there is also consumer, company and union intervention stopping comparative advantage fully applying itself. Take Renaults recent decision to close production outside Swindon, UK, to focus on the French manufacturing base. This, despite the fact the Swindon factory was more efficient.

The company being French saw that it was prudent to support the French base – politics. Consumers,love to buy nationalistically, even if the product is inferior. And, Trade Unions in France are very strong and could have caused serious issues if Renault closed French production over English.

Beyond this a cost which is never accounted for in the theory is that of fluctuation in transport costs. In our industry, fire-safety, where many components are made in developing nations (Thai computer components for example) are bought to the EU for final assembly and then re-exported. But transport prices are rocketing. Oil prices are driving up freight costs which are very sticky coming down again. These varying transport prices call into question the benefits of specializing and undermine the basis for comparative advantage as an applicable model.

Finally I think the biggest factor in comparative advantage not working is domestic demand! For example; French resistance to foreign wine; American Steel having to be ‘American’; Australians drinking VB!; and in India ‘Thumb’s Up’ (a horrible cola drink) preferred to the internationally loved Coke Cola!

However, you could counter this last point. Do consumer really ignore the superior quality and lower prices of foreign products and therefore undermine compartative advantage or do domestic produces just know their market better.
Either way your arguments of potential worldwide monopoly, Economies of Scale etc can be shot down when a international super power such as Coca-Cola can’t get a strong foot hold in market of a billion Indians!

Ultimately another question to be asked is do we want comparative advantage to succeed?

This is a social-political-economic argument. Closer trade brings nations together; the EU has fostered the longest period of peace between European nations in history. But then do nations want/need to be interdependent? Would we lose our skill base if we imported in all our textiles for example?

Also in the west particular we are discerning consumers. We dont want the coffee from the cheapest national producer; we want Columbian Fair-Trade, medium roast, course ground coffee and so forth.

Finally; are we also moving to a state where the word comparative advantage should no longer be applied to states but rather businesses? I could give you a huge list of where companies buy off competitors because they do this better and cheaper. The car industry is infamous for it; rover buying honda engines; the one series chassis was bought from Hyundai; VW sell their engines to BMW, Audi, Alfa, Fiat and many more. The one producer who insisted doing it alone went bust; Saab!

Are global ‘super brands’ the new basis for the comparative advantage model?

How to Use Horizontal Levels and Price Action to Trade

While there are numerous forex trading strategies, perhaps one of the simplest – and most successful – is to use horizontal levels and price action. While there are more complicated strategies, many successful professional forex traders use this approach as the core of their own strategy.

To know how this strategy works, it is important to understand exactly what a horizontal level is and why it is important. In essence, horizontal levels are price levels that represent either resistance or support in the market. For instance, a price may fall to a support level, at which point buyers step into the market and create demand, driving the price up again. Similarly, when a price rises to a resistance level, traders start to sell to lock in profits, creating downward pressure.

In some cases, a price will oscillate between a lower support level and an upper resistance level for an extended period of time, creating opportunities for trading in the channel between the two levels. In other cases, the price will break through a level, return to the level and then reverse again. In this case, the role of the horizontal level changes – an old resistance level becomes a new support level, or vice versa. For instance, a price might rise to a resistance level and break through it, fall back to the resistance level and then start to rise again. When this happens, the old resistance level starts to act as a new support level.

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Both of these scenarios offer trading opportunities. In the case of a channel, a potential opportunity occurs when the current price hits the upper or lower range of the channel. For cases where there is a breakthrough, a potential opportunity happens when the price returns to the horizontal level that the price broke through. For instance, if a price breaks through a resistance level and then returns to that level – now a support level – this may offer a high-probability trade.

However, not all of these cases are trading opportunities. To determine whether there is a likely opportunity, traders need to look for price action at these points. Essentially, these are major market price events, such as a pin bar reversal. When these happen in combination with one of the channel or breakthrough events at a horizontal line described previously, then there is a high likelihood that a profitable trading scenario may follow.

One good example of this is when a price drops to a support level, followed by an inside bar breakdown that leads to the price breaking through the support level. If the price then declines further and then reverses upward, the trading opportunity occurs when the price hits the horizontal level it broke through. At this point, further price action is a high-probability signal for trading.

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