Using tramline trading to make sense of panicky markets

Even as markets panic, they conform to definite patterns, says John C Burford. Patterns that chart-based traders can predict. Here's one recent example in the US dollar/yen market.

As you know, I have been following the USD/JPY market for big profit potential.

I recently wrote about the large wedge formation that was building on the weekly chart; then on the central bank intervention that produced the recent spike low; and then on the huge rally that followed.

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The action in the USD/JPY market has been exciting, to say the least and has been totally mapped by my tramlines, as I will show.

And because the market is heavily long the yen (carry trade), the potential for huge reverses is on my radar.

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Going back to my wedge formation, we had a break below the wedge on the spike low of 16 March to the 76.50 level, and then the impressive recovery.

The market thus successfully tested my long-term support at the 80 area.

How tramlines can help forecast volatility

But let's take a look at my tramlines to see if any of this very volatile trading could have been forecast beforehand.

Here is the situation in early March, prior to the central bank intervention bombshell:

SB00067-01

(Click on the chart for a larger version)

I can draw a very nice tramline right away with many touching points as marked by my red arrows.

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This line goes back at least a year, and so I can regard it as very well established.

Where can I place my second tramline?

Using my parallel line tool on my spread betting platform, a very good candidate is this one with touch points marked with green arrows:

SB00067-02

(Click on the chart for a larger version)

OK, so now I have a good working pair. All the way along these two tramlines, for over a year, there were some great trading opportunities.

Now let's draw two more tramlines, each equidistant from the ones already drawn.

This is what the chart looked like on 15 March, just before the spike low:

SB00067-03

(Click on the chart for a larger version)

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I have drawn my third tramline and it passes through the lows of October/November, as marked with the blue arrow.

That is a good fit, so let's keep going and draw yet another tramline beneath that.

The spike hits my tramline on the button

Then, the floodgates were opened on 16 March and the market plunged to 76.50 amazingly, right to my fourth tramline (yellow arrow)!

How did the market know where to stop? (I hope I never have to answer that question).

SB00067-04

(Click on the chart for a larger version)

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Isn't that pretty?

Now the market has surged clean through my third and second tramlines and is challenging my first tramline as I write (red arrow).

I'm sure you have spotted the very overbought momentum reading, and so short-term traders will be taking at least partial profits here.

Let's now draw a tramline equidistant above the first one to give us clues for upside targets in case the market rallies further:

SB00067-05

(Click on the chart for a larger version)

Now bullish USD/JPY traders will be looking to the new tramline in the 85 area as their first target and bearish traders will be looking to short here.

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That is what makes a market.

Tramlines can give chart-based traders a definite edge, as I hope I have shown here.

Even in market panics, such as we saw 16 March, they obey patterned behaviour.

Remember that tramlines are simply lines of support or resistance that separate periods of trading on the charts. They are totally visual and can be read by even beginning traders in seconds.

I consider that one of their strengths.

NB: While on the subject of using simple methods for trading, I know that many traders like to delve into ever more complicated systems that seem to promise easy profits. These are the 'black box' systems, and are worth exploring, but for beginning traders, I would recommend starting with a simple chart-based system that puts you in direct contact with the markets and your own trading decisions.

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NB: Don't miss my next bit of trading advice. 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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