Tramlines are parallel lines that enclose all trading activity within the channel between the tramlines. The upper tramline is a line of resistance, while the lower line is a line of support.
Eventually, either support or resistance gives way and the market moves through one of the tramlines.
But before the market enters the trading channel, it will make a series of minor lows or highs.
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I have found that these points can have a mighty influence on the market in the future as it trades within the channel!
In fact, many times, they act as a pivot' for one of the tramlines.
That's why I refer to them as prior pivot points or PPPs.
Let me walk you through a great example with crude oil:
(Click on the chart for a larger version)
To the left of the chart, you can see that the market is declining. Then it experienced a good bounce, only to decline again past the vertical yellow line I have drawn in.
The market then embarked on a slow-grind, upward march with many overlapping minor waves.
There was a head-fake on 23 April, but crude recovered to trade back within the channel.
I was able to draw tramlines describing this trading channel (between the yellow lines). The lower one (second tramline down) fell nicely across many of the minor lows, while the upper one passed over the three major highs (red arrows).
This upper tramline also passed through the low marked PPP. This PPP lies outside the trading channel, as do all PPPs.
Also, my PPP is a low, and my red touch-points are highs. The PPP must be opposite to the tramline touch-points a PPP-low must go with highs, and a PPP-high must go with lows.
The PPP anchored the upper tramline in a vice grip and determined the positioning of my other tramlines perhaps for days to come.
This is powerful information to have access to.
I have found that my tramlines are much more secure if they have a PPP.
After that, crude plunged down breaking the tramline as marked by my right-hand yellow vertical line. In fact, at that point the market was challenging the fourth tramline quite a plunge in two days and since tramlines act as targets, this was an area to watch.
Let me give you another example. Here is a good PPP on the chart for the S&P:
(Click on the chart for a larger version)
Even from so long ago, this PPP has anchored my upper tramline with two lovely touch-points (red arrows).
So look for possible PPPs when searching for tramlines.
If you're a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
The essentials of tramline trading
An introduction to Elliott wave theory
Advanced trading with Elliott waves
Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .
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