Let’s review S/R (Support and Resistance) lines together! Not interested in such basic knowledge!? Well, but if you are not trading with one of those Price Action strategies, you should think again.
[B]Part 1[/B]
Why S/R lines are so important again?
Many people pay attention to those lines.
If many think they are important, why don’t you? It’s gotta be something!
Price Action trading strategies use S/R lines.
I think everyone should use at least one PA trading method because it’s simple and so effective.
[B]When many traders pay attention to a S/R line, two big events will happen.[/B]
[B]1. There will be a bounce.
2. There will be a breakout.[/B]
Obviously when price hits a S/R line, it is more likely to get bounced. After all, this is the reason we call them “Support and Resistance”, isn’t it? Then they should not let price go through easily. Think of them like big walls.
But there are times price goes beyond those lines. If we could know WHEN this happens, we can be successful in breakout tradings! But there is a hint.
[B]Only a strong price action can break the walls.[/B]
I’m going to try and answer this… Feel free tell tell me if I’m wrong.
A strong PA that is capable of breaking S&R lines would be one with strong movements prior to reaching the given level. One would be able to see a strong PA move due to the price movements and volatility? (Long candles, marubozu candles, three soldiers or three crows, etc)?
ClarkFX answered it. The key word is volatility. And you do not need a technical analysis to find that out.
[B]Part2[/B]
The strength of a candle.
As a rule of thumb, [B]a long candle on your chart[/B] means a strong PA. Higher TFs are more reliable, of course.
A long candle appears usually when there is important fundamental news. Or when there is a lot of orders at the line. And this long candle really is the sign of a new trend often.
But notice also when a S/R line is not that strong, like [B]a weak wall[/B], a regular PA can penetrate it. So it is a matter of which is stronger.
Take a look at the image below.
See the red circle. That is the first candle to attempt a breakout. And it penetrated the R line! You might want to jump in there because this is a breakout, but the 2nd and 3rd candles are Bearish, got rejected! Think of the strength of that first candle. [B]That one was not strong enough.
[/B]
Same image zoomed in. [B]Look at the bunch of candles that want to go up[/B] LOL. And in the 8th time, they tried to break the wall again (a tiny wick of the candle got in) but got rejected hard again! Do you think they are going to give it up now?
They retreated and plotted something. Their strategy worked. And now they got in HARD!!
See the red circle. It got rejected hard there for the 8th time, but it came back fast. This happens sometimes before a breakout.
Now, there are many “potential S/R lines”. Some of them will turn out to be not valid. But some of them such as pivot points, especially R1 R2 R3 S1 S2 S3 [B]almost always function[/B] as S/R lines. The reason for this is that there are so many people use pivot points as Stop Loss lines.
*Price more often penetrates pivot point compared to other points
Using pivot points, you can set an easy strategy. Price hits pivot line 75% everyday according to some study. So, if you see price is uptrend towards pivot line on 4H or 1H, you can expect it will reach there in the same day (75%). And here also is interesting statistics.
[B]One point to another[/B]
From R1/S1 to pivot 75％
From R1 to R2 35％
[B]One point to two points[/B]
From R1 to R3 10％ *much harder to keep breaking walls!
Which Pivot in particular are you refering to? Classic, Camilla, Woodie, Fibonnaci, Floor Fibonnaci or Fibonnaci Retracement? Also what TF Pivot re TF chart?
Same could be said about the 3rd candle back from the one you circled.
6 candles in from the extreme left of your chart, price makes a new high & pulls back. Doesn’t that now identify it as the potential breakout target bar?
There isn’t enough information on your chart to back up or determine what constitutes a potentially stronger or weaker breakout trigger.
Price pulls back, as it does in your 3rd chart & breaks out to fresh highs. Hindsight informs us that it loses its lustre 38 bars later when it falls through the swing low & probably takes you out if you placed a technical stop.
But if you only had the extreme right edge to work with when you identified that fresh bar high & pullback move (as you did in your 3rd chart example), what would have persuaded you [U]not[/U] to take the move through the swing high breakout bar & follow the move up as a possible trend continuation?
That breakout bar could have continued up another couple of figures before grinding to a halt.
The information you impart is solid enough & follows the textbooks, but unfortunately live trading doesn’t often adhere to perfect textbook scenarios.
You don’t have the luxury of omitting one bar or technical set up over another when all you have to work with is the information playing out right in front of you.
Same could be said about the 3rd candle back from the one you circled.
6 candles in from the extreme left of your chart, price makes a new high & pulls back. Doesn’t that now identify it as the potential breakout target bar?
The example is only based on the R line on the chart. So, any candle that is not close enough to it will not be counted. That candle has not reached the R line. Not challenged yet.
There isn’t enough information on your chart to back up or determine what constitutes a potentially stronger or weaker breakout trigger.
I am just giving one typical phenomenon. [B]I am not saying all S/R lines act the same.[/B] Sometimes, price can penetrate them so easily. We only discover that the wall is plain weak then. [U]I am not teaching you how to trade for a breakout on all situations[/U].
The information you impart is solid enough & follows the textbooks, but unfortunately live trading doesn’t often adhere to perfect textbook scenarios.
You don’t have the luxury of omitting one bar or technical set up over another when all you have to work with is the information playing out right in front of you.
You are quite right. And again, this thread is not about a breakout trade. I just gave one example of what happens at S/R lines. But one thing is clear though and it happens over and over. [B]A strong candle does break a S/R line.[/B] Or many small candles need to challenge to break it. Think of triangle price pattern.
If you see in live, you only can tell what is going on, not what will happen. But [B]it is always better to pay attention[/B] rather than not knowing anything about S/R lines. By the way, as a rule of thumb, do not take a position BEFORE a breakout or bounce.
BP School on Pivot points… thanks. :rolleyes: I guess what your saying then in answer to my [I]Specific[/I] questions is you don’t know. A little knowledge is a dangerous thing don’t you think? Especially when advising others.
I realize that, but on your 1st chart example you haven’t indicated where you’ve plotted that resistance line from.
Your audience only sees the corresponding price action from where you’ve highlighted the red circled bar.
What I’m saying is these support & resistance zones need to be identified & logged [B]ahead of time[/B] so that the trader can prepare to trade (or not) the level as the price action begins moving up to & around it. There will usually be more accompanying information that will have to be considered first before deciding to trade a particular level.
Your audience can’t see how or why you’ve identified that line as a potential forward resistance level.
Here’s a live example of what I mean.
This current chart of the aususd is approaching a possible area of resistance from earlier in the week. It acted as a minor support base during November, & although I’ve only captured part of the previous months price action, if you look back to November 16th & 17th you’ll see where & why I’ve derived this area from.
This is what I meant by offering a more complete view of where & why a level might be put forward as a potential candidate for a high probability trade.
Obviously what you do with that information as the price reacts to it will be dictated by your trading strategy or system.
There are a small group of professionals who post on here who would strongly disagree with that statement, but we won’t go there now.
Right now, I am just introducing some S/R lines. Like I said, some are more reliable, and some fail to function as S/R lines. [B]It all depends on how significant the S/R line is.[/B]
I am not talking about where to take positions, etc. It surely does relate to PA strategies, but that is not what I am talking at the moment. I am simply saying that breaking a S/R line has an important meaning, and we all should pay attention to that.
It’s classic for the particular information. But I am NOT saying the data is applicable to all pairs or at any time though reaching to pivot is about 70% to 75% in many pairs.
I’ll accept that with a big proviso! Pivot is dynamic. Say you enter a short/long at S3/R3… a good call statistically yes? Then new candle prints and adjusts for the up/ down accordingly… now your at or close to ‘Pivot’.
If only it were that simple.
You need to look more closely at various TF Pivots re TF charts… Incidently, you didn’t pick me up on the last Pivot I quoted… Fib Retrace… not a R or S in sight!
Lets not go down the various Pivots and applications… could take a whole new thread!
Pivot points are so interesting S/R lines, and I have read people’s strategies, etc. Combined with NR7 indicator, aiming for pivot point from S1 or R1 is one of the easiest PA methods. If this is combined with a London Break strategy or NY Box, it’s almost guaranteed to win.
Anyway, I am not so into pivot points though I want to touch just the basic of those strategies
There are some other S/R lines to watch out… Coming up some more next!
Here is a situation. PA moved up and broke a R line. For the breakout traders, it is time to cerebrate. Enjoy the ride as long as the PA keeps going! But the thing is, it will not keep going forever. Sometimes, it comes back sooner than you like even though the breakout was legitimate, not like a fake one.
There is no clean-cut definition of what makes a fake breakout or legitimate one, but I tend to think it is how far the candle penetrates and stays penetrated for some time. But say we can be happy to see if 100+ pips go up after breaking the R line.
If an uptrend is weak, price will come back 50%~60% (Fibonacci Retracements). But an interesting thing often happens when price hits this R line again. It becomes a S line.
The image is D1 chart, USD/CHF some time ago. The same line functions as a resistance and support. In between them, there is a breakout candle. This is a very typical PA that you can find in your chart.
*Please know that once you know how to find significant S/R lines, you can find better ones than the example one.
As a rule of thumb, the higher time frame you use, the more reliable those S/R lines you can find. There are some great tips to spot those S/R lines (I am not going into the details), but here is the biggest hint. It is the spot(s) where many people pay attention to.
