Support, Resistance, Stochastics, and EMA: A Study

[ziebarf 10]

Forward:

 

First of all, this doesn't completely involve candlesticks, but they could easily be incorporated into the method. This forum seemed to be the best place for me to post this study, if not please feel free to move it/delete and I apologize for the inconvenience. For a little background on me: In my trading I have been a student of support/resistance and volume with an emphasis on trading naked. I am still new to this (been at it for around a year). My biggest issue with trading by support and resistance was finding confirmation for my trades. Price patterns and volume divergence seem to work well, but I am curious for more. A few days ago I started playing with some of the classic indicators and think I might have stumbled upon something.

 

In this thread I will try and document some of my findings and hopefully spark some discussion. First of all, the strategy relies heavily still on the use of support and resistance. I find these levels by looking for ranges and natural swing points on a larger timeframe (thank you Dbpheonix for shedding the light on AMT) ala the last chart attached.

 

Findings:

 

When price arrives at one of these levels, I am looking for the stochastics to be in either the overbought or oversold areas. After that I watch to see how the stochs behave. If they ramp off to the other extreme, it might indicate there are sellers/buyers at these levels (best explained by the chart case3). On following tests the stochs should appear the thin out and not break into the extreme levels as much (this however is not always the case but the ideal situation). This again is best explained through the charts as it is difficult to describe without visual reference. It should be noted that I am only watching the stochastics at and around the levels of support and resistance.

 

The EMA is used to help filter out trades (specifically breakouts) and even offers potential entries after the reversal or breakout has occured. Breakouts are tricky really, but ideally the stochastics will remain at the extreme level in the direction of the breakout and price will be closing well above/below the EMA.

 

 

Entries and stops are the tricky part and everyone has different rules, case4 illustrates how one could potentially enter a trade. Again, I am just trying to record my adventures with stochastics and none of this should be taken as an absolute. We all know that in trading, nothing works every time.

Edited October 6, 2009 by ziebarf

[ziebarf 10]

Re-reading my post, my thoughts were a little convoluted. Essentially I am trying to measure the strength of support and resistance with

 

Today had some great action, I switched the charts to candles to make it a little more fitting with this forum. I also changed from a twenty period EMA to an 8 period EMA. Ideally I would like to enter on a rejection of a support or resistance level when the EMA switches side of price. This is better illustrated in the chart I have attached.

 

Attached is two things, the current trade I am in, and the S/R levels I will be hunting for. I have noticed there is some discrepancy in the way renko bars and candles print the stochastics, so I have decided to stick to candles for now. Reasons for the trade are annotated on the chart.

[ziebarf 10]

Closed trade, this one worked out well. I threw a 20EMA on there to help keep me in the trade.