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Support and Resistance (how to)


Caseynotes

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Really excellent clip  that touches on a number of important factors:

  • While I can agree that recent price is more relevant to current trading decisions I'm not sure it matters where you "start" from when drawing support/resistance so long as you see the whole picture - interestingly at the end he does say that he used this to project congestion zone forward so slightly contradicting himself but actually I agree with this so great!
  • I love the idea of zones (I call them congestion zones) and I draw mine in pretty much the same way as the author of the clip - big tick, a line is not sufficient
  • I also wholly agree with the notion that inexperienced traders get into a trade too early, often simply a lack of patience acting on psychology, of course seasoned traders and pros are also guilty of this so take heart but guard against it.  So hard to do when the other side of the coin is missing the move altogether but there is always another trading opportunity
  • Interesting that he mentioned  observation about professionals driving price to clear out retail guys.  Definitely one to watch but again the how and why is less important that having an analytical technique that helps get a good trade entry
  • The notion of the "early break out" (in this case a spike below below the lower line of the congestion zone) or fake break out driven by professionals trying to take out earlier entrants is interesting: is this because the lines were not drawn well or is it because traders rely on accuracy of lines too much or both?  Professionals often trade against (or fade) such fake breakouts from a range and more often than not the fade is the correct play (until a trend change of course)
  • Another great point is that a break out of a congestion zone (or Triangle or Tramline) is only confirmed with a candle close (for this I only use 1 hour candles not anything less).  Until then it could be a fake and should not be traded (watch out for times of extreme volatility though like FOMC of NFP as 1 hour may not be sufficient in these cases).  Conversely a fake breakout is a great signal for the prevailing trend to continue and often swiftly.
  • One thing the author didn't mention was the concept of a resistance line break and kiss back.  If you miss the first break you often get a second chance with the kiss back (or near kiss) and we can see that on the chart used in the video.
  • In my view congestion zones are effectively made up of close lines of support AND resistance and this is a place where Bulls and Bears struggle for supremacy.  It can go either way but using bigger picture analysis techniques can help tip the balance of likelihood one way or the other.  Excepting fake breakouts a confirmed move out of a congestion zone is the way to trade and using stop in orders at the right points (i.e. not just above or below the lines) is the way to go here.
  • The Stock markets yesterday was a good example of this.  There is a zone of congestion just below the S&P 2046 level so we need a break below this to confirm another leg down (probably to 2000).  BUT the retrace we got off this congestion zone last night offers an even better entry for a Short higher up, in my view.  this is Support/Resistance working in harmony with other techniques such as EW and tramlines etc.

Wow such a lot from just one 8 minute clip!  It is one thing knowing all of this but another being able to identify it in real-time and act correctly.  Practice makes perfect (well adequate maybe...)

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Wow is right, that is a pretty fulsome break down, thanks for the effort and you reiterate and raise good, valid points.

A couple of thing occurred to me that you also touched on, one is that the bigger traders can sit back and watch on the higher time frame, they know most retail traders can only afford small stops and therefore are more likely to be playing a smaller time frame chart, the 15 minute is popular (and therefore will always be getting in too early). The big player can afford to wait and watch a short squeeze develop as the break losses momentum and then pile in to reverse it. So it is more a case of creating and taking advantage of the liquidity pool than an attack on me personally.

 

The idea of a band of support and resistance bracketing price action is used by most professionals who are trying to get in on likely big moves and why many use market profile charts as these highlight this very aspect, you can regularly here them moan that it took 2 or 3 attempts at getting in (often failed limit orders). You are right there is increased congestion in triangles and ranges, and yes, there are ranges within ranges, the area between S/R is an area of sideways movement or as per Auction Market Theory a fair value area and has an equal number of buyers and sellers and therefore a no buy zone. It is imbalance that causes price to move or probe.

 

I look at a great number of other traders charts and lines are never in exactly the same place but always within a close area, the important thing is that it is an area where big players have stepped in in the past and may well do so again. Statistics say S/R holds more often than it breaks and it pays to play the odds.

 

You are right in my opinion regards waiting for a re-test, I have mentioned before I usually miss the start and end of any move and it has always served me well, and sure, sometimes price just bolts away without me, tough. So did i read you right, that you wait for a bar close on a break of S/R on the larger time frame then look on a smaller time frame for a failed re-test? That would seem very sensible.

 

 

 

 

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Good points all 

 

I agree it is much more likely professionals are looking for their own opportunities rather than actually targeting retail traders.  The key to good retail trading is to try and get in on the big boys moves.  I use technical analysis rather than trying to reason things out.  Price moves are, in the final analysis, the only valid guide.

 

I have the same experience of failed attempts in terms of trying to get in on moves, that is why I try to follow the mantra, lose small and win big, as I know I will lose more that I win.  Some people ask me what my hit rate is, I say that is not important, only the fact that my account grows rather than shrinks is important.

 

Agreed re big buyer/sellers stepping in at points of congestion.  some people subscribe to the supply/demand theory on this but anyway you look at it this means that markets have memories (well the traders do anyway).  The catch is of course that when a trend breaks then the previous resistance becomes support and vice versa and on a serious trend reversal congestion zones can be blasted through so everything is circumstantial to what is occurring big picture in any market at any time.

 

I don't always wait for the retest as sometimes the market can just blast away, depending on the situation.  Sometimes (e.g. USDCAD yesterday) I take profits on the first trade that then funds a second on the pullback.  Sometimes I miss, or am not confident enough about the initial move and then wait for the pull back/kiss.  I pretty much look at it just on 1 hour charts (rarely 15mins and usually only then to zoom in on an EW count) but I will also look at Daily and then hone in using the hourly.

 

Please keep serving up these useful pieces on trading techniques as you find them, very helpful! 

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If you want to try something along the same lines but completely different try a Tom Dante periscope, but be warned, not for the faint hearted, both in trading style and presentation and you must have a parent or guardian sitting beside you if you watch it.

He does have a long trading history and nearly 700 viewers watching this.

 

I should also point out I don't trade like this but his underlying points are valid.

 

https://www.periscope.tv/w/1DXGybelRDdJM

 

 

 

 

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  • 8 months later...

And this is such a classic error that many make. By definition anybody who has used L2 data or price ladders will notice that traders will just up the bid or offers at particular support and resistance zones and others will see this and jump ship. This is why it all is a probability game, the same rule applies to trend lines. 

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Yes that was what i was referring to, that 

the more times Support is tested, the stronger it becomes.

Support and Resistance are lines on your chart.

You should place your stop loss at Support and Resistance.

 

Correction > number of touches the > weakness, S & R are zones only and Stop loss wise never place them in obvious S&R areas, because everyone will gun for them including all of us, lol.

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