How to Quantify Support/Resistance Levels and Pivot Points?

[suby 10]

Hey Guys,

 

I was wondering if anyone currently has a model for quantifying Support/Resitance Levels and Pivot Points or some resources/books they could recommend my way to learn more about this...

[BlueHorseshoe 10]

Hey Guys,

 

I was wondering if anyone currently has a model for quantifying Support/Resitance Levels and Pivot Points or some resources/books they could recommend my way to learn more about this...

 

What platform do you use?

 

BlueHorseshoe

[suby 10]

What platform do you use?

 

BlueHorseshoe

 

Hey BlueHorseShoe,

 

I use

 

ThinkorSwim

[BlueHorseshoe 10]

Hey BlueHorseShoe,

 

I use

 

ThinkorSwim

 

I don't think that I could really help with any code for that, I'm afraid.

 

Have a hunt around in the default indicators for the platform though - you may find something that is workable.

 

Sorry I couldn't be more help.

 

BlueHorseshoe

[suby 10]

I don't think that I could really help with any code for that, I'm afraid.

 

Have a hunt around in the default indicators for the platform though - you may find something that is workable.

 

Sorry I couldn't be more help.

 

BlueHorseshoe

 

No worries, thanks for the help regardless!

[BlueHorseshoe 10]

No worries, thanks for the help regardless!

 

By the way, you mentioned Pivots.

 

If by this you mean a "swing" type structure (a high with lower highs on either side of it) then then this is an excellent quantitative way to define S/R levels.

 

If you meant "daily pivots" or "floor trader pivots" which are the static lines calculated each day from the prior day's prices - well they're a complete waste of time in my opinion and experience.

 

Hope that helps.

[Patuca 13]

By the way, you mentioned Pivots.

 

If by this you mean a "swing" type structure (a high with lower highs on either side of it) then then this is an excellent quantitative way to define S/R levels.

 

i could say something about staggered time frames here being a monkey wrench but I won't say much (high with lower highs..etc. whose mine or yours?? ..etc....).

 

gotta jump

 

adios

[addchild 10]

Hey Guys,

 

I was wondering if anyone currently has a model for quantifying Support/Resitance Levels and Pivot Points or some resources/books they could recommend my way to learn more about this...

 

This might be an interesting place to start

 

Swing High / Swing Low Indicator for Think or Swim « Read the Prospectus

 

Also maybe look into something like fractals, specifically, clusters of fractals.

[suby 10]

This might be an interesting place to start

 

Swing High / Swing Low Indicator for Think or Swim « Read the Prospectus

 

Also maybe look into something like fractals, specifically, clusters of fractals.

 

Addchild, thank you for this! The markets are beggining to look a lot more like a math problem each day rather than a "double top, Head and shoulders pattern"

 

I can't thank you enough!

[BlueHorseshoe 10]

Addchild, thank you for this! The markets are beggining to look a lot more like a math problem each day rather than a "double top, Head and shoulders pattern"

 

I can't thank you enough!

 

Hi Suby,

 

Here's a thought that may or may not be useful to you, and please remember it should just be treated as an opinion because I'm not providing any evidence to back it up . . .

 

From what you know about Niederhoffer you'll be aware that it is possible, by betting on mean reversion, to have a very high win rate (small wins), but a few very large losses that mean you're not profitable. Because you can be mathematically confident that price will always revert to its mean, then cutting losses can become an issue.

 

Nevertheless, cutting losses is essential - ie having some form of stop loss.

 

The next thing that you will find is that the markets are remarkably efficient at putting these two exits into equilibrium (and your account balance too, ignoring costs). If you take a random entry and you use, let's say, a 1 point target and a 9 point stop, you'll find that over a large data set you'll have something like a 90% win rate. ( 1 x 90 = 90 ) - ( 9 x 10 =90 ) = a breakeven strategy. If you use a 5 point target and a 5 point stop, your win rate over the long haul will be about 50%, and a simple bit of maths tells you that once again, this leads to breakeven. Hopefully I have explained myself well enough for you to see what I mean about the market efficiency in operation there.

 

What does this mean?

 

It means that you need to have an edge in your entry.

 

It's pretty commonly said that amateurs are the ones fussing over entries, but 'exits are where the profits are made'. Though exits mustn't be ignored, entries are a crucial part of finding a profitable edge, especially with a system based on mean reversion, where any exit other than a profitable one is, theoretically, non rational.

 

In summary then, I think you may find that to get a mean reversion type strategy to work, you will need to find low-risk points of entry.

 

I hope that's some help, and remember, it's just my opinion!

 

BlueHorseshoe

[suby 10]

Hi Suby,

 

Here's a thought that may or may not be useful to you, and please remember it should just be treated as an opinion because I'm not providing any evidence to back it up . . .

 

From what you know about Niederhoffer you'll be aware that it is possible, by betting on mean reversion, to have a very high win rate (small wins), but a few very large losses that mean you're not profitable. Because you can be mathematically confident that price will always revert to its mean, then cutting losses can become an issue.

 

Nevertheless, cutting losses is essential - ie having some form of stop loss.

 

The next thing that you will find is that the markets are remarkably efficient at putting these two exits into equilibrium (and your account balance too, ignoring costs). If you take a random entry and you use, let's say, a 1 point target and a 9 point stop, you'll find that over a large data set you'll have something like a 90% win rate. ( 1 x 90 = 90 ) - ( 9 x 10 =90 ) = a breakeven strategy. If you use a 5 point target and a 5 point stop, your win rate over the long haul will be about 50%, and a simple bit of maths tells you that once again, this leads to breakeven. Hopefully I have explained myself well enough for you to see what I mean about the market efficiency in operation there.

 

What does this mean?

 

It means that you need to have an edge in your entry.

 

It's pretty commonly said that amateurs are the ones fussing over entries, but 'exits are where the profits are made'. Though exits mustn't be ignored, entries are a crucial part of finding a profitable edge, especially with a system based on mean reversion, where any exit other than a profitable one is, theoretically, non rational.

 

In summary then, I think you may find that to get a mean reversion type strategy to work, you will need to find low-risk points of entry.

 

I hope that's some help, and remember, it's just my opinion!

 

BlueHorseshoe

 

BlueHorseshoe,

 

This exactly the tangent I am on right now. I have already defined my risk/reward parameters but what I must admit to as I am constantly learning and looking to improve is that I truly can't identify what low-risk points of entry are...

 

Could you possibly give some examples or resources in regards to this...?

 

There must be a concrete method for determining these entry points and developing probabilities based off of them or maybe i'm just dreaming?

[addchild 10]

BlueHorseshoe,

 

This exactly the tangent I am on right now. I have already defined my risk/reward parameters but what I must admit to as I am constantly learning and looking to improve is that I truly can't identify what low-risk points of entry are...

 

Could you possibly give some examples or resources in regards to this...?

 

There must be a concrete method for determining these entry points and developing probabilities based off of them or maybe i'm just dreaming?

 

 

There isn't much that is concrete in trading. But if you are just trading intraday, a decent strategy would be entry on a "stop run" But you still need to be cognizant of trend days, because lots of trends are just fueled by people calling tops and bottoms. My advice would be to catch in on the way back up, not the way down.

[BlueHorseshoe 10]

BlueHorseshoe,

 

This exactly the tangent I am on right now. I have already defined my risk/reward parameters but what I must admit to as I am constantly learning and looking to improve is that I truly can't identify what low-risk points of entry are...

 

Could you possibly give some examples or resources in regards to this...?

 

There must be a concrete method for determining these entry points and developing probabilities based off of them or maybe i'm just dreaming?

 

Hi Suby,

 

If I could give you any kind of a definitive answer to this question then I would be a rich man (and I'm not!).

 

And you probably need to develop your own answer based upon your own beliefs about market behaviour.

 

But my previous post was made with the S/R levels of your opening question in mind. Depending on what instrument you wish to trade, you'll often find a behavioural bias around such levels. Once you find a raw probability you can combine it with other elements in your strategy, such as trading with the longer term trend, or overbought oversold levels on an oscillator (there are some great posts by JSwanson in the forum on using a 2-Period RSI - a technique he has appropriated from Larry Connors), or some sort of tape-reading signal from the DOM, or something using Market Profile, or fundamental information, in order to provide a low risk entry.

 

An example could be something like:

 

- Identify an uptrend (however you choose to do so).

 

- Place a buy limit under the market at an area where you know there is a bias for reversal to the upside, such as horizontal S/R, for example.

 

- If your oscillator is oversold once you get down to that level / there are massive bids under that level / the fundamentals are bullish / or whatever else it is you have chosen to refer to so as to multiply your edge at entry, then leave your limit in place to hopefully get filled.

 

You've still got all the challenges of managing and exiting the trade to face, but as long as the ingredients you have put in above are high probability ones, your entry should have an edge.

 

One way to test the effectiveness of an entry is to run simulations for identically sized stops and targets of varying sizes against the entry. With an identical stop and target and a random entry, then you would expect breakeven results (50/50 on entry, 50/50 on exit). So with an identical stop and target and an entry with an edge you should get better than breakeven results.

 

BlueHorseshoe

[BlueHorseshoe 10]

You might also find this article interesting - about Niederhoffer and Nassim Taleb:

 

gladwell dot com - blowing up

[steve46 12]

A visual example might help

 

The attached chart shows a couple of concepts that work for me...with benefit of research I know how to identify areas where previously participants have come in to move markets...I believe I know why they decide to act at these prices....and at these times....so I use that information to make visual, the areas on my chart where I believe they may want to act today to move price up or down...The large blue colored is my workspace from several days ago....within that space I have what I call an "inset" or darker blue area where I think participants are likely to act today (at specific times)....my rules are simple....price tests and closes above and on the retest I take it long....price tests and closes below and on the retest of that price I enter a short position....whatever direction you enter, the stoploss is a close no the other side of the dark blue bar...(about 2 NQ points)....my profit targets extend on the short side to about 30 NQ points...

 

Not going to get into all the details but the system shows me that price is probably going to move south....I am willing to take longs but I won't spend a lot of money trying to make it work...since I know (from experience) that the system is probably right...

 

I guess the point is....(and it is my only my opinion) you will never be able quantify a system so that you don't have to take responsibility for making a decision....its just not possible...no matter how many questions you ask folks, no one here is going to provide the information necessary for you to cobble together a system that allows you to trade without having to use your own judgement.

 

I have spent a lot of time doing the research and the result is that I have an edge that works every day...yet I still have to make a decision as to where and how many times, to put money at risk....for me, it is time AND price so it is a easier to do, but I still have losing days...eventually what skilled folks learn is that once you have a basic concept that works, the amount of profit you make is directly related to how well you manage and limit losses...

Edited November 2, 2012 by steve46

[BlueHorseshoe 10]

...no matter how many questions you ask folks, no one here is going to provide the information necessary for you to cobble together a system that allows you to trade without having to use your own judgement.

 

This is true, and hopefully my post was clear enough that I was suggesting the kinds of things (rather than giving specific examples of things) that could be substituted in alongside support and resistance to try and build an entry with an edge that is distinct from any edge that the exit might offer.

 

Although you don't have access to whatever calculations Steve46 is using to provide the levels he trades off, he has provided an interesting suggestion that was not included in my list of examples - looking for a probabilistic edge around specific entry times. Combining behaviour around S/R levels associated with specific times would be an interesting line of investigation.

 

BlueHorseshoe

[steve46 12]

This is one edge I don't mind sharing (to a point).....there's an old saying among my generation of participants.."its time AND price"......knowing the signficance of time is one way of keeping yourself out of the periodic chop that occurs regularly in contemporary index markets...

 

Also there is significant edge to be had, if you learn how to trade economic reports, earnings reports ("Apple earnings" trade on Page 48, post 378 of my thread), bond auctions, and more recently Euro news of all kinds...for a period of years, I made a nice living just trading the time period PRIOR to and AFTER these events....there are folks who specialize only in event trades where the trader has to learn how to act based on the combination of time & price....

 

Finally, about half my income derives from time based trading prior to the open of both the Globex Markets (Asia & Europe) and RTH (US markets)....the opportunities are there if you take the time to learn them...this is in part what I teach folks to do...professionals call these trades "layups" because they tend to be consistent producers year after year....

 

Okay then thats my good deed for the day, week, month AND year....

 

Good luck

Steve

Edited November 3, 2012 by steve46

[ForexTraderX 10]

 

Also there is significant edge to be had, if you learn how to trade economic reports, earnings reports ("Apple earnings" trade on Page 48, post 378 of my thread), bond auctions, and more recently Euro news of all kinds...for a period of years, I made a nice living just trading the time period PRIOR to and AFTER these events....there are folks who specialize only in event trades where the trader has to learn how to act based on the combination of time & price....

 

Finally, about half my income derives from time based trading prior to the open of both the Globex Markets (Asia & Europe) and RTH (US markets)....the opportunities are there if you take the time to learn them...this is in part what I teach folks to do...professionals call these trades "layups" because they tend to be consistent producers year after year....

 

Okay then thats my good deed for the day, week, month AND year....

 

Good luck

Steve

 

Ya. news/econ report trading is really like price action/candlestick trading. No, it's not as simple as "good report = buy. bad report = sell". But I never really understood this type of garbage logic anyway. That's like saying "green candle = buy. red candle = sell." If that's your approach to reading price action, then your gonna pay for a lot of other peoples dinners. Same thing with news/data/catalyst event based trading. However, just like reading candlestick price action, the news/event/catalyst based trading can be a viable profitable approach to trading.

 

And really good point on the time thing. This never gets enough attention IMO. But, there is usually 1 good trade in asia. 1 good trade in london, and maybe 1 or 2 good trades in the U.S. session. The hour before and after the "open" of each session tends to be the hour that "the move" is going to be found. Combine with a few other basic concepts like previous daily highs/lows, etc..., and this can be a real "bread and butter" money maker.

 

I mean, if I had a dollar every time the EUR/USD slid downward during asia, then london opens only to retest the asian session lows before reversing 30-100 pips to the upside...then I would make a good livin....oh, wait. nevermind. I do have a dollar for many of those times.

 

Very good points though Steve... and both are sorely neglected by the general trading populace. My guess is because neither approach has enough multi-colored squiggle lines to hypnotize the masses.

 

FTX

[MidKnight 12]

And really good point on the time thing. This never gets enough attention IMO. But, there is usually 1 good trade in asia. 1 good trade in london, and maybe 1 or 2 good trades in the U.S. session. The hour before and after the "open" of each session tends to be the hour that "the move" is going to be found. Combine with a few other basic concepts like previous daily highs/lows, etc..., and this can be a real "bread and butter" money maker.

 

Just to elaborate a little on what ForexTraderX said. The reason most of the "good trades" happen around the opens is because that is where the news is scheduled to come. I've plotted time of day distributions based on these "good trades" across 5 years of intraday 60m data and while the time of day that the good trades come is fairly consistent, they also did clump up with the news times. I have not yet figured out how to trade news events so for now, I disregarded the information from the distributions I did.

 

Also to add more about time in the Forex world. I feel there are consistent opportunities that happen at about the same time when the market is trending for the day. Remember, people are involved to move a market and the boundaries of the participants has an impact (ie, people are going home, new players are getting to work and starting the day). I don't really consider these type to be in the big mover category, but they are predictable scalps.

 

Now if I could just figure out more of the event trading stuff I could drastically shorten my day!

 

With kind regards,

MK