Trader’s Toolbox: Support and Resistance Revisited
Although many of you will find this lesson in one of the most basic concepts of market behavior “old hat”, it never hurts to review. One of the first things a new trader is told (I hesitate to say learns as many never do) is to buy a breakout above resistance and sell a fall through support.
Resistance is the level which holds a market down, while support is an area which props up a market much like a ceiling and a floor. The key is to identify the critical levels. There are a number of methods to determine support and resistance: trendlines, moving averages, retracements, Gann angles, etc. However, simple observation can be an effective means of locating the important areas. A quick glance at the October cotton chart reveals the most basic levels of support and resistance (broken lines).
A previous high often provides resistance, while an earlier low tends to offer support. Support or resistance levels are not necessarily flat. For example, trendlines reveal areas of rising support or falling resistance. Also, when broken, uptrend lines offer a new level of rising resistance, while the opposite is true for downtrend lines. In fact, virtually any broken area of support will become resistance and vice versa. After breaking a level of support (or resistance), the market commonly comes back to test that level before resuming the downmove (upmove). This may be the single most effective method of locating low-risk entry points for trading purposes. This lesson may seem like wasted space to the experienced. However, it is amazing how often traders simply forget (or ignore) the power of basic support and resistance levels. This concept can be very profitable, but it may be just too “easy”.
Finding an Edge with Support and Resistance
Today I would like to introduce Karen of Wealth Wizard World. Karen is an experienced trader who took an interest in the markets at a very young age has continued since then. Through her own blog and website, Karen shares what she has learned in her twenty-plus years and today she has agreed to share this knowledge with Trader’s Blog readers as well.
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I’ve traded for many years – about 20 to be precise. During the early years, I read everything I could get my hands on and tried several methods. The lessons learned were not what to do, but what not to do, and yet I was looking for something more.
There are lots of indicators to use and chart patterns to watch. What bothered me was that I realized that indicators lag. They respond to the movement of price.
Chart patterns work very well for some people, but they didn’t do much for me. I saw several head and shoulders patterns break to new highs; flags, pennants, and wedges break opposite of what they were supposed to do. What was an eager, studious, young trader supposed to do?
Using Gann Swing Charts In Futures Trading…
Looking at a chart is like looking at a complex painting. Everyone has their own interpretation. Likewise, being able to see trade setups takes a trained eye and everyone has their own approach. Today, Duncan from Swing Trends is going to show us how he uses Gann Swing Charts to analyze futures.
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One of the largest problems in trading any kind of financial instrument is how to analyze price action. Present 10 different traders with a given candle chart and ask them to classify market trend, support and resistance and chart patterns and the chances are you will receive 10 different looking sets of analysis in return. Not only is it likely that traders will differ substantially in the important areas identified, present the same trader with the same chart, at a different time, it is highly likely that the two charts you will now have will be different to each other. Read more
Exact Swing Points -Support And Resistance
Today I’d like to welcome back Mark McRae from SureFireTradingChallenge.com. I personally have known Mark for over three years, with Adam knowing Mark well over 5, and Adam and I both agree that Mark is truly an innovator and one of the hardest working traders we know. His latest project, SureFireTradingChallenge.com, kept him holed up with charts and traders from all around the world to find some of the best methods in the world for trading. Check it out here.
Now his blog post today is more applicable now then it ever has been…support and resistance! Let me let Mark teach you a bit more:
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Where exactly are the support and resistance points?
Where exactly are the swing points on a chart?
This is a particularly important lesson!
Just about every system or method of trading at least takes note of where the key support and resistance levels are.
I have found a double use for my method of identifying these points – They are also Swing Points!
You may think you know where Support and Resistance is, but do you really?
How do you know where support and resistance really is?
The problem with Support and Resistance (S&R) is that it is not a definite number. It is not an exact point on the chart at which price will, without any hesitation stop.
In fact S&R is actually an area – it is not an exact number as we would all like to think.
The dilemma of course, is that in order to do our calculations we need an exact point. You can’t enter $50.10/20 area when using fibonacci or working out your stops and limits. You need an exact number even though S&R is not an exact number.
Try telling your broker that you want a stop loss at somewhere between 50 and 55 and watch him burst a blood vessel.
This is what I want to concentrate on in this lesson. This is a technique I have found to be particularly good at not only identifying strong S&R points but also swing points.
In order to find S&R we must first identify market swing points. There are various ways of doing this but I am going to use the one I have used for years.
For the purpose of swing points we are not interested in the open or close of the bars only the high and low.
Take any bar and think of that bar as the start bar (S). If there are two consecutive higher highs than the bar you marked (S) then that is a swing up e.g. bar (1) has a higher high than bar (S) and bar (2) has a higher high than bar (1). If there are not two higher highs than bar (S) then you move to the next bar and see if there are two consecutive higher highs.
This can be particularly useful if the market is trading sideways and you are trying to determine the breakout point. There may be many peaks and valleys but for me there is only one real point – that is the most recent swing up or swing down.
Look at the next diagram
You can see that although there were a few highs and lows that you could have taken as support or resistance, but it wasn’t until bar (M) that a definite swing point had been identified and you could mark bar (K) with an (S).
Swing Down
To work out the swing down point – take any bar on a chart and think of that bar as your start point – bar (S). If the next two consecutive bars make lower lows than the previous bar then that is a swing down e.g. bar (1) has a lower low than bar (S) and bar (2) has a lower low then bar (1). If there are not two consecutive lower lows then it is not a swing point and you move to the next bar.
Just as in the example above you can see exactly the same thing with the swing down. Even though price made a few highs and lows it wasn’t until bar (M) that you could mark bar (K) as the (S) point.
Support And Resistance
Only once we have clearly marker swing points can we go on to identify our support and resistance points.
As you can see from the chart I have marked all the swing up points and swing down points. When we are in a down trend then the swing down points act as resistance and when we are in an up trend the swing up points
act as support.
Marking the support and resistance points using this method of first identifying the swing points will give you definite points on a chart from which to calculate your stops, limits and projections.
Good Trading
Best Regards
Mark McRae
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Please take some time to visit Mark and see his new project: SureFireTradingChallenge.com.
A look at divergence in panel indicators
Today I’d like to welcome back Gary from Biiwii.com. I’ve asked Gary to teach us a bit on divergence.
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I want to have a look at divergence by the lower panel indicators and the valuable clues they can provide when used in conjunction with price activity, support/resistance levels and of course fundamentals of a given stock, commodity or other asset.
Divergence can be used to help define bullish or bearish setups. With my M.O. as a ‘bottom feeder’, today I will focus on a chart that sports most of the components I like to see when setting up for a swing trade; it is the etf UNG (the United States Natural Gas Fund) which has been declining relentlessly from a manic high in June and mercilessly punishing anyone innocent enough to buy into this mini-bubble under the incorrect assumption that it was ‘commodities to da moon’. But as “what goes up comes down” so too does the reverse eventually assert itself.
In looking at NatGas, I like the fundamentals much better from a seasonality and value perspective (thanks to a 40% decline) if only for a swing trade into the fall or winter. Fundamentals are the first priority. Check. Next, the decline has brought the price down to a notable area of lateral support. A decline like this is simply not going to be arrested until support can be defined. Check, we are at noticeable support.
Finally, what I like to see in a bottom feed is relentless and and dispiriting price action down to said support with bullish divergence by the indicators. We have that in spades with RSI, MACD, CCI and Rate of Change all nicely divergent even as bubble participants give up the ship (fresh lows in price). Right at support. I have included the full Stochcastics which have also diverged but more importantly are on the verge of ‘triggering’ above 20. That would be another important cross reference to a bullish case.
So there you have it. A simple bottom feed amid terrible price action down to support and bullish divergence. Nothing but NOTHING in this market is 100% and it is all about risk vs. reward. This trade in my opinion has a good risk profile. The risk is certainly better for Natty than back in July, wouldn’t you say? I have my own money in this trade and speaking of risk, if the noted support fails so too will the trade and I will book a loss. It won’t be the first time. But the key is to always understand your risk profiles and control same.
Edit (10:00) At the time this post was written (pre-market 8/27/08) I was expecting UNG and NatGas to continue hammering out a painful bottom (those are the best kind for sustainability). But during normal market hours we appear to be getting quite excited and gappy. If UNG registers a manic over bought condition directly off of the low I am going to sell it. Please use the above as a chart study on indicator divergence only.
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