Archive for the ‘support/resistance’ Category

More E-Mini Trading Setups with Support and Resistance

It’s not unusual to see traders using support and resistance to set up potential trades. The most common trade I see among novice investors is a set up that envisions the price action “bouncing” off an existing support or resistance lines. There are many versions of this particular trade, and it is not unusual to see small investors implement this trade over and over. To be sure, using support and resistance lines as potential setups is very common.

Unlike the trade I described above, where the small traders are looking for a bounce off a support or resistance line, I am looking for a continuation through a support/resistance line. This makes sense at several levels. First and foremost, I’m a trend oriented trader and dislike trading against the trend. By definition, any bounce off a support or resistance line would entail a move against an existing trend, which is something I avoid, especially in a strong trend. Secondly, in order for the price action to move through a support or resistance line it takes a medium, at the least, and usually a strong push to pierce the line. Inevitably, this strong push creates excess momentum which is carried through for 10 or 15 additional ticks, and those additional ticks are the prize I am seeking to capture. This set up usually results in a very violent and short trade, as the momentum pushes the price upward or downward at a high rate of speed. It is an exciting trade to watch and even more exciting to initiate.

When setting this particular trade up, I generally look for a strong support/resistance line that will intersect an established trend line. As an aside, I tend to prefer to take this trade to the short side as the market tends to move faster when heading downward. This can be attributed to panic selling, or long traders bailing out of short positions as the price action moves against them. In any event, I position my entry three or four points below the support/resistance line and wait for the price to come to me. Needless to say, it is never a good idea to chase the price action and it is rare for me to initiate a market order. I want to enter a trade at a point of my own choosing where I think I have the best chance of profiting.

Once you become accustomed to spotting the set up, you’ll find it occurs two to three times daily. The trade is relatively reliable if it occurs in a trending market, and the trend does not necessarily have to be a strong one. On the other hand, I would avoid taking this trade when the market is in a well defined channel. Breakouts or breakdowns out of channel formations are generally unreliable and typically fail. False breakouts from a channel formation look very enticing from the onset, but after moving three or four ticks in your favor they tend to retreat back into the channel. Once in the channel, it is anyone’s guess where the price action may go as movement inside the channel is random, at best.

In summary, we have looked at a trade using support/resistance lines. Instead of looking for a bounce off these lines, we have outlined a straight that entails a continuation of a trend through known support/resistance. We have noted that this trade is reliable when used in conjunction with a trending market, further we have cautioned against taking a straight out of very well-established channel.

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An E-Mini Trade When the Market Doesn’t Breakout or Breakdown

My favorite e-mini trades (and my most profitable e-mini trades) are breakouts and breakdowns. These trades tend to perform reliably and are prone to run for very nice gains. Unfortunately, there are days when the market is consolidated into a 20 or 30 point range and every breakout/breakdown fails. After the first few attempts at trading the breakout and breakdown patterns and watching them fail, you quickly realize that a change in strategy is necessary.

It is important to understand that consolidating patterns (or channels) are the most difficult patterns to trade and should be only traded with great care. The quality setups in consolidating patterns are less frequent and many enticing set up patterns form. However, the majority of those enticing setups in a channel can be disastrous. So a trader is left with two choices; one is to simply not trade and make an early exit to the golf course; the other is to carefully weed out all false setups and take advantage of the few good setups that will arise. As any experienced trader will tell you, trading consolidated patterns is tedious. There are many days when I feel trading in these patterns is not worth the trouble.

However, I consider trading breakouts and breakdowns to be trading “outside” the channel and trading in a consolidating market to be trading “inside” the channel. Generally speaking, I refuse to take a trade as the price action ping-pongs between support and resistance in a channel. This type of price action is very unpredictable and you can find yourself sitting in a trade for an extended period of time with negligible results. Even worse, you can find yourself sitting in one of these trades and the market unexpectedly takes off in the opposite direction. Quite simply, the risk is not worth the reward, at least to my way of thinking.

On the other hand, a false breakout or breakdown can present a very intriguing trading possibility. Usually when a breakout or breakdown fails, there is considerable selling or buying in the opposite direction and the momentum from the selling or buying will drive the price back through the original support or resistance and carry the price another 10 points or so. So, in essence, when I see a breakout/breakdown fail, it presents a chance to trade outside the initial support/resistance back into the channel for quite some distance. Believe it or not, this is a fairly reliable trade, though I have seen very little written about it. In executing this trade, you are essentially trading from the outside of the channel back into the inside of the channel.

There are times when the price will pause for a period of time on the support/resistance line just pierced, my experience is that the price action will continue and return to the middle of the channel. I suppose this trading is very similar to a technique called reversion to the mean, though I learned the trade without reversion to the mean in mind. When I see this trade developing now, I will slap some Bollinger bands on my chart and can get a good feel for the length the might travel back inside the channel by gauging where the middle line, or mean, sits relative to the two standard deviations most Bollinger bands utilize.

In summary, we have described a trade that is the exact opposite and a breakout/breakdown and done just the opposite by trading toward the channel instead of trading away from the channel. We have noted that this trade does not occur with the frequency of some trades, but it is fairly reliable. Finally, I cautioned against trading inside the channel as trades in this area are very unpredictable and random.

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Support and Resistance: The Key to E-mini Trading

There are certainly no shortage of oscillators, proprietary indicators, and specialized trading systems on the market today. While I have not looked at every single trading system on the market, it is my impression that most are a rehash of old principles and the same tired indicators. Even the newest quantitative computer trading systems have done little to enhance the overall return in e-mini trading. Just the same, many skilled traders continue to crank out profitable returns year in and year out, and they do it without fancy new techniques or proprietary algorithms.

How do they do it? They simply know how to trade.

Knowing how to trade involves utilizing a variety of time-tested techniques and applying your intellect in utilizing those techniques. In my trading, one of the most important techniques I employ is the charting of support and resistance. By the end of the day, my charts generally have a variety of lines arcing across most of the daily price action. Once I draw a particular line in place, I leave it there for the entire day. Often times, lines drawn early in the day become extremely important later on. For that reason, it is important to leave all drawn lines in place.

Let’s review one very important fact, yes I said fact, regarding price movement: The market tends to start and stop in the same places. Further, the market often pauses and reverses on at the same places. There is, of course, many raging arguments about why this is true. Some see these starting and stopping lines as natural lines that form through the course of price action. Others believe that these lines are cause by technical trading and are, in a sense, a self-fulfilling prophecy because of the large number of technical traders. As a trader, I do not worry about the “why” of the situation, I simply understand that the market tends to pause and stop along the same lines.

These lines are referred to as support and resistance. A line that is higher than the current market price represents potential resistance, and a line that is lower than the current market price represents potential support. It is imperative in your trading to be aware of the exact location of support and resistance when initiating a trade. For example, if you are looking at a 12 point profit target and there is a line of resistance six points above your potential entry point, it would be unwise to expect the market to move 12 points. That is not to say that the price action could not move through the line of resistance, because some resistance lines are easily broken. Unfortunately, it is impossible to determine which support/resistance lines will hold firm and which support/resistance lines will be compromised.

It is my experience that support lines are more often compromised than resistance lines. Why? In general, the market moves downward much faster (according to scientific study, about three times faster) than the market moves to the upside. This is fairly logical if you think about it, it is not unusual for traders to sell in a panic, yet they tend to buy in a more pragmatic fashion. In short, I give resistance lines more credence than support lines. That being said, it would be a terrible mistake to ignore support lines because they often hold firm.
Very experienced traders often times can see support and resistance without drawing physical lines on the chart, but I find it far more useful to draw my support/resistance lines, lest I forget they are there. The notion that the market tends to stop and start along the same lines, or points on a chart, is imperative to understand and utilize in your trading.

In summary, we have emphasized the idea that the market tends to stop and start along the same lines on a trading chart. Further, we have emphasized the importance of being aware of support/resistance lines when initiating the trade, especially when your potential profit targets may require crossing through support/resistance lines. Personally, I avoid taking trades directly into support and resistance because more often than not the price will stop short of your profit target. Be aware of support/resistance at all times, and remember to trade with the trend.

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More Notes on FibGrid from a Technical Analysis Skepticyes,

Years of trading experience has reinforced a single, indisputable fact; prices tend to stop and start along common lines.  The reason for these phenomena is poorly understood, as is the position of the exact point these lines utilize for their stopping and starting points.  This observation is not an extraordinary revelation for anyone who has spent any length of time in front of a trading chart.   Often called support and resistance lines, these stopping and starting points are evident when observing the price action on any futures or stock chart.

The world of Efficient Market Theory would have us believe that these areas of support and resistance are the result of random market movement where supply and demand are in equilibrium.  In an academic sense, this explanation makes good sense, as there does not seem to be a discernible pattern in either the lines of support or lines of resistance.  It might also be useful to note that once a line of resistance is passed through by the price action, it often becomes a line of support, and vice versa when considering support lines.  In short, it is common for most lines to be, at one point or another, both support and resistance; it all depends upon the time period under analysis and the movement of the underlying assets price action.

There have been a wide variety of attempts to quantify the location, or predicted location, of these support/resistance lines.  Floor traders pivot points have been a popular support/resistance predictive device for quite some time, and can be very useful.  On the other hand, pivots points can often be far off the mark and, on some days, completely irrelevant. There is no reliable way to determine on which days the market will honor floor traders pivots and which day they ignore them.  That, of course, creates a problem for traders and pivot points…it is difficult to discern which day to use pivot points and which day to ignore them.

FibGrid on the other hand, has added much needed clarification to the support/resistance equation. As anyone who has consistently read this blog can attest, I have been a long time critic of the vast array of technical trading tools that have come to market.  Everything from goofy robots, to elaborate charting programs have all been tested and found wanting.  But this darn FibGrid actually works, and I have been forced to retract my iron clad condemnation of technical trading programs.  It is most embarrassing.

David Starr describes the program most eloquently:

“The tendency of financial market movements to be proportional to other movements in ratios that have Fibonacci proportions is well documented. For example, many know that prices often retrace 38. %, 50%, or 61.8% of a move. Others know of some of the common projection ratios and we use many of these in our analysis. Less known is the FibGrid technique that projects a series of possible support and resistance levels based on projections from the beginning stages of the last bull market of significant degree.

The amazing thing is how prices tend to find these support and resistance levels that were projected from prices years earlier (sometimes even decades earlier) and those projections provide levels that are meaningful in almost all timeframes, including short day-trading timeframes. This 2584 share chart of the emini Dow futures shows how price obeys FibGrid levels on intraday movements. The key values for the projection of these levels were set back in 2002 and the support/resistance levels shown today have not moved since then. Prices still find them.”

I use FibGrid in my trading room and wouldn’t consider trading without the program running.  There are many lines that appear in the FibGrid program that might normally be ignored by the average trader, yet time after time I notice price action stopping on these less than obvious lines, sometimes right to the exact tick.

It would be difficult to calculate how many point I have made or been prevented from losing using the FibGrid program, so my endorsement is primarily anecdotal; but I am often astonished at the accuracy of this program in identifying support and resistance.

I would like to point out that FibGrid, in and of itself, is not a complete trading system.  This program will only make you existing trading system far more effective and profitable.

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