Identifying the support and resistance

thebull27 · Dec 29, 2006

hi fellas Im new here in this forum.

I have been trading stocks for a while and so far with small success. The key, I believe is recognizing the real support and resistance levels and having a resonable take profit.

do you guys have any system to recognize support and resistance levels and determining the take profit levels?

damianoakley · Dec 29, 2006

Hi bull,

Personally, I don't use Profit Targets. I prefer to let my winners run for as long as possible to extract maximum profit.

If you are wanting to trade support and resistance levels, you are probably best looking at classic double-tops/bottoms, trendline breaks and possibly fibonacci levels.

Thanks

Damian

dbphoenix · Dec 29, 2006

thebull27 said:
hi fellas Im new here in this forum.

I have been trading stocks for a while and so far with small success. The key, I believe is recognizing the real support and resistance levels and having a resonable take profit.

do you guys have any system to recognize support and resistance levels and determining the take profit levels?

You may be interested in the S&R thread below my name.

Db

thebull27 · Dec 30, 2006

hi damian

if you dont use support and resistance then how do you decide on buying and selling stocks?

is it some sort of linear model?

damianoakley said:
Hi bull,

Personally, I don't use Profit Targets. I prefer to let my winners run for as long as possible to extract maximum profit.

If you are wanting to trade support and resistance levels, you are probably best looking at classic double-tops/bottoms, trendline breaks and possibly fibonacci levels.

Thanks

Damian

thebull27 · Dec 30, 2006

dbphoenix

thanks a lot for your great threads they are really something.

there are a few things that I still dont understand. (first of all what is AVDV, PD, ADR?

)

secondly, how do you decide on entering a position based on trend lines and S/R?

I mean how do trendlines and S/R work together in influencing your decision on entering the position.

thanks a lot

dbphoenix said:
You may be interested in the S&R thread below my name.

Db

firewalker99 · Dec 30, 2006

damianoakley said:
Hi bull,

Personally, I don't use Profit Targets. I prefer to let my winners run for as long as possible to extract maximum profit.

If you are wanting to trade support and resistance levels, you are probably best looking at classic double-tops/bottoms, trendline breaks and possibly fibonacci levels.

Hi Damian, I was wondering how do you then determine your exit point? "as long as possible" is obviously what we all want to do with our trades

I usually have a fixed target for my first lot (when scaling out and trading two lots), and try to get the most out of my second. My first target is based on my backtesting and papertrading. I'm using the ATR to determine the stop and try to have at least a 1:2 risk reward ratio. So basically my first target is at 2x ATR, after that I move my stop to breakeven. I then exit the second lot at 3x ATR. It would be much better if I found a way to manage the trade but am still looking for a way to improve the exit strategy into something more dynamic.

I have reviewed hundreds of trades and found that almost half of those travel as far as 4x ATR. I would call that the maximum favourable excursion. For instance on DAX that was about 15-20 points last couple of weeks. Using ATR I'm already using something more dynamic than a fixed target of say 10 or 15 points in each market situation. Depending on the volatility 10 points can be very close or rather far away. Sometimes DAX ranges in 30-40 points, other times DAX moves 100 points in a single day. Now especially in those trending days I fail to get the best out of a trade, when it's (in hindsight) the easiest to do so!

I'm now looking and testing several different strategies to see which one works best on getting more profits out of my trades:
- exit when price is approach next S/R level
- exit only when a new setup appears that tells you to reverse your current position
- exit on break of trendline
...

If you have anything to add or any suggestion, I'd be welcome to hear, as I'm sure would thebull27.

dbphoenix · Dec 30, 2006

thebull27 said:
thanks a lot for your great threads they are really something.

there are a few things that I still dont understand. (first of all what is AVDV, PD, ADR? )

secondly, how do you decide on entering a position based on trend lines and S/R?

I mean how do trendlines and S/R work together in influencing your decision on entering the position.

thanks a lot

AV = volume of advancing issues

DV = volume of declining issues

PD = previous day

ADR = average daily range

I can put all of this in context if you can frame a question.

As for trendlines, I don't use them to enter a position since they don't provide support or resistance. In fact, I don't use them much at all, other than whatever I see in my head.

As for using S&R, there are three ways to use it. First, go long when price breaks through R. Second, go long after price breaks through R then retraces back toward R. Third, go short when price fails to break through R.

There are loads of examples in the S&R thread, and they were posted in real time, but there are many more thousands of examples of hindsight charts out there. But without specific questions relating to specific charts, you can get only general advice. So, generally, I wait for price to test S, for example, then I place a stop limit buy above that point with a stop below. If price reverses, I'm in the trade, if it continues to fall, I'm not.

As to price targets, I exit when I get a reversal signal. Otherwise, I stay in and manage the trade until I hit the ADR (I trade futures) or the day is done.

Db

firewalker99 · Dec 30, 2006

dbphoenix said:
As to price targets, I exit when I get a reversal signal. Otherwise, I stay in and manage the trade until I hit the ADR (I trade futures) or the day is done.

Db

I remember from your posts in the S/R thread ADR can be used as a potential point to be on the look-out to exit a trade. But in the case of especially trending days, price can travel as far as perhaps double the ADR, which leaves still quite some money on the table. I don't mean to say that you need to squeeze out every drop, but I think you can gain a great deal of understanding by correctly identifying a trending day from the start. I've observed many times how price closes at the opposite (drawing a diagonal line on your chart for instance) of where it began, even sometimes picking up momentum near the end...

dbphoenix · Dec 30, 2006

dbphoenix said:
There are loads of examples in the S&R thread, and they were posted in real time, but there are many more thousands of examples of hindsight charts out there. But without specific questions relating to specific charts, you can get only general advice. So, generally, I wait for price to test S, for example, then I place a stop limit buy above that point with a stop below. If price reverses, I'm in the trade, if it continues to fall, I'm not.

Here's a chart of a stock I did last summer for somebody and which I've updated. I don't know if he ever did anything with it or not. It's very straightforward, but straightforward is what to look for.

Note the demand line is broken in February, suggesting a change in demand, or buying interest. Price then forms a "triangle" or "coil", working toward an equilibrium between buying interest and selling interest. Buying interest comes in at ever-higher levels and selling interest comes in at ever-lower levels. Many people would short the break through the bottom of this coil in Jul (the first red dot). Others would wait for a retracement back toward the coil. Still others would note that the volume (or trading activity) was much less at the breakdown than it had been during the last swing down and either postpone entry or stop themselves out.

Given the potential reversal signal given by the abovementioned difference in trading activity, which happens to occur at potential S, I would enter at the green dot with an eye toward a short at the second red dot in case I was wrong about the reversal. I'd then set a stop below 480 after price made a new high.

It all seems very simple, but if you have very definite and clear rules, it is very simple. If you don't, it's anything but.

Db

bracke · Dec 30, 2006

dbp

"As for trendlines, I don't use them to enter a position since they don't provide support or resistance. In fact, I don't use them much at all, other than whatever I see in my head."

Slightly surprised to read the above as one often sees price reversal when either the upper or lower trend line is hit and thus appears to provide support / resistance. Plus are they not known as the supply and demand lines?.

Regards

bracke

dbphoenix · Dec 30, 2006

bracke said:
dbp

"As for trendlines, I don't use them to enter a position since they don't provide support or resistance. In fact, I don't use them much at all, other than whatever I see in my head."

Slightly surprised to read the above as one often sees price reversal when either the upper or lower trend line is hit and thus appears to provide support / resistance. Plus are they not known as the supply and demand lines?.

Regards

bracke

The key word here is "appears". S&R are found in price, not in lines that the trader draws.

Db

Mr_Nasdaq · Dec 30, 2006

Trend Lines Provide Support and Resistance...

thebull27 said:
I mean how do trendlines ... work in influencing your decision on entering the position.

Hi thebull27,

The StockCharts.com web site has clear and concise answers to your questions about Support, Resistance and Trend Lines...

http://stockcharts.com/education/ChartAnalysis/index.html

thebull27 · Dec 30, 2006

thats a pretty good comment. the problem is, I believe is that you can only identify a trendline once you have atleast two points. after that if you will look for the third point (when prices touch the trendline) as a support level I believe that it is dangerous because trendlines do tend to break after a while.

what I do believe is good is looking at the breaking point as a point of entry as a begining of a change in direction.

but as you can see it doesnt work all the time and its difficult deciding on a take profit and stop

bracke said:
dbp

"As for trendlines, I don't use them to enter a position since they don't provide support or resistance. In fact, I don't use them much at all, other than whatever I see in my head."

Slightly surprised to read the above as one often sees price reversal when either the upper or lower trend line is hit and thus appears to provide support / resistance. Plus are they not known as the supply and demand lines?.

Regards

bracke

dbphoenix · Dec 30, 2006

thebull27 said:
thats a pretty good comment. the problem is, I believe is that you can only identify a trendline once you have atleast two points. after that if you will look for the third point (when prices touch the trendline) as a support level I believe that it is dangerous because trendlines do tend to break after a while.

what I do believe is good is looking at the breaking point as a point of entry as a begining of a change in direction.

but as you can see it doesnt work all the time and its difficult deciding on a take profit and stop

The job of a trendline is to show trend. However, this can be done just as well by a linear regression line or the appropriate MA. Then you don't have to concern yourself with "points".

As for a "break" in whatever sort of line you're using, this may signify nothing more than a change in momentum. And perhaps not even that since the move is often resumed at the same or an even more aggressive angle.

So continue trusting what you see, not what you've read somewhere. Once you've spent enough time in front of the screen, belief will no longer be pertinent. You'll know.

Db

Edit: Here are a regression line and 10wk MA. They all tell the same story. As long as you can tell up from down, you'll be fine.

damianoakley · Dec 30, 2006

thebull27 said:
if you dont use support and resistance then how do you decide on buying and selling stocks?

is it some sort of linear model?

Hi Bull,

I never said that I didn't use support & resistance - I said that I don't use Profit Targets.

Thanks

Damian

damianoakley · Dec 30, 2006

firewalker99 said:
Hi Damian, I was wondering how do you then determine your exit point? "as long as possible" is obviously what we all want to do with our trades I usually have a fixed target for my first lot (when scaling out and trading two lots), and try to get the most out of my second. My first target is based on my backtesting and papertrading. I'm using the ATR to determine the stop and try to have at least a 1:2 risk reward ratio. So basically my first target is at 2x ATR, after that I move my stop to breakeven. I then exit the second lot at 3x ATR. It would be much better if I found a way to manage the trade but am still looking for a way to improve the exit strategy into something more dynamic.

I have reviewed hundreds of trades and found that almost half of those travel as far as 4x ATR. I would call that the maximum favourable excursion. For instance on DAX that was about 15-20 points last couple of weeks. Using ATR I'm already using something more dynamic than a fixed target of say 10 or 15 points in each market situation. Depending on the volatility 10 points can be very close or rather far away. Sometimes DAX ranges in 30-40 points, other times DAX moves 100 points in a single day. Now especially in those trending days I fail to get the best out of a trade, when it's (in hindsight) the easiest to do so!

I'm now looking and testing several different strategies to see which one works best on getting more profits out of my trades:
- exit when price is approach next S/R level
- exit only when a new setup appears that tells you to reverse your current position
- exit on break of trendline
...

If you have anything to add or any suggestion, I'd be welcome to hear, as I'm sure would thebull27.

Hi Firewalker,

I employ a Trailing Stop to try to run my winners as far as possible.

ATR can be a good trailing stop method if using a Trend Following system.

Thanks

Damian

Mr_Nasdaq · Dec 31, 2006

The Many Aspects of Support & Resistance...

A wide variety of individual aspects of Support & Resistance are in common use by traders today. Trend Line Support and Trend Line Resistance are but two of them.

I use the following list of individual aspects of Support & Resistance in my work .

When two or more individual aspects of Support or Resistance coincide (reside within 10 cents of one another) in order to form an area of concentrated Support or concentraded Resistance, it is then that I sit up and take notice.

That's because two or more individual aspects of Support or Resistance that coincide create a much more reliable trading opportunity than does an individual aspect of Support or Resistance that is standing alone.

The following 5-Minute Charts provide a visual representation of how the QQQQ honored its areas of concentrated Support and concentrated Resistance over the last few days:

Individual Aspects of Support & Resistance:

From a Daily Chart:

20-Day Moving Average
50-Day Moving Average
200-Day Moving Average

Upper Bollinger Band
Lower Bolling Band

Daily High
Daily Low
Daily Close

Daily Pivot Points (S2, Pivot, R2)

Fibonacci Numbers

From a Weekly Chart:

20-Week Moving Average
50-Week Moving Average

Upper Bollinger Band
Lower Bolling Band

Weekly High
Weekly Low
Weekly Close

Weekly Pivot Points (wS2, wPivot, wR2)

10-Week Trading Band

From a Monthly Chart:

20-Month Moving Average

Upper Bollinger Band
Lower Bolling Band

Monthly High
Monthly Low
Monthly Close

Monthly Pivot Points (mS2, mPivot, mR2)

From a 'Point & Figure' Chart:

Double-Top Breakout (D-Top)
Double-Bottom Breakdown (D-Bot)

Triple-Top Breakout (T-Top)
Triple-Bottom Breakdown (T-Bot)

Bullish Support Line (BSL)
Bearish Resistance Line (BRL)

dbphoenix · Dec 31, 2006

Or one could note the S&R that price provides to itself:

thebull27 · Dec 31, 2006

Mr. Nasdaq, thanks, I know the site

its a great site, but a bit elementry, I have read what it says there about S/R,

Mr_Nasdaq said:
Hi thebull27,

The StockCharts.com web site has clear and concise answers to your questions about Support, Resistance and Trend Lines...

http://stockcharts.com/education/ChartAnalysis/index.html

thebull27 · Dec 31, 2006

I attached a graph of a trade I'm on right now

this is ford motors company daily chart.

you can see the bullish trend line in the begining of the move.

once that was broken I shorted the first batch.

If the price would have gone above 9.25 with high volume I would have gotten out of the position.

in this case i could have strengthened my position but didnt (dont know why I guess I just dont trust myself enough yet with the trading systems)

point 2 was the point where the support broke with high volume.

in the last trading day (friday) when the price went back to check out the resistance I shorted another batch.

I'd be happy to hear what you guys think

thanks a lot guys for your info and great discussion

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