Hello all,
I have been trading for about 9 months now, one month live, so please excuse my noob question! One of the most important tools I use for entering trades is support and resistance. By default it is a tool based on the past but for how long in the past?
For example, EUR/USD broke down below the 1,2625 level today, which was the 4 month low. So, it trades in an area where it traded back in 2010. Is it valid to suppose the market will “remember” the levels it traded back then? Can a resistance level of 2010 become a support in 2012?
Can a resistance level of 2010 become a support in 2012? no. The price has moved on.
The closer the S/R level to the price the more relevant it is.
My research suggests the market will certainly bounce off & honour area’s & levels that have previously acted as support & resistance going back that far, as evidenced by two more charts to compliment your EUR/USD example.
The market will probably have been pricing in & reacting to different fundamental stories back in 2010, but apparently traders are creatures of habit & those who pay close attention to technical details such as S&R will always be on the look out for common area’s of previous conflict to see how price action relates to those area’s in relation to the current fundamental themes.
Thank you both for your answers, two opposing suggestions, both sound logical in their way. I feel lost now that price trades in this new area, any more opinions please on the matter?
Why would you be lost?
That level back from 2010 confirmed its validity last Friday at the first touch by finding bids. The bids quite obviously weren’t as heavy yesterday as they were last Friday because on the second visit price pushed through with minimal effort. That in essence is what support & resistance trading is all about.
A level or zone comes into view, it gets tested, funds sufficient bids or offers (depending from which way it’s getting traded), & the stronger camp eventually overwhelms the other.
If the support is robust it will hold up to multiple tests & form a solid bottom or a series of higher lows where bids begin to confidently bolster the zone.
If it’s weak it’ll get busted, usually quite quickly as bids dissolve & sell stops begin soaking up the order flow.
You’re going to get a pretty good idea how relevant & important this 2630-50 zone is on the first revisit, which might take place sometime today if you’re lucky.
Offers will now begin to get layered from the bottom of that channel up through 1.2650 & there will be buy stops atop 1.2690 through 1.2720 waiting to catch any aggressive follow through on the back of an event risk.
The way in which to approach trading these common support & resistance zones is to trade them from a position of strength until they tell you otherwise.
So for example, the Euro trend is clearly bearish leading into the 1.2630-50 zone, therefore the higher probability bet is to short rallies away from these zones & trade into & through them. You can then trail your stop loss on successful re-tests and/or pyramid a position by shorting the pullback.
Failing that, & depending on your strategy you could simply wait for an important level like this to break & simply trade the pullback away again providing you possess an appropriate set up.
Thalia thanks a lot, very informative post. Actually I had set a short entry order last night @ 1,2640, but the price traded up to 1,2616 only today and wasn t triggered. No worries, maybe tommorow.
As for the reason I feel lost, I can t seem to find proper levels to set my take profit or where to expect an upwards bound of the price when it trades below the 1,2600 level in order to go long for scalping some pips. Studying the charts, I noticed the 1,2510 area had acted as support back in October 2010. This is something new to me, doesn t look very straighforward and for now I wait to see how the price goes.
Wouldn’t it make more sense to look for the higher probability short opportunities trading with the prevailing bearish trend rather than attempting to trade lower probability longs against the trend?
Even if you’re only looking to take small bites out of the market, surely the smarter option would be take those bites out of the market demonstrating the clearest directional momentum, & at present that would be trading shorts.
No point in making life any harder for yourself than it needs to be.
Speed bump, you are right. I ve had some successful countertrend trades in the past but it proved in the process to be risky. This week I had my SL hit twice and now my target is to enter shorts. I need to spend some more time studying this weekend and sort my plan for next week. I will look for S&R levels from back in the past too
Disagree. Traders who follow the monthly or weekly charts WILL look at levels years back. Seeing as these traders tend to hold their positions for a more long term position, their trading size is considerably more than a day trader.
As Speed bump said, look at historic data and see how key S&R levels get tested time and again. And the other piece of advice I would echo is trade in the direction of the trend UNLESS you really know what you are doing
