Support and Resistance

[Sledge 13]

  bootstrap said:

But order types are for another day.

 

I think it would be a great thread to discuss not only order types and their uses, but couple that with strategies for entry and exit. I think it would provide a lively discussion and provide different perspectives on different sects of traders and how they utilize the order types and where.

[atto 20]

  OAC said:

I don't quite understand the logic why the levels have to be horizontal only?

In your chart attachment, I actually see a horizontal trendline that has been tested twice, hesitated, broken through, and came back for the retest. It is been my experience that the same principle should hold for trendlines at an angle but you choose to ignore. I am kinda lost here ?

The idea is that there is nothing magical about any lines. S/R "works" because it identifies prices that have illicited action before by the bulls, bears, or both. S/R lines are usually projected into the future as "possible support/resistance", because we don't know if they will cause the same response.

 

Horizontal S/R do not show a trend (which can be used for entries/exits), which is why people use trend lines. These lines aren't the exact same as S/R. Their primary purpose is to show the direction and magnitude of the trend. If they stay valid, the trend stays valid. Conversely, if they are broken, the trend could be weakening or reversing. Trend lines do not have the same characteristics as horizontal S/R lines because they are moving, so prices they identify as "bounds" may or may not have any reaction. A moving average performs much of the same job.

 

Trend lines are great for staying on the right side of the trend.

[Kiwi 16]

  atto said:

Horizontal S/R do not show a trend (which can be used for entries/exits), which is why people use trend lines. These lines aren't the exact same as S/R. Their primary purpose is to show the direction and magnitude of the trend. If they stay valid, the trend stays valid. Conversely, if they are broken, the trend could be weakening or reversing. Trend lines do not have the same characteristics as horizontal S/R lines because they are moving, so prices they identify as "bounds" may or may not have any reaction. A moving average performs much of the same job.

 

Trend lines are great for staying on the right side of the trend.

 

An interesting perspective and not one I wish to negate. I would just like to point out that there may be others.

 

I used to be a strong user of trendlines and then parallel channels (which I found to be better at containing and proving trend). More recently I have pretty much abandoned them as unneeded.

 

Why? Because horizontal s&r does show trend and it shows it better than trendlines show it (because it isn't gamed as much I suspect). So I use progressions of horizontal s&r to read trend (read that also as market profile progressions although I use volume clusters rather than tpo clusters).

 

The thing that's missing from that which was provided by trendlines was tests and test failures. So instead of trendlines I use a couple of lazy man's trendlines ... mas. It seems that enough people use mas (smas on longer term charts and emas on intraday charts) that their probable s&r is as useful as the probable s&r provided by trendlines.

 

Not saying you're wrong - just that one of the big joys of trading is that one can be right in so many different ways.

 

Cheers

[OAC 10]

  atto said:

Horizontal S/R do not show a trend (which can be used for entries/exits), which is why people use trend lines. These lines aren't the exact same as S/R. Their primary purpose is to show the direction and magnitude of the trend. If they stay valid, the trend stays valid. Conversely, if they are broken, the trend could be weakening or reversing. Trend lines do not have the same characteristics as horizontal S/R lines because they are moving, so prices they identify as "bounds" may or may not have any reaction. .

 

But how often do you see a trendline gets broken and price goes back to retest the trendline before the prices finally break down into a new trend ? I think plenty. I am trying to understand how the pure S/R trader think ? Can you give some actual examples of entry techniques of buying support and selling resistance? Do you use a momemtum indicator like walterw does ? And how do you get around the fact that smart money like to play games at these horizontal levels (Floor trader's pivots,s1, s2, r1, r2, yesterday's POC., VAH, VAL ...etc)because they know many traders are following them ?

Edited July 17, 2008 by OAC

[atto 20]

  Kiwi said:

Not saying you're wrong - just that one of the big joys of trading is that one can be right in so many different ways.

I don't actually think we're disagreeing, though you're right in that there's different ways to do it. I use trend lines to identify trends, but if you can just eyeball it and see a trend, then that's pretty much the same. A use a 200 SMA as a long term "trend line" as well.

  OAC said:

But how often do you see a trendline gets broken and price goes back to retest the trendline before the prices finally break down into a new trend ? I think plenty. I am trying to understand how the pure S/R trader think ? Can you give some actual examples of entry techniques of buying support and selling resistance? Do you use a momemtum indicator like walterw does ? And how do you get around the fact that smart money like to play games at these horizontal levels (Floor trader's pivots,s1, s2, r1, r2, yesterday's POC., VAH, VAL ...etc)because they know many traders are following them ?

Personally, I think trend lines "work" as S/R often because it's keeping you on the right size of the trend. This is just how 21, 33, 50, 100, 150, 200 etc SMA/EMA's "work". As for retests, price often retraces as it starts a new trend.

 

I do not use momentum, but do use volume. The "games" you refer to can largely be mitigated by studying volume in the context of price action. Shakeouts/fakeouts do occur, but can usually be identified. The good thing about trading based on S/R is that your risk/reward can be minimized by watching price around these levels. Think of these points as HUPs. The more confirmation of a rejection or breakout, the later you are in the move.

 

Markets just opened, so I'll try to get you a graphical example later today.

[walterw 10]

Check this thread on why S&R change roles (flip) http://www.traderslaboratory.com/forums/f34/intrinsic-reasons-for-support-and-resistance-1724.html and yes it may also work on diferent angle lines... but horizontal actually refers to a level where market participants are positioned and may tolerate until certain point their stops.... no rocket science... risk / rewards flows and triggers... cheers Walter.

[kvn 10]

bootstrap -- Thanks for the clarification.

[BlowFish 10]

  bootstrap said:

Attached is the perfect setup for confirming the Pivot Low.

 

Basically you want the market to trade back towards the Pivot high, where the low is above the High of the Pivot Low.

 

Entry points are:

 

1) touching/penetrating support.

2) most recent high if market retraces a little but never reaches support level3) at resistance if market continues to move without a retracement towards support.

 

All of this is just the opposite for a short bias.

 

Thanks for the pic. Thats what I figured you meant. So you would enter on the close of the last blue bar or the break of the pivot high if it is the last bar thrusts through it?

[kvn 10]

  BlowFish said:

Thanks for the pic. Thats what I figured you meant. So you would enter on the close of the last blue bar or the break of the pivot high if it is the last bar thrusts through it?

 

The last blue bar would just confirm the pivot low and give you your zone. If price didn't trade completely outside of the first bar to make the pivot low then it's not going up, so wait for price to drop and make a confirmed pivot low to get your zone.

 

After you confirm the pivot low and have your zone, if price falls to the support level, you'd enter long. If it doesn't reach the support level, you would enter on a break of the most recent high, which happens to be at the exact same price as the resistance level of our zone. If price didn't swing down like in the chart and just went straight up from our confirmed pivot low, you would enter on the break of the resistance level.

[kvn 10]

  BlowFish said:

Thanks for the pic. Thats what I figured you meant. So you would enter on the close of the last blue bar or the break of the pivot high if it is the last bar thrusts through it?

 

I may have read you wrong with my other reply. But it helped me anyways. After testing the setup some, I got it, you meant if the bar that confirms the pivot low also breaks the resistance level?

[ztrader 10]

  kvn said:

ztrader -- What pre-identified levels are those? Are they the OHLC for the prev/curr day & hour as displayed in the box? I've played around with those and various other levels briefly but I might have been looking for too precise of interaction than I saw. For the Forex pairs, do you calculate the levels based on NY session or do you include overnight?

kvn,

 

Let me premise this post by saying that I am "technically handicapped" when it comes to most of the technical trading subjects discussed in this and other forums. So, my thoughts on your thread is limited to what I have studied, learned, and developed from my own observation of real time market actions and historical data, ideas from other traders, and various bits and pieces of readings. Now, having said that, here is my response to your post.

 

From my perspective, OHLCs are footprints of the market left behind by price actions and interactions between the BULLS and the BEARS with which key levels, major and minor support and resistance areas are established and later will be revisited as BUYERS AND SELLERS scrimmage for control. Those pre-identified key levels are those OHLC footprints with custom settings and calculations. OHLCs in the text comment box for the previous and current day are also considered key zones in my method.

 

For forex pairs, the levels are based on OHLCs during the 24 hour period and on each 3 sessions

 

If you look at the YM or ES charts from yesterday and today, you will see where prices bounced as the BULLS took control and dominated the push to the upside. My entries are taken almost immediately near those levels.

 

This may not make a lot sense to you [and others] at this time as you are trading the swing highs and lows. Nonetheless, I hope this gives you some overview of how I do it.

 

Trade well what you see on your chart in real time. ENJOY!

 

ztrader

[OAC 10]

  Quote

I do not use momentum, but do use volume. The "games" you refer to can largely be mitigated by studying volume in the context of price action. Shakeouts/fakeouts do occur, but can usually be identified. The good thing about trading based on S/R is that your risk/reward can be minimized by watching price around these levels. Think of these points as HUPs. The more confirmation of a rejection or breakout, the later you are in the move.

 

 

I think I am beginning to get it. You may have a more sophisticated approach. But I think for the average S&R trader, it is more like reading the tape, it is hard to explain on paper. I do it myself at times. Especially when the market is trying to break through a critcal resistance lets say with several attempts that failed and the action is fast and furious. Let say on the 4th attempt, I would enter at the break out level depending on price action, I only give it 10 to 20 seconds to go my way or I will scratch the trade.

If the market manages to break through, it is probably shooting for the moon. But I mange to keep my risk small.

[MC 10]

  OAC said:

I think I am beginning to get it. You may have a more sophisticated approach. But I think for the average S&R trader, it is more like reading the tape, it is hard to explain on paper. I do it myself at times. Especially when the market is trying to break through a critcal resistance lets say with several attempts that failed and the action is fast and furious. Let say on the 4th attempt, I would enter at the break out level depending on price action, I only give it 10 to 20 seconds to go my way or I will scratch the trade.

If the market manages to break through, it is probably shooting for the moon. But I mange to keep my risk small.

 

I long for that lightbulb to go off. I've had many moments trigger in my brain but the shakeout/fakeouts still get me anxious. I don't rely on them for my setups but still want to understand when its just games and when its legit. Here's to many more hours of screentime.

 

Thanks to all you guys sharing.

[ammo 10]

if your quick enough you can watch the tick during the shake and bake,and also have a comparison chart of uvol/dvol on your screen,those two indicators along with volume at a supp/resist line should take away a lot of the doubt

[atto 20]

  atto said:

Markets just opened, so I'll try to get you a graphical example later today.

I apologize for the wait. Today was a great example of S/R trading. I am attaching a chart of mine (which I have prettied up, but pretty much what I'm looking at), an ES U8 1m chart. As a disclaimer, you're seeing hindsight analysis (and only my opinion). I am focusing on one trade that I did take, but please remember that it's "easy" to see this stuff after the fact.

 

 

Dashed cyan lines are longer term S/R, thin blue were added today (premarket and later). I've labeled four main areas of interest. We peaked soon after open, and I put the thin blue line you see as a High. A range was held above a previous support, which entertained a couple bounces, before it broke (A). You could have traded these bounces, since there were plenty of buyers there. In this case, you would have most likely broken even (or gained a tick or two, depending on entry/exit). As mentioned before, you have to watch Price Action around these points. In this case, price did not bounce like we expected, so you want to get out until confirmed otherwise. After a break, price consolidated above new support (added during premarket). Volume climaxed, helping to confirm this support, before returning back above longer term support.

 

At (B), price approached the previous swing high on slowing volume, indicating exhaustion. As you can see, price confirmed the resistance formed by the swing high. From here, we face rather unimpressive volume, as we slowly melt down. The resistance confirmation could have been tradable, but it was coming into lunch and volume didn't help. Towards the end of lunch, price returned to the longer term support. We see the first interest right around this line from the buyers.

 

Buying here (just before C) would be an aggressive long, but comes with excellent risk/reward. If the support is broken, you can immediately get out. This isn't to say you can't re-enter later. At this point, you either enter, or look for a pullback to enter. Volume keeps confirming a bull move, so a good conservative entry would be at ©, risking a max of 2 ES (if the trade was a dud, you could probably get out sooner). However, we're paying very close attention to the thin blue line. If price doesn't slam through it, start to unload your position and wait.

 

Sure enough, price never even hesitates at the previous resistance, so we stay in our position. The next area to watch the the previous High of the day. This time, we see climaxing volume as we approach, and then very quickly lose interest from buyers (lower volume, no real price movement). This is a great exit (if you're scaling out, first exit), as we wait and see what happens at the retrace.

 

If you hang on for a second test, we experience a little hesitation, and then a break. Since we had less energy in the break, I expected less upward movement. Also, we have a longer term resistance right above, so r/r for a re-entry isn't wonderful. I added three trend lines to show you how I use them. You can see a steepening uptrend through B, C, and D, and then price starts to streach through these. The 1260 area would be a good final exit for any remaining longs.

 

As a side note, we can see a failed breakout at 14:30. Notice the lower energy (price movement and volume) as price makes new highs. I was waiting for a bigger pop before I entered, which never came. If you did enter on the breakout, you'd very quickly notice the lack of interest, and exit for b/e. Compare this breakout to the one at © to get what I mean.

 

Makes any more sense? If you need any clarification, or have any questions, feel free to ask. There's many ways to skin the cat, and this is what seems to work for me. As an example, the 1246 bounce area also happened to be a 76.4% retrace of the larger move.

[atto 20]

  OAC said:

But I mange to keep my risk small.

Yes, that's the point. You're risk managment sounds very good. I will wash trades, even if they're slightly going my way, if they aren't moving like I expected. With S/R, you want to always be aware of the fractals (larger timeframes). Don't take trades straight into confluence of support or resistance, unless you have a good reason.

 

Check out SnP500Trader's videos, he has a very firm grasp on S/R.

Edited July 18, 2008 by atto

[OAC 10]

  atto said:

. Towards the end of lunch, price returned to the longer term support. We see the first interest right around this line from the buyers.

 

Buying here (just before C) would be an aggressive long, but comes with excellent risk/reward. If the support is broken, you can immediately get out. This isn't to say you can't re-enter later. At this point, you either enter, or look for a pullback to enter. Volume keeps confirming a bull move, so a good conservative entry would be at ©, risking a max of 2 ES

 

Atto:

Thanks for your contribution. I am interested to know what did you exactly see to make you say that the first sign of buying interest occurred at the long-term support ? Is it the WRB or the long green candle ? Or something else ?

If I were to buy around ©, I think a momentum Indicator would come in handy here. Personally I would be looking for CCI 50 to cross above zero. If I missed that entry, with CCI 50 above +100, it is very common you will see a GB100 with the CCI 14. With an even higher momentum condition, I may look for a ZLR with CCI 14.( Thanks Walter) It may sound complicated, but doing it this way allows one to limit the risk to a couple of ticks. As you mentioned earlier without the benefit of hindsight, we really don't know this could have developed into a thrust move. So personally I am not that comfortable risking 2 ES points.

[atto 20]

If using a setup like that seems to work for you (and make more sense), then do it. Specifically, I was referring to price/volume around that area. Since S/R is "projected" into the future, I was watching this very closely. I don't specifically use WRB's, but it's right there I'm interested in. I was watching on a 10 second chart for entry.

 

As I said, you'd be very willing to scratch the trade if it doesn't work out. As for the more conservative entry, the max 2 ES referred to the distance back to the line... I wouldn't risk that much either.

[OAC 10]

  kvn said:

There isn't too much out there that goes into advanced SR that I've found. (I guess maybe because it's a simple concept, buy S, sell R. :o) So I was hoping to see what some of the more experienced traders have to say on the subject and share some of my findings as well, if there is enough interest.

 

I'd like to go into things such as the various ways of finding SR, gauging which levels are more likely to hold, entry timing techniques and so on.

 

If you have something to add, please do, I am very interested in this subject.

 

To get back to your original question about advanced SR, which I don't think has been given sufficient coverage yet. The advanced SR is finding confluence area with multiple techniques and multiple timeframes. I suggest that you have a couple pieces of good software like TradeStation, Ninjatrader, Ensign.

Every morming I have these automatically calculated for me:

YPOC, YVAL , YVAH, YH, YL,Globex POC, Virgin POCs, Hourly POC, Dailly Pivots(pp,s1,s2,r1,r2), weekly pivots, monthly pivots, Daily VWAP, weekly VWAP, monthly VWAP, then you run Fibonacci studies on multiple time frame, retracements, extension, expansion , and 1:1 measured move. The last step would be looking for Swing points on multiple time frame. As you know we always assign higher weight to the higher timeframe S/R. I think that is plenty for horizontal levels.

[DbPhoenix 42]

  OAC said:

Every morming I have these automatically calculated for me:

YPOC, YVAL , YVAH, YH, YL,Globex POC, Virgin POCs, Hourly POC, Dailly Pivots(pp,s1,s2,r1,r2), weekly pivots, monthly pivots, Daily VWAP, weekly VWAP, monthly VWAP, then you run Fibonacci studies on multiple time frame, retracements, extension, expansion , and 1:1 measured move. The last step would be looking for Swing points on multiple time frame. As you know we always assign higher weight to the higher timeframe S/R. I think that is plenty for horizontal levels.

 

Perhaps you could provide some examples to show how you use all of this to make a trade decision.

[OAC 10]

It is easy. You just concentrate on your favorite techniques. The rest just provide supporting evidence.:o

[OAC 10]

All kidding aside, you don't know how many times I have seen some of these levels come together and stopped the market dead in its track.

[MC 10]

  OAC said:

All kidding aside, you don't know how many times I have seen some of these levels come together and stopped the market dead in its track.

 

Would you agree than any level with converged S&R has the chance of stopping dead in the tracks OR breaking with velocity? I have seen the later as well, where there is a major zone for supply/demand and it just breaks and SOARS. It has to do with the reaction of participants at that key level right?

[OAC 10]

In Support & Resistance 101 , they always compare S&R with floor and ceiling. So a very strong S&R shouldn't break that easily, no ?

[MC 10]

  OAC said:

In Support & Resistance 101 , they always compare S&R with floor and ceiling. So a very strong S&R shouldn't break that easily, no ?

 

Easily no, I guess that's what I mean. When they do break (setting aside gaps) they go wild in my limited experience. Probably due to the pressure needed to push through that level. That could lead to a question of maybe its better to use market orders on these setups in case since a limit could be jumped on an explosive move? S&R could be broken even though they hold most the time. Thank god cause if they never broke the market would be pretty boring.

 

I saw all the levels you said you have computed...any chance you could show a few charts from the past so I could see what you're watching?