In our last email we showed you how to successfully and safely trade in today’s highly volatile market conditions.
Now that you know how to safely trade in today’s highly volatile market conditions, you will want to know how to navigate around those ‘speed bumps’ that can interfere with your trade successfully reaching its target.
Support and resistance are two concepts beginning traders learn about first when they delve into technical analysis. Even with the best mechanical trading systems, there are outside influences called contextual variables that can have a negative impact on your trade’s outcome.
For position traders, support and resistance acts as a hard surface that price tends to bounce off of rather than easily trade through. For intraday trading, the same levels behave differently at smaller chart settings; e.g., one minute or small-setting tick charts.
First, let’s establish a distinction based on the origin of a particular support or resistance level. When price is moving or trending in a given direction and then has a clear reversal, the bar at that reversal point is referred to as a pivot or a swing.
Depending on whether the pivot occurred while the market was moving up or moving down, the last price point that was plotted before that reversal is the actual pivot point and would be treated as a resistance level or support level.
Not all support or resistance levels are equal in their ‘stopping power.’ Obviously, the higher the chart setting, the greater the so-called ‘stopping power’ of the support or resistance pivot.
For example, a pivot support or resistance level from a daily chart has massive ‘stopping power‘ compared to a support or resistance level from a much smaller setting chart (e.g., five-minute).
The question is often asked, ‘How far back should I go when considering support or resistance pivots?’ Because support or resistance is inherently a subjective decision based on herd mentality, there is no consistently reliable metric traders can use when deciding what to expect when price reaches such a level.
To minimize inconsistency from a pivot’s potential impact on a trade, it is recommended that you disregard all pivots extending further back than the most recent swing high or swing low. This is not to say that an older pivot can’t have some negligible impact in the future, but it makes logical sense to consistently consider only the most recent swing high or swing low pivot.
There is also the consideration of confluence. Since a support or resistance level can affect the outcome of a trade other than at the pivot’s exact price, you should take into account what would be called a ‘zone of influence’ above and below the exact price point of the pivot itself.
Confluence comes into play when two or more support or resistance levels are either occurring at the same price or their ‘zones of influence’ overlap. This cumulative effect can create greater ‘stopping power’ then either separate support or resistance level. Instead, you should think of confluence as a broader ‘zone of influence’ rather than individual support or resistance levels.
There are also hybrid forms of support and resistance that are not based on pivots. An example would be what are called Floor Trader Pivots. An indicator commonly found in nearly all day trading platforms, it can plot these pivots after the opening tick of a daytime trading session. It is based on a formula that pit traders once used to anticipate potential stopping points in the market based on the previous day’s activity and the current day’s open.
At the beginning of this post, it was stated that intraday traders do not treat support and resistance the same way as position traders. If you do not expect price to bounce off of a given support or resistance level, then what behavior should you expect?
When viewed on a daily chart, pivots appear as typically sharp turns, often the familiar V-shaped or inverted V-shaped pattern. However, when you drill down to very small chart settings that are often used for day trading (e.g., one minute or small-setting tick charts) the time it took for a much higher setting chart to make the turn will often appear as if price is either going sideways or in congestion on the smaller-setting chart.
This is valuable information because you will be able to anticipate potential price levels where the market may stall or go into congestion for a brief period of time before either continuing or reversing.
So how do you apply this knowledge of support and resistance levels to your intraday trading? In the TradeSafe System we have an indicator that automatically selects all the chart settings (beginning with daily and working its way down to much smaller settings) on the opening tick, and then plots the most recent support or resistance pivot level for each of those chart settings.
Each and every chart you would use for a given market would have this indicator installed. After the opening tick you would see horizontal colored lines of varied thicknesses that are plotted to correspond to the most recent swing high or swing low pivot from its associated chart setting.
You would be able to see a graphical representation of all of the support and resistance levels, as well as their confluence, on each and every chart. This enables you to treat this plotted result as a roadmap of potential interference with any upcoming trade that might occur within a given ‘zone of influence.’
As was stated at the beginning of this post, even the best mechanical trading systems cannot account for conditions outside of a system’s parameters. These contextual variables can definitely affect the outcome of a mechanical trade.
Does this mean that a given mechanical system is no longer truly mechanical? Not at all. If it is based on Boolean logic, as is the TradeSafe System, it remains inherently mechanical. However, its performance can be enhanced by factoring in contextual variables such as support or resistance.
The TradeSafe System includes an indicator that automatically plots these levels for you on the opening tick of each session. Once you have a roadmap you can anticipate how an upcoming ‘zone of influence’ could impact a potential trade you might consider. This enables you to increase your probabilities for positive profitable trades beyond that of the System itself.
Stay tuned for next week’s installment to learn more about how other contextual variables can interfere with trade follow-through and profitability.
To learn more about TradeSafe, please click HERE
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