Introduction

This webpage describes how to use the trend channels and the support and resistance levels calculated by the VRM algorithm on a charting system.

Contents

  • Which levels are important?
  • Highest and lowest sentiment levels
  • Duplicate levels
  • Colour coding and line style for the weekly levels
  • Colour coding and line style for the daily levels
  • Arbitrage and triplets
  • EMA channels to observe trending, retracement and reversals
  • 10 minute candlesticks
  • 30 minute candlesticks
  • 1 hour candlesticks
  • Other timescales
  • Daily and weekly timescales
  • Trend channel middle
  • Top, middle and bottom of trend channels
  • Colliding trend channels
  • Using the VRM levels with other trading strategies
  • Summary
  • Which levels are important?

    The VRM trend channel top, middle and bottom and the associated 24 levels at daily and weekly timescales are the road map or obstacle course through which the FX price action moves in the future.  At these levels, support and resistance can occur or the price just moves straight through.  Certain levels are more likely to be support or resistance levels than others.  In order of importance for either daily or weekly timescales these levels are:

    Priority Level Name
    1 top, middle and bottom of the trend channel
    2 S1 sentiment level (colour coded purple in the VRM charts)
    3 the highest and lowest sentiment S levels
    =4 the H levels especially the lowest H level (colour coded red in the VRM charts)
    =4 the L levels especially the highest L level (colour coded red in the VRM charts)
    5 remaining S sentiment levels

    Highest and lowest sentiment levels

    The highest sentiment S level at daily or weekly timescales is the last level at which the FX price can be considered bearish.  Quite often an FX price will rise to this level and then fall for the remainder of the time period.

    The lowest sentiment S level at daily or weekly timescales is the last level at which the FX price can be considered bullish. Quite often an FX price will fall to this level and then rise for the remainder of the time period.

    Duplicate levels

    You will have seen on the Charts webpage describing the GBP-USD chart format that some levels are duplicated or are close.  When two levels are duplicated or within 2 basis points we just use the one level.  That can sometimes reduce the eight S sentiment levels down to 4 levels.  Remember to discard the level with the least priority.  For example, if the top of the trend channel value equals an H level then discard the H level.

    Colour coding and line style for the weekly levels

    Once the duplicate levels have been discarded, the following colour and line style can be used for weekly levels in a chart.  We recommend separate weekly and daily charts. 

    # Level Name Coding
    1 top, middle and bottom of the trend channel blue solid line
    2 S1 sentiment level red dashed line
    3 the highest and lowest sentiment S levels black dashed lines
    4 the H levels  black solid line
    5 the L levels black solid line
    6 remaining S sentiment levels black dashed line

    All weekly candlestick charts shown on this website use the above colour and line style.

    Colour coding and line style for the daily levels

    Once the duplicate levels have been discarded then the following colour and line style can be used for daily levels in a chart.  We recommend separate weekly and daily charts.  Black and red are reversed so you can recognise the daily and weekly charts easily.

    # Level Name Coding
    1 top, middle and bottom of the trend channel blue solid line
    2 S1 sentiment level black dashed line
    3 the highest and lowest sentiment S levels red dashed lines
    4 the H levels  red solid line
    5 the L levels red solid line
    6 remaining S sentiment levels red dashed line

    All daily candlestick charts shown on this website use the above colour and line style.

    Arbitrage and triplets

    All the FX pairs form part of a triplet owing to the continuous effect of arbitrage.  For instance 

    EUR-GBP  X  GBP-USD  =  EUR-USD

    It turns out that this has very important implications for the VRM algorithm.  When one component of a triplet is bouncing off its VRM level another component is bouncing off its VRM level as well.  On other occasions GBP-USD will bounce just because EUR-USD bounced off its trend channel side.  We therefore recommend loading all the levels for the components in a triplet even if you plan to trade only one pair.  The additional information of the other two FX pairs is very powerful.  You can see which FX pair is following another FX pair or is just a bystander.

    EMA channels to observe trending, retracement and reversals

    Using an Exponential Moving Average (EMA) Channel lets you evaluate the interaction of the price action with a VRM level.  Using 4 and 7 time samples EMA(4,7) for the channel sides allows you to see how the front 4 time samples compare with the 3 rear time samples as the price action approaches the VRM level.  We call this the EMA channel in the next sections.

    Here are some definitions for the EMA(4,7) channel

    In the next sections we show how to trade at different timescales using the VRM levels.

    10 minute candlesticks

    The two charts below show the 10 minute price action of GBP-USD over the weekly VRM levels (top chart) and the daily VRM levels (bottom chart) on the 11th July 2018 with the EMA channel overlaid on each chart. The charts follow the colour and line style convention described above. They show the price action bouncing down off the daily S1 sentiment level at 1.3267 and falling to the weekly level 1.3203.  Looking for large gaps between VRM levels is advantageous.

      

      

    Some key points to remember when trading with the 10 minute charts are:

    30 minute candlesticks

    The 10 minute candlestick charts described above can have a large number of EMA channel reversals during 24 hours.  At the larger timescales of 30 minute candlesticks there will be fewer reversals of the EMA channel during a one day period.  As long as the trader is happy to increase their stop loss to allow for more price variation, then 30 minute candlesticks can be used with the VRM levels and the EMA channel to define retracements and reversals.

    The 10 minute candlestick charts with their EMA channel in the last section can still be used to enter a trade when the 10 minute EMA channel is trending in the same direction as the 30 minute EMA channel.  Looking for large gaps between VRM levels is again advantageous.

    The charts below show from left to right the price actions of the triplet GBP-USD, EUR-GBP and EUR-USD on 21st June 2018.  The top charts show 30 minute candlesticks with the weekly VRM levels, while the bottom charts show 30 minute candlesticks with the daily VRM levels.  Line style and colour follow the suggested rules above.  EMA channels are shown in all the charts.  GBP-USD, EUR-GBP and EUR-USD can be seen coordinating about their respective VRM levels as a triplet as they progress through the day.  GBP-USD low was at weekly level 1.3106 close to daily level 1.3112.  Daily S1 sentiment levels, indicated by the black dashed lines in the bottom row of charts, are important levels in all three FX pairs.  GBP-USD fell below its daily S1 level 1.3173.  EUR-GBP had initial support at its daily S1 level 0.8783.  The daily S1 level for EUR-USD at 1.1567 was both a support and a resistance level.

    1 hour candlesticks

    The charts below show from left to right the price actions of the triplet GBP-USD, EUR-GBP and EUR-USD on 19th July 2018. The top charts show 1 hour candlesticks with the weekly VRM levels, while the bottom charts show 1 hour candlesticks with the daily VRM levels. Line style and colour follow the suggested rules above. EMA channels are shown in all the charts. GBP-USD, EUR-GBP and EUR-USD can be seen coordinating about their respective VRM levels as a triplet as they progress through the day.  GBP-USD and EUR-GBP can be seen bouncing off their respective short term trend channels marked with a blue line in the lower charts.

    Other timescales

    Other candlestick timescales such as 1 minute, 5 minutes or 3 hours can also be used.  As the timescales get smaller the EMA channel will have more reversals and therefore provide more buy or sell signals. 

    At longer timescales the 30 minute hour candlestick EMA channel may have reversed while the 3 hour candlestick EMA channel is still trending leading to a large variation in running profit and loss.

    If a larger timescale is used for trading, the 10 minute candlestick EMA channel can still be used to start and end a trade.  For instance, the trade will start when the 10 minute candlestick EMA channel is trending in the same direction as the 3 hour candlestick EMA channel and end when these EMA channels are trending in opposite directions.

    An FX market can take some time to interact with a VRM level as it discovers the price level.  Observing the price action about the VRM levels at larger timescales with the corresponding candlestick EMA channel can reveal the bigger picture trend direction.

    Daily and weekly timescales

    As long as the user is prepared to increase their stop loss sufficiently to allow for variations in price within the VRM short or long term trend channels, these trend channels can be used to trade.

    The long term trend channel chart below for EUR-USD shows that when the market closes the week below the middle of the long term trend channel, the market is bearish.  Vice versa, when it closes the week above the middle of the long term trend channel it is bullish.  After 19th February 2018, EUR-USD was never a long term buy.

    Once the EUR-USD started to fall about 23rd April, the end of day price of the EUR-USD fell below the middle of the short term trend channel in the chart below.  The chart shows that about 6th June the EUR-USD started to close the day above the middle of the short term trend channel, but this short term bullishness was insufficient to generate a bullish long term trend.  

    Remember that the range top to bottom of the long and short term trend channels for the next future time periods is given on the VRM charts and this is the potential movement of the price in the future.

    Trend channel middle

    The previous two charts show the significance of the trend channel middle.  When the weekly close is below the middle of the long term trend channel the long term trend becomes bearish.  Vice versa when the weekly close is above the middle of the long term trend channel the long term trend becomes bullish.

    Similarly, when the daily close is below the middle of the short term trend channel, the short term trend becomes bearish. Vice versa, when the daily close is above the middle of the short term trend channel, the short term trend becomes bullish.

    In rising bullish markets, the price action is usually above the trend channel middle.  In falling and bearish markets, the price action is below the trend channel middle.

    Top, middle and bottom of trend channels

    In general, when the price action closes the day on the other side of the short term trend channel top, middle or bottom this is a signal for a change from bullishness to bearishness or vice versa.

    Similarly, when the price action closes the week on the other side of the long term trend channel top, middle or bottom this is a signal for a change from bullishness to bearishness or vice versa.

    Colliding trend channels

    The user should always be on the lookout for potential collisions between the top, middle or bottom of the short term trend channel and the top, middle or bottom of the long term trend channel.  Here is the GBP-USD chart showing the top of the short term trend channel bouncing off the top of the long term trend channel on 19 April.  Once this bounce occurred, the short term trend channel fell and the price fell with it.

    Using the VRM levels with other trading strategies

    The VRM is an algorithm that provides a road map of daily and weekly support and resistance levels through which the price will move in the future.  These levels are sought by other trading strategies.  For instance a mean reversion trader will look for zones where retracement will happen back to their mean.  The highest and lowest VRM sentiment levels are the last levels of bearishness and bullishness which correspond to these zones.   Similarly traders who use support and resistance levels or trend lines can compare their values to the VRM levels.

    The VRM levels can be compared to levels calculated by other trading methods to look for confirmation.

    Summary

    The VRM is an algorithm that calculates short and long term trend channels and daily and weekly support and resistance levels.  These form the road map through which the price action will move tomorrow and next week.  Click on the link below to see more examples.

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