Support and Resistance

[Bearbull 10]

There is nothing wrong or right with any approach, MA, RSI divergence, CCI, Pitchfork, MP, Wyckoff, Gann, Elliot, Fibonacci etc, these are all tools of the trade, they do not work by themselves, it is up to the skill of the trader to create an edge and make them work.

If somebody is consistently successful in trading by employing Planck's or Hubble constants, Avogadro's number, frequency of tides , harmonic vibrations from the depths of the Universe, who are we to say he or she is wrong:)

 

All the calculated pivots numbers for example do not have any solid logic behind them, however if enough folks trade by them , then obviously prices will react at those levels, same goes with Fib. levels. Carolyn Boroden has made a career out of it. Infact fib. numbers have taken up cosmic significance:)

As W. Gallacher pointed out " Surely the medieval mathematician would be astounded at his impact on twentieth century commodity man. His mathematical series was constructed from observations on the incestuous copulation patterns of rabbits.

Let's see, you start with a male and a female, then you take the first female offspring and you........well, better not get into it";)

[erierambler 10]

There is nothing wrong or right with any approach, MA, RSI divergence, CCI, Pitchfork, MP, Wyckoff, Gann, Elliot, Fibonacci etc, these are all tools of the trade, they do not work by themselves, it is up to the skill of the trader to create an edge and make them work.

 

I've tried to create an edge with quite a few of those approaches and had no success. Sure there was some edge but the frequency was poor. With S/R, frequency is greater which is more attractive.

erie

[Bearbull 10]

I've tried to create an edge with quite a few of those approaches and had no success. Sure there was some edge but the frequency was poor. With S/R, frequency is greater which is more attractive.

erie

 

Precisely, you have found after experimentation with various tools of trading an edge/setup/strategy which allows you trade profitably on a consistent basis, but that does not in anyway negate other tools of the trade. I know quite a few traders who make a most envious living with a combination of pivot levels, moving averages and 3-4 other momentum indicators (RSI etc), despite the fact that all these maths based indicators have a fundamental logical flaw

i.e Price (variable A) is sliced and diced to create an indicator which in turn is employed to predict Price (Variable A). However in the hands of a skilled trader, there is no problem.

[Sledge 13]

I'd say that if you:

1. Use S/R levels as your primary guide

2. Learn to read Price Action

3. Utilize a momentum indicator as a SECONDARY verification of your price action reading skills.

 

I think you'll be a pretty happy camper.

Aaron

[cowpip 10]

I'd say that if you:

1. Use S/R levels as your primary guide

2. Learn to read Price Action

3. Utilize a momentum indicator as a SECONDARY verification of your price action reading skills.

 

I think you'll be a pretty happy camper.

 

If those are the components that constitute your 'edge,' then yes, you will absolutely be a happy camper. For another individual, using Fibs, CCI's and the orientation of humping birds might yield greater success.

 

That is why screen-time is so important. You won't find your own edge if you don't get enough of it. And since this typically requires a whole lot of watching-time, it helps explain why most people end up on the losing end of the stick and then proclaim, "you can't make any money trading." Rubbish. They just gave up too early or exercised inadequate skill in money-management to pull them through the screen-time phase.

[Sledge 13]

If those are the components that constitute your 'edge,' then yes, you will absolutely be a happy camper. For another individual, using Fibs, CCI's and the orientation of humping birds might yield greater success.

True, I did try the "orientation of humping birds theory of technical analysis," created by Doctor Robin Sparrow, but it netted me about 6 pips before I gave up on it and moved along. :o

 

That is why screen-time is so important. You won't find your own edge if you don't get enough of it. And since this typically requires a whole lot of watching-time, it helps explain why most people end up on the losing end of the stick and then proclaim, "you can't make any money trading." Rubbish. They just gave up too early or exercised inadequate skill in money-management to pull them through the screen-time phase.

 

So very true, I remember watching and watching and thinking- damn, this is never going to make sense.. and then all of a sudden- BAM, there it was. I find myself now looking at the EOD going "Crap, well tonight should have a mark-up and then back downward we'll go to resume the trend.. should I bank the money and re-enter or just leave it alone?" I sort of enjoy watching the sneakiness too, I am seeing more and more bars that tend to be "freak out" bars (i.e. bars to throw traders off the scent of the real trail) and it makes you sort of chuckle to see it.

 

If anyone wants a cut-and-dry, honest post to read about Screen time- I point you to bootstrap's thread he started here:

http://www.traderslaboratory.com/forums/f34/why-screen-time-is-important-4226.html

 

Aaron

[BHReach 10]

All the calculated pivots numbers for example do not have any solid logic behind them

 

They may not have been created based on solid market logic but they are a very crude way to measure "regression to the mean" type turning points.

 

From my own observations, when they appear to reverse the market's direction, I look to the left on the chart and in the vast majority of cases they coincide with a price action based S/R area and that S/R is usually the more accurate of the 2.

 

Doug Tucker has done some research on Floor Trader Pivots and he could find no difference between them and random horizontal lines as far as reversing the market goes (they do have other uses).

 

Bill

Edited July 26, 2008 by BHReach

[sevensa 10]

Who is Doug Tucker?

[Guest forsearch]

No idea. Here's his blog for all interested:

 

http://tuckerreport.com/about/

[ochie 10]

From my own observations, when they appear to reverse the market's direction, I look to the left on the chart and in the vast majority of cases they coincide with a price action based S/R area and that S/R is usually the more accurate of the 2.

 

IMO, over time calculated pivots became so popular with retail traders they became a Self Fulfilling Prophesy and some kind of bounce, pause, or even a reversal may happen. I agree that one should look left to see if real chart S/R is present. S/R is created by an inability to facilitate trade (prior swings which can be S/R upon a test) or heavy trade facilitation (which produces congestion). A trade using pivot calculations without confluence of one or the other may not be the best way to go.

[BlowFish 10]

If you 'doodle around' you discover that floor pivots have some simple but rather elegant geometric properties.

 

Last time I checked the ES, it traded at the pivot about 68% of the time (easy to do with excel). Useful to know? Maybe. Self fulfilling probably, but I guess the same can be said for yesterdays high/low or last weeks h/l for that matter.

 

The trouble with how most people do statistical tests is how they approach them. I have seen stuff that shows Fibonacci and Gann levels are no better than random also. Most testers seem to test whether the line works by testing if it is a price extreme "to the tick". How many S/R levels work to the tick? I Am sure you could show the same for PoC VaH & VaL though again these at worse are self fulfilling and at best 'real'.

[BlowFish 10]

Who is Doug Tucker?

 

From reading his blog about pivots I would bet hard cash that he was once a student of Charles Drummond. Incidentally I can see nothing that suggests he has done any sort of research apart from eye balling some charts. Having said that he seems like a sensible sort of guy.

 

Edit: I see he acknowledges Drummond at the end of the piece.

Edited July 27, 2008 by BlowFish

[BHReach 10]

I have seen stuff that shows Fibonacci and Gann levels are no better than random also. Most testers seem to test whether the line works by testing if it is a price extreme "to the tick". How many S/R levels work to the tick?

 

I don't use Fibonacci, Gann, or Pivot levels for the reason previously stated, I consider them redundant. The information overlap between those levels that work and Price Action based S/R is extremely high.

 

When considering trade entry, I want confirmation from independent sources of information. For example, I like to trade reversals at S/R when it is combined with trend exhaustion.

 

How many S/R levels work to the tick?

 

S/R levels are really zones. The 'size' of the zones depends on several things, the market fractal the level is visible on, how the level was created (swing hi/low, area of congestion, gap), and price pace as it approaches the level.

 

If price is approaching S/R with high momentum it is likely to at least overshoot if not blow right through. OTOH, if prices are struggling to make progress, they are likely to under shoot the S/R level.

 

It is amazing how accurate the S/R levels are respected on the smaller fractals with average price volatility.

 

Incidentally I can see nothing that suggests he has done any sort of research apart from eye balling some charts.

 

I don't think you can draw that conclusion. He has demonstrated sufficient skill in mathematics and programming to be able to do the pivot research. Not showing the details of what he did does not mean he simply eyeballed some charts. I do admit that the lack of detail about what he did reduces the value of his conclusions (i.e., it's wise to be skeptical).

 

Bill

[BlowFish 10]

Hi Bill,

 

The point I wanted to make was simply that just because someone claims something to be so on their blog does not make it so:) One also has to be a bit careful with observations (rather than objectively tested data), especially if they are not your own. I could find no evidence on Tuckers blog that suggested any sort of scientific testing. Maybe I did not look hard enough. Thats not to say I disagree with what he was saying much has merit.

 

My hunch why S/R 'works' is simply because many many people enter or place stops etc. around those levels. Does that make them 'self full filling', does it matter as long as they 'work'? Almost by definition these levels/zones are self fulfilling after all they are where traders tend to enter and exit the market. On a BO up through R, BO traders will get long faders will get short, shorts will cover etc.

 

If you allow the same latitude with pivots (for example using the zone between (h+l)/2 and (h+l+c)/3) you may find that they do in fact 'act' as support and resistance. Along with yesterdays H & L many watch the mid point. Who knows without running the tests. Btw I found it interesting that your observations would suggest some information overlap with more derivative levels.

 

What is important is that people find things that work for them. The path to acceptance is likely to be quicker if they can find a way to objectively test things for themselves. I think one of the many trading pitfalls is forming 'beliefs' on what you have been told are 'facts' rather than what you have established as true for yourself. In short I am questioning his method and results not his conclusion

[Kiwi 16]

Skill in mathematics (statistics, programming etc) does not in any way imply that the hard boring work of really testing things has been done.

 

I can assure you that I have the skills but I can also assure you that my low tolerance for boredom negates them in this situation.

[walterw 10]

Hi Bill,

 

The point I wanted to make was simply that just because someone claims something to be so on their blog does not make it so:) One also has to be a bit careful with observations (rather than objectively tested data), especially if they are not your own. I could find no evidence on Tuckers blog that suggested any sort of scientific testing. Maybe I did not look hard enough. Thats not to say I disagree with what he was saying much has merit.

 

My hunch why S/R 'works' is simply because many many people enter or place stops etc. around those levels. Does that make them 'self full filling', does it matter as long as they 'work'? Almost by definition these levels/zones are self fulfilling after all they are where traders tend to enter and exit the market. On a BO up through R, BO traders will get long faders will get short, shorts will cover etc.

 

If you allow the same latitude with pivots (for example using the zone between (h+l)/2 and (h+l+c)/3) you may find that they do in fact 'act' as support and resistance. Along with yesterdays H & L many watch the mid point. Who knows without running the tests. Btw I found it interesting that your observations would suggest some information overlap with more derivative levels.

 

What is important is that people find things that work for them. The path to acceptance is likely to be quicker if they can find a way to objectively test things for themselves. I think one of the many trading pitfalls is forming 'beliefs' on what you have been told are 'facts' rather than what you have established as true for yourself. In short I am questioning his method and results not his conclusion

 

 

This "key" levels as I call them actually talk to you telling you where the participants created positions, from there on you will experience the beauty of the "flow" of tolerance in stops and targets as the market may push or refresh from/to a gravitational "main positions" area... thats where vwap based analisis also do outperform many othe fixed S&R analisis... now we who use vma`s have the advantage of reading price action and be able to see a clean performance of a powerfull adaptive indicator who has the ability to follow the flow with the least noise posible...

 

This type of analisis gets empowered when you have an extraordinary RRR embeded to your strategy, and that comes in the realationship of your targets vs stops...

 

So S&R is actually one of the pivotal studies of TA... you can complicated or simplify it, depending on what life style you prefer... the chimp has decided to keep things simple... my 2 cents, cheers Walter.

[Bearbull 10]

Hi Bill,

 

The point I wanted to make was simply that just because someone claims something to be so on their blog does not make it so:)

 

 

All depends on the quality of the content of the blog just as the quantity of posts on these threads mean nothing if he or she is merely engaged in totally non-productive, controversial exchanges.

 

In any case the final option is in our hands, go back to the charts and check out any methodology explained in any blog or thread and verify for yourself, it if does not jive, fine, move on to the next, there is no need to harbor any grudge against the previous one which did not work for you;)

[BHReach 10]

Apparently I stepped on some toes by expressing my opinion about floor trader pivots and other calculated ('magic number') price levels. I apologize for that.

 

Let me summarize my views so they are clearly understood:

 

1. FT pivots et al are crude measures of regression to the mean (referring to them as gravitational levels is OK too). Mean reversion is a very important market principle. That means you should be able to construct profitable trading methods using the calculated levels.

 

2. My observation (note the term observation not scientific study) is that in the vast majority of cases, when the 'magic number' price levels work as S/R, they are coincident with previous S/R based on PA and in most cases when they don't work, there is no previous S/R based on PA at that level. That means to me that they don't add much in the way of new S/R levels that are not already available from S/R based on PA and they do add some false S/R levels.

 

3. There are many variations of FT pivots. Sierra Charts has 10 to choose from. Which to use, which to use?

 

At the risk stepping on more toes, I don't use indicators much either. Most algorithmic indicators are some kind of digital filter derived from price, that makes them lagging indicators. If you use them to generate trading signals, you will enter trades later than using PA most of the time.

 

For example, a 10 bar MA lags prices by 5 bars. It tells you on average what prices were doing 5 bars ago.

 

In addition, most indicators add no new information. The information in price derived indicators can be seen directly in PA (in most cases).

 

Also, most of these indicators have a fixed look back period (like the 10 bar MA). That means the digital filter is tuned to a specific frequency. As long as the dominant market cycle is compatible with the tuned frequency the indicator works well. When it's not, the indicator works poorly. E.g., a MA crossover system works well in a trending market (low frequency dominant cycle) but gets whip sawed in congestion (high frequency dominant cycle). Note: a MA is a low pass filter.

 

Trendlines/channels are a good way to sense changes in the pace of the market. If you take the trouble to learn how to use Andrews Pitch Forks plus variations, they can be a very effective trading tool.

 

I don't use them, I can see changes in pace directly from PA. You need to be aware that changes in the price scale can effect your perception of market pace. This is most noticeable when prices go parabolic. To see what I mean, take any chart and double the price scale, now double it again. Compare the 3 charts and notice on the 3rd chart how much the trends are squashed wrt the 1st chart and how difficult it is to compare the pace of the trends.

 

I am not exactly sure what VWAP is but from the flyover hint Walter put on his chart, I would guess it's a MP thing. I looked at MP briefly and decided it was too complex to learn in a short period of time so I put it aside for later investigation.

 

From the short exposure I had to it, it looked like the important price levels occurred where prices spent a lot of time (like in a congestion period). I already have those marked as important S/R levels based on PA so I don't know how much new information it will add.

 

Also, since it is based on volume, it cannot be used for the Forex market.

 

I like things that are simple and work in all markets on all market fractals. PA with PA based S/R fit the bill for me.

 

Every trader has to create their own trading plan that is compatible with their temperament.

 

Bill

[zdo 20]

Bill,

 

Thanks for your post. I was doing great until I came that word 'fractal'

What the fv@( is a fractal? :o

[BlowFish 10]

I have to say Bill most of what you say pretty much agrees with my own view of things.

 

Zdo http://en.wikipedia.org/wiki/Fractal In the context of market data it essentially means you get similar patterns and behaviour on a 5 min chart as a 10 min as a 15 min etc.

[atto 20]

Bill,

 

Thanks for your post. I was doing great until I came that word 'fractal'

What the fv@( is a fractal? :o

To elaborate on BlowFish, fractals are repeating patterns. In trading, they can allow you to take the risk of a short term trade, and parlaying that into a longer term trade.

 

For a very simple example, if you entered long at the start of an uptrend, which was a wave inside of a larger uptrend, you are using fractals. Most people who do analysis on different timeframes are using fractals in one way or another.

[Kiwi 16]

Apparently I stepped on some toes by expressing my opinion about floor trader pivots and other calculated ('magic number') price levels. I apologize for that.

 

Let me summarize my views so they are clearly understood:

 

1. FT pivots et al are crude measures of regression to the mean (referring to them as gravitational levels is OK too). Mean reversion is a very important market principle. That means you should be able to construct profitable trading methods using the calculated levels.

 

2. My observation (note the term observation not scientific study) is that in the vast majority of cases, when the 'magic number' price levels work as S/R, they are coincident with previous S/R based on PA and in most cases when they don't work, there is no previous S/R based on PA at that level. That means to me that they don't add much in the way of new S/R levels that are not already available from S/R based on PA and they do add some false S/R levels.

 

3. There are many variations of FT pivots. Sierra Charts has 10 to choose from. Which to use, which to use?

 

At the risk stepping on more toes, I don't use indicators much either. Most algorithmic indicators are some kind of digital filter derived from price, that makes them lagging indicators. If you use them to generate trading signals, you will enter trades later than using PA most of the time.

 

For example, a 10 bar MA lags prices by 5 bars. It tells you on average what prices were doing 5 bars ago.

 

In addition, most indicators add no new information. The information in price derived indicators can be seen directly in PA (in most cases).

 

Also, most of these indicators have a fixed look back period (like the 10 bar MA). That means the digital filter is tuned to a specific frequency. As long as the dominant market cycle is compatible with the tuned frequency the indicator works well. When it's not, the indicator works poorly. E.g., a MA crossover system works well in a trending market (low frequency dominant cycle) but gets whip sawed in congestion (high frequency dominant cycle). Note: a MA is a low pass filter.

 

Trendlines/channels are a good way to sense changes in the pace of the market. If you take the trouble to learn how to use Andrews Pitch Forks plus variations, they can be a very effective trading tool.

 

I don't use them, I can see changes in pace directly from PA. You need to be aware that changes in the price scale can effect your perception of market pace. This is most noticeable when prices go parabolic. To see what I mean, take any chart and double the price scale, now double it again. Compare the 3 charts and notice on the 3rd chart how much the trends are squashed wrt the 1st chart and how difficult it is to compare the pace of the trends.

 

I am not exactly sure what VWAP is but from the flyover hint Walter put on his chart, I would guess it's a MP thing. I looked at MP briefly and decided it was too complex to learn in a short period of time so I put it aside for later investigation.

 

From the short exposure I had to it, it looked like the important price levels occurred where prices spent a lot of time (like in a congestion period). I already have those marked as important S/R levels based on PA so I don't know how much new information it will add.

 

Also, since it is based on volume, it cannot be used for the Forex market.

 

I like things that are simple and work in all markets on all market fractals. PA with PA based S/R fit the bill for me.

 

Every trader has to create their own trading plan that is compatible with their temperament.

 

Bill

 

Good post Bill,

 

I would add:

 

To 3: The value of the pivots is that there is a population of followers so if they coincide with S&R or widely followed fibs then that population can be added to the S&R at that point. The confluence concept. Despite that I no longer have any pivots on my charts.

 

To your indicator comments: Never forget that a price bar is also an indicator. All (?) indicators summarize information and the original intent was probably always to make trading easier so you trade some lag in the summarization for an easier life. In the case of price bars the lag is where you wait for the price bar to complete before acting on it. You may also miss important information (the swings within the bar may not be just noise).

 

To market profile: Much of what you see in horizontal s&r is reflected in MP too but the difference in perspectives will add you your understanding. Also, MP is not based on volume although it is often used and considered in MP interpretation. The TPO is based on time and price only.

[BHReach 10]

Bill,

 

Thanks for your post. I was doing great until I came that word 'fractal'

What the fv@( is a fractal? :o

 

Others have already answered your question, I use market fractal instead of time frame because time frame does not seem appropriate for tick, volume or range bar charts.

 

Bill

[OAC 10]

 

2. My observation (note the term observation not scientific study) is that in the vast majority of cases, when the 'magic number' price levels work as S/R, they are coincident with previous S/R based on PA and in most cases when they don't work, there is no previous S/R based on PA at that level. That means to me that they don't add much in the way of new S/R levels that are not already available from S/R based on PA and they do add some false S/R levels.

If your "magic number" price had to work only with S/R derived from PA, then they don't work at all. Period. My opinion is that you are looking at over-used and over-abused levels like the Floor traders Pivot and basic Fib Retracements. Even indicators like Stochastic and MACD used to make fortunes for their inventors before they got too popular.

This is an extremely competetive game, you need to be smarter and dig deeper than everyone else in order to discover your edge. Although S/R derived from PA do work. Since they are quite well known, PA is quite choppy and unpredictable around these levels. Your edge can only be obtained through countless hours of screentime. I think it would be a disservice for any newbies reading this to not be shown the whole picture.

 

http://www.traderslaboratory.com/forums/f34/why-screen-time-is-important-4226.html

[crabbydog 10]

S/R is my core trading strategy, and has been since I made the turn. I determine the S/R levels by using pviot prices. And sicne I promised a little meat with my next post, here you guys go.

 

Using your first tick attachment.

 

Wait for the first pivot high and pivot low to form. The order doesn't matter.

this forms the Open S/R box. (#1 and 2)

 

Wait for a new pivot price to form outside the OSR. Since it forms above the OSR I am looking to go long. I now wait for the pivot low to form. I want the market to trade completely outside the range of first bar that makes the pviot low. I now have my Zone.

 

In this order, I will go long on a break of of the second pivot low(the green dot), or a break of the most recent high on the retrace leg, or a break of the second pivot high. The initial stop is the OSR support level.

 

Can see the thumbnails, but the enlarged pictire shows blank, anything that can be done about that? I have looked at plenty of other thumbnails that worked and am using firefox