Support and resistance (S&R) is an essential tactical concept for Forex trading. But ask traders about trading support and resistance levels and the variety of answers could overwhelm you. Traders use a wide range of tools, indicators, and levels to identify support and resistance, such as trading un-squared areas. In fact, many of these approaches on how to spot and use support and resistance could work perfectly fine. After you read this post, you will know a “new” way of identifying and using support and resistance: it’s called the trading armpit. The armpit is a level which acts as support and resistance. The armpit, however, is hidden from the eye and recognition of most traders because it tends to be well disguised. The armpit is the middle candle of 2 impulsive moves in a row (could be up and down or down and up).
In the image above you see an example. Let us now show an example of “M mountain armpit”. When the impulse is up and then down the middle candle is on the top. This is called an “M mountain” structure. The low of the middle candle will act as resistance.
When the impulse is down and then up the middle candle is on the bottom. This is called a “V valley” structure. The high of the middle candle will act as support.
Step by step review of trading armpit
Step 1: is to recognize the impulse. The price action is not difficult, but it does take some time to train the eye to recognize this pattern correctly and quickly. Read more about this here. Step 2: is to recognize when 2 impulsive swings have occurred (in opposite direction of each other). These swings make up the V valley or the M mountain. Step 3: find the candle that has the lowest high in a V Valley structure or the highest low in an M mountain structure (called “middle” candle). The candle with the highest high and lowest low is in fact not the most important but in most cases, these candles tend to be the same. That means the middle candle often has the lowest low and the lowest high OR the highest high and highest low but only the lower high and higher low are a must. Step 4: Place a horizontal level at the level mentioned in step 3. This level symbolizes the support and resistance which is the armpit. Step 5: look for signals that confirm the price is bouncing at the expected level mentioned in step 4.
Why does it work?
Why would this tactic work? Price, in fact, closes the “gap” and retraces almost all of the swing prior to it, which is the reason why this level often encounters fierce support and resistance. Also, note that from a psychological point of view why the M mountain or V Valley structures are strong because a momentum is followed by a momentum to the opposite direction. Basically, the price makes a 180-degree turn and moves impulsively in the other direction. The first price was moving with momentum up/down, but then it suddenly moves with momentum down/up.
Tactics not strategy
Realize that the article mentions “tactics” and not a strategy. That distinction is done on purpose. After having explained the details, it is important to realize that the armpit works best as an extra supportive confirmation of analysis or trade setups. Using the armpit as a tool of forex confluence gives traders an extra edge. It is possible to use the armpit as the primary consideration when scanning and selecting the charts, but not recommended to trade purely based on the armpit method.
Problems with Forex Tactics
Be cautious when using and implementing the concept when trading. Some problems could occur that are noteworthy.
Price does not reach the armpit level. Just because an armpit level is on the chart does not guarantee that price will reach the armpit level. 2) Frequency:
Once price respects an armpit, its value and importance decrease when price approaches the same level a 2nd or 3rd time. In some cases, the same level does provide a support or resistance again, but the chances do decrease.
3) Two (2) Armpits:
In some cases, 2 armpits appear on the chart. In those cases be careful when the price gets down or up to the 2nd armpit level. Depending on the circumstances and structure of the market, a trader could opt to close out the first trade, could choose the close and reverse, or hedge the profit. 4) Wrong Armpit:
Not recognizing the correct armpit is a dangerous mistake. Sometimes “half” correct armpits do work as well, but technically speaking they are not armpits. Armpits must have momentum price action: a bearish swing high and swing low followed by a bullish one OR a bullish momentum followed by bearish. If price action is corrective, then by definition no armpit can be present. SUMMARY
To summarize the armpit is a useful confirmation of your current strategy, any analysis, and potential trade setups. It also provides an extra understanding of the market structure. With this concept in mind, traders are better equipped to understand at what levels price can get rejected. Using the armpit as a simple forex strategy is not recommended. The preference is to use the concept as a tactical approach when using both a discretionary strategy or stricter rules based strategy. Have you heard of the trading armpit before reading our post? What do you think of it? Do you agree that it’s better for confluence purposes or do you use it as a standalone strategy instead of tactical purposes? Let us know down below in the comments section!