How Markets Move

If there was only one tool I could use as a trader it would be the trend line. Time and time again I see markets confirm or reverse their current trend by way of a trend line test or a trend line violation. The market is blind justice, and trend lines are the balance beam from which the scales hang.

A trend cannot reverse until a trend line is violated. And once a trend line is violated the market has a strong tendency to migrate to the next higher level trend line. Once that trend line is violated on a closing basis the market again moves to test the next higher time frame trend line. By migrating higher or lower it also lays down new trend lines behind it which set it up for the next directional move.

My second most important tool would be Pivot Points. Similiar to trend lines, when a Pivot is violated the market moves to the next higher time frame pivot. The GBPJPY chart below is a perfect example of this behavior.

Once GBPJPY clears the intermediate-term bear trend line following the double bottom from 7/08 to 7/15 it then moves above its Central Pivot Point which clears the way for a move up toward Pivot Resistance 1 and its long-term bear trend line.

The big question of course it where does the market go from here? The answer to that needs to be “We don’t know or care”. We just go w/ the flow and take the appropriate signals as they occur. A word of caution though, we generally would not be shorting the market to close to the Central Pivot, or buying it too close to R1 and that long-term bear trend line. We would also want to err on the side of that long-term bear trend.