Everyone Has A Different Playbook

Last updated on April 26th, 2017

trader emailsWhen you write trading tips for a blog, you often wonder if people read them and act of the information that is presented.

Receiving emails is a great way to know you are contributing to the trading world in some small way.

It also confirms that a lot of what people learn, the usual rehash of subjects, is really not helping them.

I received an email from a reader named Devon and it was in regards to support and resistance trading.

Support And Resistance Trades

I’m going to copy the email and answer this persons question in this forum

Shane – I’ve seen many of your trading blog post and I think they are terrific.  My question however is that I see trades around support or resistance areas and you never take them.  I’ve also seen you trade right into a support or resistance level.  Since multiple hits of a level make it strong why do you skip them?

Thanks for the email Devon.  Over the years I lost count how often I’ve heard that multiple hits on a support or resistance level tends to make it stronger.  Some trading systems and methods actually use this belief as the backbone of the method.

Stronger is certainly a matter of opinion and what some may consider strong, others will consider it weak.

How do you quantify the strength in an objective way?

If you think something is strong or weak, you must have a way to determine that.  The question is “what measurable variable do you use to tell the difference between a strong hold and weak hold?”  Many traders would have totally different opinions on which S/R levels are good ones to trade.

When I look at an area that has held price, what matters to me is how long price hung around at the support or resistance level.  Fast rejections due to buying or selling pressure is something I would consider “strong.”

If price tends to hang out at the level or rejects and quickly returns, I think it’s safe to suggest lack of buying or selling interest.

What we really have at any place on the chart that is part of your trade plan is a decision area.  What do you need to see happen to have you enter the market and put your trading capital at risk?

 

Multiple Price Rejections

I think it is a dangerous practice to simply assume that multiple hits and rejection is a direct relation to strong levels.  What occurs quite often is a confidence booster that in the end, causes some oversize in the loss department.

Why?

Because many people will see price constantly reject and think the same thing is going to happen at the next visit.  Let’s load up the boat and take a position outside of our trade parameters.

This graphic should explain.

support and resistance

There is obvious buying pressure at the levels marked with the arrows and you can clearly see the buyers stepped in quite strongly.  Keep in mind that those who trade support/resistance bounces usually place their stop just beyond the level.

Side Note:  The bigger players know where the majority of traders place stops.
Tighter stops equals bigger position sizes.  A quick run into the area of stop mass and many traders are taken out.

These are solid rejections which can often times lull traders into trading too confidently and increasing their position size.

Cluster Of Juicy Stops

The more traders that buy at this level, the more stops tend to cluster beyond the level.  The red line signifies where all the textbooks tell you to place your stops when utilizing support trading.  It’s a disaster waiting to happen when the level breaks, stops are triggered, and slippage is a strong possibility.

Even worse, the losses a trader will take will depend on how aggressively they increased position sizing because “they knew” the level would hold?

But there is a clue that shows that the conviction of the buyers is beginning to slacken and a heads up for you to adjust position sizing or skip the next trade.  Notice the black lines plus the letter “L”.  There was strong rejections at the support line but the excursion away is lessening.

The last push even has an extremely bull candle showing strong upwards momentum that is stopped right in it’s tracks.

Notice the far right of the chart that when price broke the support level that had multiple direct hits, it broke with strength taking stops with it.

 

No Trading S/R Clean Rejects

I don’t trade support and resistance bounces as seen in that chart.  It’s not part of my trading playbook.  I prefer bounces and a pullback because my experience for myself (and through many many trades) playing the bounces as shown don’t have an edge.

As well, I will also be interested in flushes in the support and resistance zones.

This way of trading for me applies to day trading and swing trading.  It’s valid on any time frame.

These are not trades that are blindly taken and also revolve around trend direction, state of higher time frame (not necessarily trend direction), and overall context

This chart highlights roughly what I would look for.

buying support tests and pullback trading

Price had just slammed through an area of resistance (now marked Fmr Resistance) and pulled back and price was supported (marked Current Support) where priced moved away to the previous high.

The pullback to current support was anything but strong (the candles tell the story)  and we see a test of current support where price breaks it and is quickly bought back.  I marked that as a flush of weak longs given the preceding price action.  That is a sloppy test might be a trade for me.

Imagine for a moment that price did not flush but did continue upwards after the bounce as seen on the chart.  The pullbacks would come into play as ways to enter this move.  There are various ways to enter pullback trades but those are beyond the scope of this trading tip.

I believe every trader should take what they have read and seek to verify the validity of the content through their own testing.  Reading and being taught is one thing but I have always found the testing phase of any “market truth” much more valuable than what I read or what taught.

If you have found success trading support and resistance as taught by the book, I applaud you.  I just never found validity in trading it the way it is normally presented.  I also urge you to question things that are touted as trading truths.

By questioning the standard method of doing anything, you may come across something that tops it, hands down.

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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