Foundation of the Median line - 50 % ratio
50 % Ratio indicates the strength of a developing swing / trend and is an important level to use in trading.We calculate the 50 % levels of Year H-L prices,Month H-L prices,Week H-L prices and use them to outline the market's strength when below or above the 50% level.For trading using swing H-L prices and calculating 50 % level, we can assume the trend is down when prices are below and up when prices are above.
The System or Method
Median Line method can be a stand alone system with some simple rules similar to the concept of using trendlines.Like in trendline channels, this is also a trend identification channel , but gives a higher probability of the points where the price can lead to.There are many common features ,and some nuances of median lines which each individual can develop as per his trading style.
There are purist traders who trade only with median lines and patterns for confirming support and resistances at the Median Line, Upper median line parallel and Lower median line parallel.
It can also be combined with Fibonacci ratios,Moving Averages, Stoch Indicator for identifying swings and exit entry points.
The approach while using ML is to anticipate when price reaches the S/R , as to where it can go.The clues to identify will be previous horizontal S/R points, trendlines, retracements,breakout of minor swings etc.Also, patterns like congestion of bars, ledges, 123 patterns can be used for confirmation and trade entries/exits.
Using median lines on a chart is like drawing a road map to ascertain where price is going.The strength, weakness of the trends can be identified by drawing the lines and where the reversals can take place.
Drawing the Median Lines
Pivots are the starting points in drawing the Median line set.
Pivots can be defined as the turning points in charts.
They can be
- selected visually where the swings are identified with low and highs
- Pivot Bar should make a higher high and the bar after the pivot making a lower high .
- The High pivot bar will have previous 2 bars with lower highs and subsequent bars making lower highs / and vice versa for a low pivot
Lines between two pivots will be a swing.Smallest swing in a chart in a time frame will be a minor swing.
Combination of swings will make a major swing.A major swing direction will change when a minor swing high / swing low is crossed by the next swing high / low.
So we identify the pivots and mark the minor and major swings in the Chart.
The simple rule to identify the trend is that the trend is up when we are making higher highs and higher lows and vice versa for downtrend.
The Median lines can be used effectively only when they are drawn to encompass the trends already present .When we draw the median set and the price has bounced off the support and resistance levels at the UMLH and LMLH and the Median line, then we can presume the median line set which has been tested will for a good map for the trends into the future.This is very effective in long term daily and weekly charts.
For short term trading, the same concept applies and we identify the trend based on the previous 5-8 swings , but can be done with a minimum of 3 swings.For very short term intra day trades , we can keep working out the forks for smaller swings also.But of course it has to be combined with other patterns to confirm entries and exits.
See below some charts where price meets the median lines and reversals are identified.