Hi I am trying to evaluate the Price Action around a Support/Resistance line. For example: 1) After touching a support line, price shoots up. Then the Support line gets high marks. 2) If price drops and stalls for several bars, before penetrating the line, it still holds some value as future Resistance. Whereas if it provided 0 support, if price did not slow down at all, the line is invalidated. 3) If price drops rapidly and then slows down a little before penetrating the support line with a big down candle, it still shows there was a lot of buying in the area. I am thinking of using momentum indicators, maybe cross of fast over slower indicators. I did some tests, they looked promissing but did not cover all cases. I don't have much experience with indicators. So, what do you guys think? Could you recommend some indicators to try out for this purpose?
Good to see this post as we eventually has someone that discuss something relevant. The support/resistance is NOT something new in trading, it been called as different name more than a century away, e.g. Jesse Livermore called it as "pivot" so do others called it as "level" and the list can go on. In reality, what this is just a price level that a lot of bull & bear interest in and the battle field for them, more specific, the trend followers and mean reversion trader. One will push the price below that support level and the others will do the different. Note: Mean reversion trader are mainly technical trader and so do most of the ET here The main killer for support/resistance trading is the market whipsaw, also known as "chop". You will die with thousand cuts if the chop persists a long time regardless you are trend follower or revert to mean traders, Jesse Livermoore is a good example. Without diluted too much about proprietary knowledge about the research outcome from my previous institutions, we find that the edge is reduced significantly with the duration of the chops due to bull/bear involvement in pivots, at least from statistically point of view and you are almost impossible to make a positive expectancy from this trading approach after slippage & commission, even with a longer time flame or indicators
I use a 5sma Envelope 0.02% on a M1 chart to judge short term momentum. Basically as price goes down to Support area, it might / most likely will break through it, so you want to wait for momentum to turn up, I wait the the 5 to turn up then try to enter in the low of that range. 2 things will happen. 1. it turns back down to a TIGHT SL. 2. That momentum will keep it going for a while. Option 2 has the potential for many times the reward compared to your risk, getting most of the reward without letting it turn to a loss is ofcourse the next issue. Pretty much everything else I've played with is to slow, to much of the turn wasted, to big a risk at stake, too much given back on the turn after the profit move to.
These are good insights in trading around S/R lines. Could you comment on my original post though? ie what indicator I could use to evaluate the strength of the line, its ability to hold price?
He did comment, but you're focused on your line and some indicator rather than what he said. There are several different manifestations of support and resistance. There is, for example, the "resistance" one finds in a parabolic rise, the point at which price can't go further and reverses. This is a result not only of buyers being unwilling to pay the ask, but buyers being unwilling to pay the ask anywhere near that ultimate point. This results in a reversal, perhaps a cascade. Another type of support and resistance manifests itself in a range: there is a level at which buyers repeatedly buy and a level at which sellers repeatedly sell. This type of range can be anywhere from a few points wide to a hundred or more. Another type is the balancing or equilibrium zone, a level at which a great deal of trading takes place while traders try to determine what is "value", i.e., what price the majority of traders consider to be the most "tradeable" price (given that the purpose of the market is to facilitate trade, and those who have a great deal to trade are going to search for liquidity, i.e., where most shares/contracts are changing hands). This zone is commonly known as "chop". If you can (a) reduce all that to a line and (b) find or create an indicator to locate that line with a high degree of probability, you will very likely become rich. However, your time may be better spent trying to understand the nature of support and resistance and correctly interpreting what traders are doing as they approach that zone.
dbphoenix Is "chop" just a narrow range? Or does it have other different properties? I understand that you may consider a wide range to be a support area, but this makes timing of the trades more difficult. Then you need to consider strength of move, exhaustion etc. Still I'd like to ask from your experience. What indicator I could use to easily identify a STALL or small reversal in price move, before it continues its original direction?
Yeah, not been trading it long too busy but zero losers, loads of out for small profits, few okay profits so far, the short term momentum is generally strong enough to atleast get to small profit. When to hold for bigger profit is the tricky part, sometimes it'll break out and it's easy others well not so. * DAX only, with 1 pt spread and zero comm's, plan to use it on FX aswell but 3x's the over all cost will create more losers ofcourse and losses.
If you're a discretionary trader and you're following my approach, there are criteria for entry, both long and short. If these criteria are followed and a long or short trade doesn't work and this is followed by another on the opposite side that also doesn't work, then you are by the definition provided by the approach in chop and should stop trading until traders exit the chop. If an automated approach contains stops, and a trade on each side gets stopped out, this same criterion could be used, but whether or not it proved to be useful would depend on how one defines the entry, how one defines the stop, how appropriate the stop placement is, etc. If the range is wide enough to trade reversals, that becomes a different proposition. If the range is too narrow, then price will reach the other side of the range before the trader or program can even enter the trade. It's up to the trader to determine how wide the range has to be in order for these trades to unfold. "Strength of move" and "exhaustion" aren't necessarily pertinent except to the discretionary trader. On the plus side, applying the same entry and exit criteria as above, both long and short trades will succeed if the range is wide enough, so "wide enough range" is self-defining. As far as indicators go, I don't use them. If this will be automated, using indicators may seem easier, but the results will not likely be satisfactory. The alternative is to code your objectives, determined by the data you collect via discretionary trading. This isn't so easy because you (a) have to do the work manually and (b) examine yourself, what you want, and how you intend to go about getting it.
Is there a technical indicator(s) that provides a regression line and the variability around that line? I can backtest indicators, but I don't know which indicator to use.