Resistance/support lines

[svensk]

When you draw these lines, is it best to put them under closing prices or lows and above opens or highs? I've seen people do both, so I was wondering if there is a rule, or is it open to interpretation.

Or is it a mix, depending on the situation? Like if putting below closes gets more hits, thus makes a better support line.

 

[tech/a]

For me lows and Highs
Also check timeframes.ie hrly/weekly/daily.
Support and resistance can also be areas of clusters of trading at and around a price level.
Its commomn for price to return or faulter at these cluster areas.

 

[motorway]

I agree with tech/a

Think about what creates the high and low of a bar

The high is where supply ( selling pressure ) was seen to overcome the demand

The low is where demand ( buying pressure ) was seen to overcome supply.

price reacted off support at the low
price reacted off resistance at the high.

The low and high of the bar is where the support and resistance are

Now if the close is also at the high and the low
Or in the middle
Then that is more information still



motorway

 

[Chorlton]

Or is it a mix, depending on the situation? Like if putting below closes gets more hits, thus makes a better support line.

Yep, IMO, it depends..... !!

Remember that the purpose of these lines is to visually identify where the buying and selling pressure is. Nothing more....

IMO do not simply draw lines on a chart without looking at it and getting a gut-feel for where you believe these levels are.

Also, as Tech/a has pointed out, look at the different timeframes.

... and remember that as Buying/Selling pressure is fluid & can suddenly change, obviously so can the S/R lines....

Regards,

Chorlton

 

[Chorlton]

I agree with tech/a

Think about what creates the high and low of a bar

The high is where supply ( selling pressure ) was seen to overcome the demand

The low is where demand ( buying pressure ) was seen to overcome supply.

price reacted off support at the low
price reacted off resistance at the high.

The low and high of the bar is where the support and resistance are

Now if the close is also at the high and the low
Or in the middle
Then that is more information still



motorway

Yep, totally agree !!

I would add though that its sometimes worth looking at the volume when comparing the close to the price range of each bar.

For example, If the volume was extremly low for a particular bar, personally, I wouldn't pay much attention to it when trying to identify S/R levels.....

 

[svensk]

Are outliers not an issue?

For example, if you have an established s/r line with multiple hits over a decent timeframe (say medium term) that is penetrated one day by a substantial margin (be it high or low) but not by the open/close, would this still be counted? It seems to me (but i'm probably wrong) that an outlier like this would be disregarded, given the strong evidence of the s/r line it penetrated.

I'm trying to find an example to illustrate my point, but am at a loss at the moment. I hope I explained it well enough to convey my point.

 

[motorway]

Sometimes We have to clearly think of supply and demand as a distinct two
sometimes as the one thing ( If all those holding will not sell till higher prices that is more than a lack of selling pressure )

If a bar goes up on low volume and then closes at a low
There was no selling pressure
But there was even less demand ..Buyers refused to follow the price up.

So that is still resistance and a level that you would be interested in seeing if the buyers next time reached up with more enthusiasm.
If selling pressure does increase ( sellers become impatient ) there is potential weakness..

same the other way around

motorway

 

[motorway]

Are outliers not an issue?

For example, if you have an established s/r line with multiple hits over a decent timeframe (say medium term) that is penetrated one day by a substantial margin (be it high or low) but not by the open/close, would this still be counted? It seems to me (but i'm probably wrong) that an outlier like this would be disregarded, given the strong evidence of the s/r line it penetrated.

I'm trying to find an example to illustrate my point, but am at a loss at the moment. I hope I explained it well enough to convey my point.

These are significant indications That would not invalidate your S/R
but confirm it

You are talking here about

Springs and Upthrusts
very revealing tests of the reality of the resistance and support

No I would not change My lines
They would be confirmed

Your lines are drawn from significant junctures..

springs and upthrusts are false moves where the other side comes in and the move reverses back into the trading range . A false move that is revealing.

depending on the volume.. That might be the last time prices hit that line before a real move ( the other way ) or If there is a lot of volume another test of the S/R lines is likely..

An extreme spring is a shakeout..

motorway

 

[Chorlton]

Sometimes We have to clearly think of supply and demand as a distinct two
sometimes as the one thing ( If all those holding will not sell till higher prices that is more than a lack of selling pressure )

If a bar goes up on low volume and then closes at a low
There was no selling pressure
But there was even less demand ..Buyers refused to follow the price up.

So that is still resistance and a level that you would be interested in seeing if the buyers next time reached up with more enthusiasm.
If selling pressure does increase ( sellers become impatient ) there is potential weakness..

same the other way around

motorway

mmm.... Interesting point...

Previously, I've always discounted low volume for these same reasons you mention ie no buying or selling pressure.

But reading your comments, I can appreciate how this may not be the best course of action.

Cheers....

 

[jammin]

Remember that the purpose of these lines is to visually identify where the buying and selling pressure is. Nothing more....

I agree, it can highlight pressure levels.
As per the chart you can see $0.30 has been both a support and resistance level over the last 6 months for MMN and I would be looking for $0.30 to be a possible support level in the next few days.
The number of times the level is hit and respected increases its importance.
The fact that it has been penetrated twice in 6 months on an intraday basis only without a multiple day continuation, would for me, re-enforce the importance of this level.

 

[tech/a]

For those interested in delving a little deeper into S/R.
Market Profile or Steidlmayer and in particular the Book.

Mind Over Markets By Dalton,will give you a very good insight to the concept of volumes within a Support zone of any bar.

Basically Market profile builds a profile of volume trading at levels on 15 min bars.Over a day you'll find that there will be an area within a days trading where most volume is churned.
It is common for this to become the support area not visable in a single bar but very visable in a number of bars which have the volume V price range identified by the analysis.

This style of analysis can be used by all traders although its most common use is with the Futures Markets. Peter Steidlmayer was a leading analyst for the Chicago Board of Trade.

 

[svensk]

Thanks for the replies guys, they helped a great deal

 

[lesm]

If anyone is interested in looking at an application of MP in practice they may like to read a thread by "bolter" over on ET circa Feb 2006. Bolter hails from WA and a synopsis of his first post in the thread is provided below. Note that he was per trading this during February 2006 wth a view to going live in March 2006.

Market Profile Plus by bolter

http://www.elitetrader.com/vb/showthread.php?s=&threadid=63202

"I’m kicking off this journal with two objectives in mind …..

1. To encourage further discussion about the practical application of Market Profiles.
2. To get me back in sync with the markets (hopefully) and determine if my old techniques still work. The discipline of updating a journal will help keep me focused on a day-to-day basis.

Background
I’ve been investing/trading for over 25 years – professionally (OPM) for the last 5 years. I have traded equities, options, and futures. These days I stick with the latter. I trade global markets and all 9 asset classes as and when. I am primarily a position trader using systems I have developed over the years. But when time permits and the market conditions are suitable I also love the cut and thrust of trading intra-day.

I haven’t day-traded since 2002 due to workload, and the fact that the markets have been fairly pedestrian. But now I have some time on my hands and the equity markets look set for a roller coaster couple of years. So it’s time to find out if I’ve still got it.

As part of my trading plan I will be PAPER TRADING for the month of February. If I meet certain objectives then I will go live March 1st.

Market Profile
I learnt Market Profiles 10 years ago but I am not a purist by any means. I’ve long since forgotten most of Steidlmeyer and Dalton’s vernacular, but the concepts are firmly ingrained. If you need a backgrounder on Market Profile I strongly recommend you spend an hour reading the excellent thread created by They – http://www.elitetrader.com/vb/showt...=&threadid=9727. There are plenty of links, references, books, software and wisdom contained within.

Personally I find the concepts underlying Market Profile and Auction Market Theory to be very compelling. It provides an intuitive and robust picture of what the markets are doing on a short term basis. It took me a long while to figure out how to incorporate the theory of MP into a trading technique. They way I use it may not be exactly what it’s originators had intended but it certainly works for me. I’m sure other traders use MP in a completely different manner and are successful also. I will introduce the enhancements that I’ve made to MP in due course.

One last point, MP is no panacea. It is not even a complete trading methodology. In my case it is only one aspect of my trading technique – albeit a critical one. I primarily use it to identify support and resistance and for understanding short-term market action."