Support & Resistance Lines
Little did I know when I was asked about Support and Resistance lines that I would have the chart, readily supplied today.
I’m a fan of support and resistance lines coz I’m a simple bloke and these are straightforward lines, not long winded mathematical equations. Do they work all the time? Nope, but neither does anything else. There is no Holy Grail, but these lines are a great starting point.
OK, an official definition first then an explanation: Support and Resistance lines are points on a chart where the probabilities favour a halt, or even a reversal, in the prevailing trend.
Do What? I make only a small apology for using words like ‘probabilities’, because that’s the bottom line of trading. It’s hard to get any legal certainties in trading so we try to use different methods to get the best odds. Right, down to business, I’ll use the chart as a working example.
Starting on the 17th July £$ rose to $2.0470, the print’s small so you’ll have to trust me on that. For a while this level provided minor resistance as the currency failed to break that level until 11.30 at night, during Far Eastern trading. Notice the sharp rise once it broke through, accelerating up towards $2.0550, where we assume it stopped because sellers outweighed buyers.
Yes, I know, for every seller there must be a buyer, but the buyers were no longer interested at that level.
So, $2.0550 is our resistance line, the point at which the buying dried up, but at the moment it’s not that bigger deal. If this were football it would have the significance of, say, West Ham. During the morning of the 18th Sterling fell back, but look at where it stopped-ignore the brief dangly bit and it stopped at our previous resistance level of $2.0470. At this level traders who failed to buy it before or who sold it at the higher levels have seen the potential for further gains and buy £$.
Now this bit is important enough to write in italics: Our line that used to be resistance is now a support line, probably with a football rating of Aston Villa.
Once more the price rose and where did it stop? Yep, a pint of Guinness to the guy in the corner, it stopped at our resistance line of $2.0550. The chart created a sort of mini double top. At this level traders took profits because it made them money last time and this was enough to halt the rise and eventually send Sterling lower again. Our resistance level now has a sort of Tottenham rating. No prizes this time for where Sterling bottomed out; this also increased the significance of the support level.
Moving swiftly onwards to the afternoon of the 20th our resistance line is broken-with attitude. Once the price broke through resistance it triggered traders’ stop losses placed just the other side of the line pushing Sterling higher.
Fast forward to yesterday morning when the force of the Sterling sell-off took it straight through our resistance line (which should have acted as support), barely stopping to wipe its feet. But look, when traders tried to rally Sterling it couldn’t get through the previous resistance level at $2.0550 and, after the second failure overnight, traders decided to flip over and test the downside to £$.
Which brings us neatly to the present. At the first attempt, around about 9 o’clock, traders failed to get £$ through our $2.0470 support, which briefly assumed Arsenal status, but when it broke at the second attempt notice the instant reaction. Stops placed just below that level were triggered and Sterling plunged 40 pips in 5 minutes. Did I trade? Nope, the irony was that I was so busy typing this that I missed the initial break and after that I wanted to wait for a rally to re-test the $2.0470 level.
There was good news though (and this happened after I took the above chart so it’s worth going in and having a look at the update). Sterling did rally to just below our line, and when it failed to break back above after weaker Durable Goods figures I sold at £$2.0457, closing soon after at $2.0447. I took a total of 60 pips on the trade, being stopped out at breakeven on my remaining £2.
There’s more on S & R lines but that’s more than enough for today.
Happy Trading
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October 25th, 2009 at 2:36 am
hi
ive been reading your comments on paddypower and found it very using and amazing how you are making the precise bets.
my confidence is shattered at the moment as i took a beatings last week from the wall street and commodities.
is it possible to help me out or do u organise classes ?
thanks mike
October 27th, 2009 at 2:22 pm
Hi Mike,
I can feel for you about your confidence being shattered, I’ve been down that dark hole many times during my trading times and I’m sure that everyone who reads this forum has, at some stage, been in the same boat. My advice would be to trade on the demo account for a while, or, if you’re going to risk your hard earned, keep the stakes to a minimum.
I’ve found through my trading experiences over the years that I’ve got kicked in the goolies for three reasons:
1) Going against the trend
2) Overleveraging i.e Too big a stake size or too many open positons
3) Going against the trend & overleveraging at the same time (catching a falling knife in downtrending markets and the opposite in uptrending markets).
I’ve usually found that you get yourself into these situations when trying to second guess trend changes i.e tops or bottoms. Getting in too early = wrong (unless you have a huge margin and can afford to tough it out). I’ve given up trying to anticipate tops and bottoms – once a trend is in place there are more than enough opportunities to get in with less risk.
Also, I now stick blindly to the system I use. If it says ‘buy’, I buy, and if it says ’sell’, I sell. I’ve found to my cost that taking a ‘view’ of what you think the market should be doing doesn’t usually work. I now wait for the market to show me what direction it’s taking and then go with it. Try to cut out the ‘noise’ of all these so called market experts and the absolutely scandalous financial reporting you get on the likes of Bloomberg & CNBC.
Hope this helps a bit. I know it won’t recoup your losses but if it can keep you out of one rash trade then it’s worth it.
Gazza P
October 27th, 2009 at 4:40 pm
Hi Mike
Sorry to hear that you’ve been having a rough time. I know how it feels – believe me I’ve been there. Infact the good news is that almost every sucessful trader I’ve talked about has reached a crisis at some point or another. I won;t pretend that eneryone recovers – plenty of people decide to walk away from trading – but enough do that you should have some hope!
Gazza, as always, has some useful suggestions. But drop me an email (zaslampaddypower.com) with your account number and I’ll see what we can sort out for you.
Z
April 26th, 2010 at 2:02 pm
Hi Z/ FT,
Ive ben trading mainly on oil and have been reserved about looking at currency until I understand more. I really like the way you stick to a system Z. Im wondering how you would go about developing a system where you can trust the measures you have built the system on. I also like the advice to not take a view and just go with a trend.
Are the resistance lines something that are published anywhere? Like an ft resistance line on oil or as above on the £$?
I suppose what Im really looking to do is laser focus my activity on oil futures.
April 26th, 2010 at 4:12 pm
Hi tim,
Z’s out the office for a few day’s but I’m sure he’ll get back to you soon. Re your question on resistance lines, they’re more subjective than mathematical and can depend on the chart used and the accuracy of the analyst’s line. The nearest you’ll get are Fibonacci lines which are mathmatical, but you’ll still have to draw them yourself. Different subsciption and tipping services will show their S&R lines and there should be quite a consensus on major levels. The thing to note is that different charts and platforms will produce a slight variation on the levels, so it’s better to think of the S&R ‘area’ rather than a precise line. For example, in today’s pieces I talked about targets on the Dow and Dax, but these were based on the Paddypower charts and will differ slightly from the cash indices and even more from the futures prices.
June 2nd, 2010 at 8:57 pm
Hi FT
Found the article really helpful- have justed started out.
Starting trading today for my first time properly and made a minor profit would of been bigger hadn’t i tried to second guess things.
I think the problem was i was following the quote from warren buffet of “when people are fearful be greedy and when people are greedy be fearful” doesnt quite work in spread betting
Thanks
June 3rd, 2010 at 9:11 am
@Lodian
FT might reply at some point today too, but yeah, not sure about that quote on a very short timescale like trading. I can kind of see where he is coming from in terms of being wary of bubbles and such. But from trading, I’ve made profits using trend following strategies, which means I go where the crowd goes. I don;t try to be the first in and I don’t want to be the last out, and I try not to worry too much about the profits I didn’t make. So whether I make money comes down to how well I can spot a trend! Good luck with the trading.
June 3rd, 2010 at 9:18 am
Like i said previously im new to this- so would benefit from seeing how other tend to follow things.
Do you have twitter?
Lodian
June 3rd, 2010 at 9:33 am
Hi @Lodian,
We do indeed have twitter you can find us at http://www.twitter.com/pptrader. Or you can find Mr FT at http://www.twitter.com/Mr_FT.
Looking forward to connecting with you on twitter.
Michelle – paddypowertrader.com- Communications
June 3rd, 2010 at 9:37 am
Morning chaps,
yeah just to echo Z’s view, Buffet’s famous quote is great when you’ve got billions to play with and a 20-year time frame, but it’s a fast track to Hell in a handcart for traders. Sure, it works sometimes; I had good trades in Tullow, ICAP and a reasonable long in BP y’day at 417p, but it’s a risky habit to get into and I’ve been on the wrong end of catching a few falling knives in the past. Good luck with the trading
June 3rd, 2010 at 9:42 am
@FT
Long BP yesterday. Brave man. Will that one be in your Trade Of The Week (http://www.paddypowertrader.com/blog/index.php/category/trader-hindsight/)?
June 3rd, 2010 at 10:46 am
Hi Z,
think it’ll have to go some to be trade of the week, but might do a blog this morning explaining the trade.