Trading Multiple Touch Levels

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Lines drawn on charts – whether they be support-and-resistance lines or trend-lines – if touched multiple times have an increased chance of preceding potential areas of heightened volatility.

When these lines are finally broken they often result in rapid, volatile breakouts. Moreover, the strength of the resulting break tends to correlate with the number of touches the line has undergone, such that a breakdown through a trend-line constructed from five or six touches is likely to be more volatile than one construction from only two or three.

When traders identify a line which has undergone multiple touches it is a good point of focus for their trading and analysis as they know a priori that at the next break will probably be a particularly swift and strong move, just the sort of conditions traders relish!

Recently one such multiple touch trend-line formed on EUR/USD, which resulted in a reasonably strong move once it eventually broke down:

Multipletouch1

The chart above illustrates the principle with the rising short-term trend in EUR/USD during the recent Greek cash-for-reform negotiations.

The trend-line for the rise ended up being touched six times before it eventually broke down on June 23. There then followed a fairly swift breakdown move which encompassed 200 points in roughly only 12 hours.

Another example is shown below and represents a sideways consolidation which occurred during late January and most of February of this year. The sideways move kept touching and bouncing off support from a level at around 1.1260. Eventually on February 27 the exchange broke down through this stubbornly defended level, resulting in another move – noteworthy for the rapidity with which it descended:

multipletouch2

How to trade?

Although it is not difficult – and well within the reader’s grasp – to formulate a simple strategy for capitalising on these types of set-ups, I have taken the trouble to outline my own strategy below for those who like things already designed and ready-to-use.

In my strategy the trader must first identify a qualifying level. For a line to qualify it must simply have been touched three or more times, either as a point of support or of resistance, or as a trend-line. By three times I mean that the exchange rate must have made contact three times and have been rejected by the level three times. The earliest possible break must therefore be at the fourth touch – and no earlier; this is in order to ensure only lines touched a high number of times are traded as these tend to yield the most rapid follow-throughs’.

Another important qualifier is that the touches must be fairly accurate. If the exchange rate comes close but does not actually touch the line then it does not count as a touch. As in all cases the final decision relies on the trader’s own discretion, however, if in there is any doubt I would advise to ere on the side of caution.

Once a line has been selected to trade the trader can enter his or her orders. The entry points for the two main types of multiple Touch Lines (MTLs) differ. For the trend-line type as exemplified by the first chart above, the entry point is at the previous touch lows and the stop is placed at the 61.8% of the distance between the entry and the peak high preceding the entry-point touch. This is more easily illustrated than explained and I so I have included a diagram below:

MTL1

For horizontal lines the entry point is placed roughly 20 points below the range lows, or at some other discretionary point; however, the important thing is the adhere more or less to the 20 point rule. Obviously for pairs which have a narrower spread, such as EUR/GBP or AUD/USD 20 points is almost double what it represents for GBP/USD or USD/CAD, however, it is a rough guide meant for pairs between EUR/USD at the lower end and Cable at the upper.

Again, the stop is placed at a 61.8% Fibonacci retracement of the entry point to the peak preceding the touch used for entry in a trend-line set-up and 61.8% of the width of the range for a horizontal move, set-up.

MTL2

The target is flexible but should be a minimum of 1:1 risk reward.

I have back-tested the results of the strategy on EUR/USD, on the 4-hr chart, with the following results:

Breakout Date Set-up stop entry Max Gain Risk Potential Reward Ratio(Reward) 1 to 1 1 to 2

26/02/15

1

1.1437

1.1269

1.0461

0.0168

0.0808

4.81

1

1

24/09/15

2

1.2889

1.2815

1.0461

0.0074

0.2354

31.81

1

1

17/09/14

3

1.297

1.2922

1.0461

0.0048

0.2461

51.27

1

1

19/08/14

4

1.3391

1.3332

1.0461

0.0059

0.2871

48.66

1

1

18/08/14

5

1.3385

1.3354

1.0461

0.0031

0.2893

93.32

1

1

10/07/14

6

1.363

1.3601

1.3588

0.0029

0.0013

0.45

0

0

24/06/14

7

1.363

1.36

1.3575

0.003

0.0025

0.83

0

0

05/06/14

8

1.3623

1.3585

1.3502

0.0038

0.0083

2.18

1

1

26/02/14

9

1.375

1.3715

1.3642

0.0035

0.0073

2.09

1

1

29/11/13

10

1.3601

1.3568

1.3525

0.0033

0.0043

1.30

1

0

20/11/13

11

1.3542

1.3487

1.3399

0.0055

0.0088

1.60

1

0

01/05/12

12

1.3252

1.3205

1.2041

0.0047

0.1164

24.77

1

1

26/02/14

13

1.3747

1.3709

1.3642

0.0038

0.0067

1.76

1

0

23/01/14

14

1.3541

1.3585

1.3739

0.0044

0.0154

3.50

1

1

20/11/13

15

1.3578

1.3483

1.3399

0.0095

0.0084

0.88

0

0

10/07/13

16

1.2809

1.2896

1.3966

0.0087

0.107

12.30

1

1

25/01/13

17

1.3313

1.3403

1.3711

0.009

0.0308

3.42

1

1

01/05/12

18

1.3264

1.3207

1.2041

0.0057

0.1166

20.46

1

1

07/02/12

19

1.3097

1.3218

1.3321

0.0121

0.0103

0.85

0

0

03/04/12

20

1.3358

1.3278

1.2041

0.008

0.1237

15.46

1

1

07/02/12

21

1.31

1.3221

1.3321

0.0121

0.01

0.83

0

0

31/08/11

22

1.45

1.4384

1.2041

0.0116

0.2343

20.20

1

1

04/05/11

23

1.4814

1.4901

1.4938

0.0087

0.0037

0.43

0

0

14/04/11

24

1.4463

1.4377

1.4365

0.0086

0.0012

0.14

0

0

13/12/10

25

1.3205

1.328

1.3496

0.0075

0.0216

2.88

1

1

10/08/10

26

1.3266

1.3157

1.2587

0.0109

0.057

5.23

1

1

19

16

As can be seen from the table the strategy is very profitable, notwithstanding the relatively small sample. Traded with a 1:1 risk reward, the strategy would have yielded 19 winners from the sample of 26, which is equivalent to a 73.08% probability. This would have produced a total profit of 1218 points against a total loss of 569 points, resulting in a net gain of 715 points.

Even traded on a 1:2 risk reward basis the strategy yielded 16 winners out of a total of 26, equivalent to a 61.53% probability success rate. His would have resulted in a total profit of 2316 points against a loss of 695 points, which would have produced a net profit of 1621 points.

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About Author

I am a forex analyst, trader and writer. I have had a career writing articles for websites and journals, starting in the travel sector and then in Forex. I use a combination of technical and fundamental analysis in my forecasting. When I joined Forex4you in 2010 I thought it was a great opportunity to work as an analyst for an international broker. I provide technical forecasts with clear entry points and targets as well as articles on fundamental and trading themes. Good luck and happy trading!