Coming at the markets from a technical analysis (TA) approach, there are many useful tools when it comes to making the most informed trades. If you've read any of my previous TA based posts you're likely to have come across the idea of "building a case for entry", using "confluence zones" as areas to consider making a long/ short entry.

If not, I'll give you the short of it:

Common TA tools to determine relatively high probability pivot points (think of it like a price level that we expect to get a good "bounce" into profits) in price include "tests" of:

1.) fibinocci retracement/ extension tool(s) levels
2.) horizontal support/ resistance lines, also "pivot lines (zones)"
3.) trendlines (TL)
4.) major moving averages (such as the 50 and 200 simple moving averages)

...among others.

The more of these "probable pivot" indicators that fall within a relatively small price range, the more "confluence" it has -- if two or more of them come within a small price range, it's called a confluence zone. The idea is that the greater the confluence, the higher are the odds that price makes a significant bounce into profits and the reasoning is simple: a large number of traders rely on these tools to determine when to buy/ sell, so having more of these tools come into play at once likely means that more traders are getting the signal to make an entry.

With that Outta the Way...

I'd like to now offer up another one of my go-to tools for determining the level of confluence, or probability of a favorable price movement -- the "pivot trendline" (PT).

The PT is a hybrid between the common trendline (a slanted line along which at least three price lows touch in the case of an uptrend line or three price highs touch for a downtrend line) and pivot line (price level that gets tested at least twice from one side and once from the other, but may be tested many times from both sides). It's a TL that "fails" at some point (price breaks through the TL) and gets tested one or more times from the "underside" (assuming it was an uptrend line).

The more times these PTs are tested from either side, the "stronger" they are considered to be, the more we can expect them to behave as a "magnet" to price and support/ resistance to future price tests.

What do these pivot trendlines look like in the real world?

Allow me to demonstrate for you :)

4-Hour Candlestick Chart of Bitstamp!

click for larger image

What am I Looking At?

On the above chart, the up-sloped black line is a traditional trendline, specifically an uptrend line (three or more lows test the line, without breaking through). All of the red sloped lines represent PTs. I placed small black arrows on the chart to point out specifically where price tested these lines and you'll notice that these tests come both from above and below them, which is what distinguishes them from the regular ol' trendlines.

The big bold black arrow points out the PT that I want to bring your focus to for the moment.

Notice how this line already qualified as a PT by the time that the third test came, around early to mid May -- two tests from below and then one from above. Also notice the relatively big bounces that price got from those test points. This is another important thing to consider along with the number of tests -- how strong are the bounces? The stronger they are, the more assured we can be that it will hold up in the future as a pivot point and that we'll get another strong bounce in a future test of that level.

The usefulness should become clear once you study the result of the fourth test of that line (the fourth arrow when looked at from left to right). Notice how it almost perfectly marked the major price low in mid July for what would have been an insanely profitable long entry.

It's also worth noting that price is currently testing one of the PTs and that we have somewhat of a confluence zone between a couple of these PTs and a trendline.

Disclaimer:

This is not intended as trading advice. It is only meant to be used to edu-ma-cate youself, foo!