MLA is a style of technical analysis that finds market direction by defining the slope of the price activity or path of price. The selection of the points utilized to create the MLA fork is determined by the individual trader. How critical are the points selected?
The goal is to find the median line and associated parallel lines that best fits the underlying vehicle. More often than not, most traders draw too small or too steep a fork. A solution is to switch to a longer timeframe. The goal is to find a median line that represents the current path of price.
A Forex trader may be interested in using MLA to generate trading signals for EUR/USD. A good starting point is to simply draw a line through prices to determine path of price.
The EUR/USD daily chart displays the changing market direction. The first path is down, then a year-long path up, followed by over another year’s worth of downtrend. Note that on an even bigger picture, the orange line shows this activity is captured in a three year downtrend. Let’s see how we can draw a fork for the long orange trend.
In the above figure, notice the most recent path of price is captured between the Upper parallel and the Quartile line at the top of the fork. See how every time price approaches the UP it is rejected by resistance (red arrows). Note that just because the price touches the UP, this does not necessarily indicate a short entry. An experienced MLA-oriented technician will see other signals (lines) that will be explained in a future post.
A Forex trader may not want to put on a trade lasting three years, so what would the forks look like for the shorter time frames? Here are a couple of shorter forks to consider:
This fork captures the same path that the blue line in figure 1.
This fork is drawn to capture path of price of the far red line in figure 1, the most recent down trend.
Something interesting about MLA is that other traders could choose different points to draw a fork that still represents market direction or pick different time frames to trade. Although Figure 1 describes the basic slope of market direction, it is the individual trader who defines the MLA fork to trade.
Flexibility using MLA is in contrast with other technical tools. For example, as much as I want ADX to be below 25 to buy on a pullback or RSI greater than 80 to sell my long, I cannot change the data. MLA affords the technician opportunity to complement the original fork with parallel and warning lines. As long as these lines continue to validate the original slope of the Median Line, we can generate trading signals.
While price is within the fork, it bounces between the Median Line, Upper and Lower parallels, Quartile Lines and as many complementary lines to capture path of price. During these bounces, these lines take on roles of support or resistance. It is at these lines that we look for a signal to setup our trade. We will add some of these complementary lines in the next post.
If you’re interested in implementing MLA be sure to visit Coghlan Capital as Paul hosts a montly public webinar on forex trading using MLA which you cannot afford to miss.
To your success!
All charts Ensign© 2012.