Step one: Analysis
This is the step where we analyze the previous day’s price action to identify the price levels of interest.
We look at three different parameters in order to find these levels:
This is the easy one: we simply look at the high and the low of the previous day and mark them with simple horizontal lines. Most of the time, when price is trending fast you will see these levels acting as support and resistance and then they eventually gets broken out with momentum.
Swing highs and swing lows are those points where price failed to make a new high or low and then reverses. They are quite easy to spot. The only thing we need to be careful of is to not select the swing highs and swing lows which have been reached already in the previous day’s price action. I will explain this later with the help of charts.
These levels are quite straightforward and most traders know how to draw them from existing data. We are looking for at least two points in the previous day’s price action which, when joined together, form a support and resistance.
Now let’s refer to an image which will help you to understand all this better:
This marks the end of the Analysis part; the next item we will look at is “Acknowledgement” and what that means.