Extrems in trading: how to determine correctly? 3 Rules
It is impossible to profitably trade in financial markets without knowledge of how to “read” the mood of the market and find optimal points for entering the deal.
For this, there are many different methods and technicians, but the most important tool remains a technical analysis.
It is it that allows you to correctly determine the movement of the price on the graphics. The concept of extremum is one of the most important in this type of analysis.
Extremes in trading - it is about them that we will talk about them today in cooperation with the NPBFX .
What are extremums in trading?
Without theory, nowhere. Local extremums are called both maximum and minimum prices for any period of time.
Moreover, it is important to note that it is local - since for a period of one day and a period per week, extremum indicators can differ significantly.
If you look, for example, at any schedule, you can see that the price moves very exciting, sometimes even races. Reaches some high point, drops down, fixes there and grows again. It is these very upper and lowest points that can be called extremums.
How are extremums related to the trend? First of all, it is thanks to them that you can understand where the price on the schedule as a whole is moving, that is, determine the trend. If each new local extremum is higher (or lower, depending on the direction) of the previous one, this is an indicator of the ascending (or descending from the displacement of extremums down) the trend.
What else do extremes are needed for? In addition to obtaining information about trends, extremums are used by traders for different points:
- Stop losses. General recommendations are as follows: in the case of opening a position, it is worth establishing a restrictive application a little at a distance from the nearest peak in prices. If the trend in the market is confident, the price of the previously extremum will return unlikely.
- Price levels . If a large number of price peaks are at about the same level, forming an actually straight line, you can perceive this a guide to concluding transactions. This works best on large timeframes.
- Channels . Thanks to extremes, channels are built in which price movement occurs. The upper boundary is formed through a straight line of price maximums, and the lower - minimums. This information allows you to evaluate profit and probable risks.
How to correctly determine extremums on the graph?
The postulate of uniform rules that will help to determine extremums in MT4 does not exist. This is primarily due to the fact that traders learn to find the necessary points very quickly with experience when looking at the schedule. We have selected a few recommendations that will help not make a mistake with the choice.
- Visually highlight the main points on the graphics. It would seem the most obvious - just look at the schedule and highlight the highest and lowest points on it. Imagine this visually as follows, taking the first instrument chart with the first timeframe. In our case, it is Audusd with the H1 timeframe. Several main points are clearly distinguished, this is most likely to be local extremums.
- Decide on the desired period of time and find points. Suppose we need to highlight the minimum and maximum points over the past five days. In this case, using the dated schedule, we highlight the area of interest to us, and only within its framework we find the highest and highest low point of the schedule.
- Check your solution using indicators. But what to do when there are doubts? For example, are these points on the graphics on the graph?
It seems to meet all the requirements - this is the same local “peak” or “bottom”, like others, it just does not catch the eye. To understand whether this point is an extremum or not, it is best to use additional indicators - there are many of them, but today we will consider the two most popular. One - for finding local minimums/maximums in large quantities, and the second for more global extremes.
In the first case, the FRACTALS indicator built -in in Metatrader 4 is used, which can be found along the path “Insert” - “Indicators” - “Bill Williams” - “FRACTALS”. The system will offer to choose the color of the indicator itself, and then automatically add it to the graph. It looks as follows. As you can see, there are a lot of designations.
For those who prefer to work with more accurate and long extremums, Zigzag indicator is best suited. It is also built into the MT4 terminal. By adding it to the schedule of any tool, we get such a picture.
Just clearly formed peaks and cavities will be the most extremums. The indicator ignores the smaller “good luck” and “falls” of the market and a continuous zigzag line notes what to pay attention to. It is worth noting that the straight lines of the indicator continue to change their position until the angle is formed. After it manifests itself on the graph, the line remains in place and is not redrawn.
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