Recently we published first article about box theory. It gave a definition of box theory. In this one we can see practical uses in trading.

Box theory in trading

As I mentioned in the first article, boxes are areas in which the price moves between bullish or bearish impulses. Additional confirmation of supports and resistances set by particular boxes can be a trend line which is itself a support or resistance.

The chart below shows how price respects boxes borders and a bearish trend line. Two potential places where a short position could be opened, consistent with the trend, are marked.

gbpusd-1

If we add Fibonacci levels to this chart they will serve as an additional confirmation of our decision.

Thanks to that we can have better efficiency in our positions. The stronger Fibonacci level is 50% but also 38.2%, 61.8% and 70.7% are quite strong and the price quite often reacts to them.

gbpusd-2

In Building the strategy, another thing we can use is an oscillator which demonstrates the scale of buying and selling of the instrument in percentage tgerms. We can use one of the most popular indicators like a Stochastic, RSI or MACD. If there is divergence on the oscillator it will be another confirmation that will give us advantage. We will write more about divergence in another article.

The chart below shows the  reaction of the price to the resistance level which is the upper line of the box, the bearish trend line, Fibonacci 61.8% and 70.7% levels and stochastic oscillator. It is not common to spot all these indicators at once but it gives huge advantage on the market and really high probability of a profitable transaction.

gbpusd-3

From this chart it can be seen that despite the positions being opened early on in the trend, they were highly profitable.

gbpusd-4-przyszlosc

The formation looks similar in a bullish trend too. Rejecting the support and the trend line at one point is a good point to open a long position. When these levels also coincide with Fibo 50% and 61.8% this is another confirmation.

eur-usd-2

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To sum up

Box theory is one of the simplest analyses to define potential direction of the price and the closest target. Adding other, can provide further confirmation of the signal leading to more certainty.

  • Supports and resistances
  • Trend lines
  • Fibonacci levels (38.2%, 50%, 61.8%, 70.7%)
  • Divergence on stochastic, RSI or AMCD oscillator.
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