S/R and the Mirror of Erised

[firewalker99]

The previous congestion at that level may account for the "plunge" below 1545 to 1543. Price recoils quickly, but pauses dead on S. Even though there is now no trend reversal, the trend remains broken.

Why would you declare the trend is broken? Is it because what you see on the chart coincides with your definition of a trendbreak? I remember a while ago, I posted a chart and my analysis was that the trend was broken, because of the break of the trendline. Price continued sideways - a bit like on this particular chart - but in that case you told me the trend wasn't quite broken yet. If I had to answer this question myself, I'd guess that the trend was broken because price reached to 1548 twice...

 

[firewalker99]

Yes, a copy of your post belongs here. I hope newcomers pay special attention to words like

After a while . . . will become . . . will be . . .

In other words, one doesn't stare at price action for an hour or so in the morning and be ready to trade in the afternoon. If the trader isn't "in the moment" and focusing entirely on what's in front of him, what's happening at that moment, then all this "observing" is probably a waste of time.

Db

In the beginning when I observed price moving, I was looking at 2 minute charts. I found there to be too much noise, then I switched to 3 and now 5 minute charts. This seems less noisy, but on the other hand it of course takes longer for the bars or candles to form. Although I sometimes had the feeling I could "sense" that buyers were going to take control, it couldn't really take me anywhere. Even if my sense was right (which is in fact was more than I'd expected) price would only move in that direction for a short while and then change heading. I'm not saying staring at charts is a complete waste of time, but personally, I don't have the feeling all these hours made me that much richer (I don't mean financially)....

 

[dbphoenix]

What are the things one would look for, when focusing on a chart (real time) tyring to identify a trend reversal? I know a break of the trendline isn't enough to qualify as a trend reversal. Can a further swing up (or down) in the direction other than the previous trend that reaches beyond (or below) the previous high (low) strengthen the thought of a trend reversal? Perhaps it's to early to ask these questions or perhaps I shouldn't be asking them at all and finding out for myself. But before one can identy a trend reversal, one must first learn to identify the trend (if I recall correctly one of the first steps Wyckoff advised).

The trend is defined classically, higher highs and higher lows (in an uptrend). Trend change and trend reversal are also defined classically, the first a break of the TL and the second a drop below the last swing low (though price can sometimes rally back above that swing point and eventually resume the uptrend; therefore, the trader has to be alert to that possibility).

But as you're describing what you see on the chart in an objectively way, you are in fact already identifying things like "a slight retracement", "a trend reversal", "a supply line". Of course you've annotated the chart before, but perhaps it wouldn't be such a bad idea for me to do the same exercise without any lines, and in real time throughout a trading day?

The point of the thread was to show how S/R lines are drawn in contextual charts for prep and how new S/R lines are drawn in real time throughout the day as traders test and establish new ones. There is also the task of learning to read even hindsight charts from left to right, which is far easier to learn if charts are posted sequentially. Not drawing the lines at all would have made the task impossible for everyone who doesn't know how to do it already, and those who know how to do it already weren't the primary targets.

Most, of course, will look at the last chart in the sequence to see where S/R was (this is suggested by the number of views of each chart). However, those who go through the sequence will see where S/R tentatively is in real time and where it might be later in the day. This is more useful to those who trade in real time, or want to, but not so much with those who are content to "trade" charts only in hindsight.

ADR

ADR is the 10-day average of the daily range. I find it to be a virtual lock in the NQ and use it for a target. Without it, trading the NQ would be far more difficult for me.

I'm not saying staring at charts is a complete waste of time, but personally, I don't have the feeling all these hours made me that much richer (I don't mean financially)....

Staring at price action and studying price action are two entirely different things. One doesn't learn anything about art simply by staring at it glassy-eyed, though he may come away with something like "Gee, that sure was purdy". Nor does one learn anything about charts by doing no more than staring at them, as I've said to you before. The trader must have some sort of focus or task or objective, such as how price behaves when it reverses. If he doesn't, the activity is useless.

As for "noise", I disagree with the idea of it, but it's not something I want to argue about, so I don't make an issue of it. But I don't find there to be any such thing as "noise". More often, the trader just doesn't know what he's hearing or what he's listening for.

Db

 

[firewalker99]

The trend is defined classically, higher highs and higher lows (in an uptrend). Trend change and trend reversal are also defined classically, the first a break of the TL and the second a drop below the last swing low (though price can sometimes rally back above that swing point and eventually resume the uptrend; therefore, the trader has to be alert to that possibility).
...
Db

Thanks for providing a clear answer.

 

[dbphoenix]

Thanks for providing a clear answer.

It's been provided before. If you're interested in reading further, do a search using "trend reversal" and my name.

 

[FX_Cowboy]

A couple of brief (and belated) comments on firewalker's analysis of the charts from posting #4. First and foremost, let me say I think you did a nice job following the twists and turns of price movement that day.

I also liked the way you tied your analysis into some of the longer term historical charts, and if I could recommend anything at all, it would be to go even further in that regard. For example, the importance of the break below 1524 is greater than just breaking down through the PDL; it also marks the break of support that had held since the previous October, an event of considerable potential significance.

One other thing I found interesting was, in chart 5, how DB added a couple of new lines to the previous chart, encompassing price action which didn't fit well with the previous S/R levels that had been drawn in. In real time, this often throws me for a loop -- especially when these new levels appear seemingly out of nowhere (such as the upper line that appears in that chart). In terms of methodology, it seems as if the lines are justified by the two SL's and SH's, up and down, which signal the possible development of a trading range.

All in all, though, very well done firewalker.

 

[dbphoenix]

Price again retraces, now to a support level from the previous day at 1538, but the movement back up doesn't make it as far, and price forms a lower high at 1542 before falling back through support to just above the OH level of 1534. The LSH formed at 3:00 is a technical reversal of the upward trend, but 1534 is never breached, and price soon breaks back above 1538 and continues upward as high as 1548 before retracing at the close to the ADR at 1542.25.

The technical question posed at the beginning of the day has been answered. The long term support level stretching back to the previous October has been tested and has held. The supply line stretching down from the high in late June has decisively been broken.

This is all excellent, Dan. I realize that you came to this with a lot of practice, having gone through the process many times before. But I'm glad to know that this stuff has stuck, and that the number of people who understand this is just a little bit larger. Under different circumstances, I'd suggest that you translate all you've done here into a trading plan, but that would more likely foul you up given that you already have a trading plan (and it's not for the NQ).

One comment about the "trend reversal". Given that -- with the exception of a few segues -- we have been in chop for nearly three years, getting technical about trend reversals can lead to being on the wrong side more than usual. This makes profit-taking at pre-designated levels more important, as does the willingness to SAR. Whether any of this applies to Forex or not, I have no idea. But it is an adaptation that I've had to make in order to avoid being thrown out of the trend more often than usual.

In this case, if one were to translate this particular section into a strategy, taking something at the ADR is appropriate, then shorting the LrH or shorting the break through S. However, since price then found new S from the morning (which in turn came from the PD), the possibility that one might have to SAR, or at least exit the short, becomes a little more than a possibility. There is also the fact that the new S level is tested again before reversing and resuming the uptrend, not a time for making a sandwich.

Given the angle of ascent, or the "stride", during that trip to the ADR, the short side seems like a lock, which is one more reason for avoiding bias and assessing the situation as it unfolds in real time.

Db

Incidentally, I doubt you care, but the fact that you have one lousy blue dot is ridiculous.

 

[FX_Cowboy]

This is all excellent, Dan. I realize that you came to this with a lot of practice, having gone through the process many times before. But I'm glad to know that this stuff has stuck, and that the number of people who understand this is just a little bit larger. Under different circumstances, I'd suggest that you translate all you've done here into a trading plan, but that would more likely foul you up given that you already have a trading plan (and it's not for the NQ).

Thanks for your kind words, which are encouraging. I also appreciate the time and trouble you took to make this information available. There's a lot more here than my first casual perusal suggested, although since S/R is so fundamental to trading by price, I should not have been surprised. In fact, I am now attempting to incorporate some of the lessons I learned here into my trading plan, but I'll go into that in more detail in my journal since it's off topic here.

 

[dbphoenix]

Thanks for your kind words, which are encouraging. I also appreciate the time and trouble you took to make this information available. There's a lot more here than my first casual perusal suggested, although since S/R is so fundamental to trading by price, I should not have been surprised. In fact, I am now attempting to incorporate some of the lessons I learned here into my trading plan, but I'll go into that in more detail in my journal since it's off topic here.

S/R seems to have become more fundamental over the last couple of years due to the fact that the overall movement has been sideways. I've watched people struggle with Darvas and Ross and candlestick theory and so on, and the difficulties apparently lie in not taking S/R seriously enough, much less trend. Then there are the instruments that don't provide volume.

Which just re-emphasizes the idea that you have to be open to what's available and adapt to it. When the bear market began, I figured we'd enter a period something like '94, but I wasn't expecting the Fed's manipulation of the housing market, and here we are with nearly three years of going nowhere.

 

[firewalker99]

A couple of brief (and belated) comments on firewalker's analysis of the charts from posting #4. First and foremost, let me say I think you did a nice job following the twists and turns of price movement that day.

I also liked the way you tied your analysis into some of the longer term historical charts, and if I could recommend anything at all, it would be to go even further in that regard. For example, the importance of the break below 1524 is greater than just breaking down through the PDL; it also marks the break of support that had held since the previous October, an event of considerable potential significance.

All in all, though, very well done firewalker.

Thank you FX, I didn't expect that kind of positive comment to be honest. When you mention relating S/R breaks with corresponding levels from the past, how far would you go? I don't mean in absolute numbers, like x number of weeks or months, but are they any objective criteria to assume that a previous support like - say from 8 months ago - still holds any significance today? Depending on how important at was at that point in time, I would assume you have to look first at what price does when it hits that level/zone. But then again, isn't that something you have to do each time, because no one can say for sure that the support or resistance will hold or break this time around...
I still owe you my comments.

 

[firewalker99]

After a quick test of resistance at 1526.25, price makes two more runs at the 1523 low, achieving only slight (and relatively insignificant) progress each time. The first retest of the previous low again rebounds up to test the 1526.25 level. The second retest breaks through 1526.25, to perhaps 1527 but runs into sufficient selling pressure to turn back down. This allows the drawing of a supply line from the (+/-) 1534 daily high.

So if I understand correctly, the supply line is only drawn after price reaches 1527 by connecting the three highs? Why would you wait for the second rebound after the second test and not connect the previous two highs with the first rebound at 1562.25. Probably this is obvious for you, but it's not for me alas.

 

[FX_Cowboy]

When you mention relating S/R breaks with corresponding levels from the past, how far would you go? I don't mean in absolute numbers, like x number of weeks or months, but are they any objective criteria to assume that a previous support like - say from 8 months ago - still holds any significance today? Depending on how important at was at that point in time, I would assume you have to look first at what price does when it hits that level/zone. But then again, isn't that something you have to do each time, because no one can say for sure that the support or resistance will hold or break this time around...

I agree with you that it's always a good idea to try to judge the importance of any previous S/R level, and of course you would want to see how price reacts when it reaches that level. However, concerning how far back you would go, I think it's fair to say that any time you reach a level where, the last time price was at that level it was a major turning point in the timeframe you are using, it would be wise to proceed as if that MIGHT be an important S/R level.

Of course, if that level has provided support or resistance more than once over a given period, as in this case, I would be even more inclined to view it as important now.

 

[FX_Cowboy]

So if I understand correctly, the supply line is only drawn after price reaches 1527 by connecting the three highs? Why would you wait for the second rebound after the second test and not connect the previous two highs with the first rebound at 1562.25. Probably this is obvious for you, but it's not for me alas.

The way I wrote that may make it sound as if there's some kind of hard and fast rule about when to draw supply lines (two highs? threee highs? more?). In reality, my train of thought had less to do with connecting three highs per se, than the fact that price turned back down at that point, beyond the previous resistance. So my reasoning was, why there if NOT the supply line?

 

[firewalker99]

Support at 1534 does not hold for long, and price falls back to just above the 1532 support level before turning back up and continuing its advance to the ADR at 1542.25.

I attached the chart again, otherwise you'd had to scroll all the way back. You mention the price advance to the ADR but don't relate any apparent importance to it. I would find it remarkable to see price go so far without hesitation (except for the slight recoil 1536-1532). Would you relate the time price spends in a range before a BO to the extent where price travels? The longer the accumulation, the higher outbreak or is it just a coincidence that I've noticed this in all the time spent looking at realtime charts.

* Edit: oh yes, I guess you don't need me to acknowledge your analysis was pretty accurate and from a clear unbiased point of view, but nevertheless I can learn from you. Oh ja, ik was het bijna vergeten, jij spreekt ook Vlaams ;-) ik betrap me er al op dat ik teveel Engels begin te praten buiten het traden...

 

[FX_Cowboy]

Would you relate the time price spends in a range before a BO to the extent where price travels? The longer the accumulation, the higher outbreak or is it just a coincidence that I've noticed this in all the time spent looking at realtime charts.

I would call that a very astute observation. As for learning from me, I would say that I'm just a student of trading by price as you are, and I hope we can learn together.

ik betrap me er al op dat ik teveel Engels begin te praten buiten het traden...

Ik heb het andere probleem -- ik heb niet vaak genoeg de gelegenheid om mijn Vlaams te gebruiken. Daarom ben ik blij om af en toe de kans te krijgen om met een echte Vlaams spreker boodschappen te kunnen verwisselen.

 

[dbphoenix]

You mention the price advance to the ADR but don't relate any apparent importance to it. I would find it remarkable to see price go so far without hesitation (except for the slight recoil 1536-1532).

As an addendum, the ADR is a reliable target for the NQ, which generally comes within 10% of it on a daily basis, and is the primary reason why I don't trade anything else. If I don't get stopped out for some reason, I have no reason to stop myself out. Instead, I just wait for the ADR.

None of which is a plug for the NQ. Just an explanation of why the ADR is posted on these charts.

 

[dbphoenix]

Since this is a tick chart, a selling climax can appear differently than it would on, say, a 5-minute chart.

I had meant to address this earlier, but forgot. These aren't tick charts. They're volume bars. That doesn't make any difference with regard to plotting S/R, but I don't want to misrepresent what's being posted.

 

[ljyoung]

Two questions for db:

In the attached chart, which if any, of the downsloping "trendlines" is (are) correctly drawn? The numbers reflect the order in which they were drawn (in real time). The horizontal lines reflect old H/L's(blue), the 8/24 H (red), the 8/23 C (green) and the 8/24C - 8/25 O pair (black).

The principle (not the "law", as you accurately point out) of S/R reciprocity (old S = new R and v/v) can, in your mind, best be understood as a manifestation of what? Possibly the area around 129.9 demonstrates the principle, if only briefly.

TIA

ljey

 

[dbphoenix]

Two questions for db:

In the attached chart, which if any, of the downsloping "trendlines" is (are) correctly drawn? The numbers reflect the order in which they were drawn (in real time). The horizontal lines reflect old H/L's(blue), the 8/24 H (red), the 8/23 C (green) and the 8/24C - 8/25 O pair (black).

The principle (not the "law", as you accurately point out) of S/R reciprocity (old S = new R and v/v) can, in your mind, best be understood as a manifestation of what? Possibly the area around 129.9 demonstrates the principle, if only briefly.

TIA

ljey

See below:

 

[firewalker99]

Two questions for db:

In the attached chart, which if any, of the downsloping "trendlines" is (are) correctly drawn? The numbers reflect the order in which they were drawn (in real time).
ljey

Hope you don't mind me saying, but it would think it's safer to start all trendlines from the same point of origin. In this case, the highest point near the top of the chart above 130.2...