Indicators to Define Simple (but Powerful) Support and Resistance
In our other Trade Ideas posts, we hope that you notice we like to keep things as simple as we can. Our most complicated idea was our LinReg and CCI. That setup only used two indicators (the LinReg and CCI), which kept the chart clean, but simple (and still much simpler than most ideas we see out there). With this idea, we are sticking to two indicators:
- Custom Bollinger Bands: the only settings that needs to be changed is to use a LWMA and change the period to 8. All the other settings are default.
- Switch Pivots: the only settings that need to be changed are to convert the default times from EST to your timezone.
The idea is extremely simple, but can find areas of Support / Resistance that you may not otherwise define as Support or Resistance. First, when the High exceeds the upper LWMA Standard Deviation, there is a potential that the High is an “area” of Resistance. The opposite is also true: when the Low exceeds the lower LWMA Standard Deviation, there is a potential that the Low is an area of Support (very simple, but we will expand on this idea in the next section).
To understand the final “Basic Premise,” we need to understand the default settings of the Switch Pivots: by default the Switch Pivots plot the Opening Range Classic Pivot Points. So, the next idea goes like this—when an area of potential Support / Resistance aligns with a Pivot Point, that zone becomes the new area of Support or Resistance.
Confluence Between Indicators
All of the above may make sense, but there is nothing like seeing examples of trade ideas. The first example is an introduction to the concepts from the “Basic Premise.” In the image, the first green arrow is where two Lows exceeded the lower LWMA Standard Deviation and where we drew two horizontal lines for potential Support / Resistance (in this case they acted as Support). The first red arrow is where a High exceeded the upper LWMA Standard Deviation and so we drew a red line for a potential area of Support / Resistance (in this case it acted as Resistance). Not only did the red line act as Resistance, but it occurred extremely close to the Opening Range R3, so we could say the zone between the R3 and red line is Resistance.
Next, we will look at a full day, so if in one of the images you see an area we didn’t mark as exceeding the Custom Bollinger Band, we will most likely draw that level in the next image. The first image shows an area of Support during the “Opening Range” period. We should also note that we are using our favorite minute bar: 3 minute. We prefer the 3 minute to the 5 minute because it gives us more bars during the day and we generally like the price action better when compared to a 5 minute bar.
The firs two images were nice and easy but how about when the market isn’t as crystal clear? Let’s ease our way into it with our next example. One of the important things to understand is the way we talk about Support / Resistance—we don’t believe Support / Resistance is a single price point, but a range of prices, so even though we draw a single line on the images, price could trade within a range of +/- X ticks around that area. The other important thing to remember is that even if price moves through an area of Support / Resistance it does not mean that price won’t come back and “respect” that area again. Finally, Support / Resistance is just a tool, it is not a system in itself, so even though this may help you define areas of Support / Resistance, you will have to incorporate this into your trading system / style for it to be successful. It’s important to remember, not every area is going to, nor should it, align with how you view the market (it’s ok to pass on “setups”).
Let’s get back to the examples. In the below example, you will notice the first area of potential “Support” (green line) occurred within 1 tick of the Opening Range Pivot Point. After price moves away from the potential Support, it came back to test the same area and was temporarily rejected. Now for another point: first touches, crosses, signals, or first of anything in technical analysis is “normally” the best opportunity. When price came back to test the area a second time, it had difficulty selling through the level, but ultimately sold below our area (High of the price bar was clearly below the level). Once that happened, the area became a potential area of Resistance, price came back to the new level of Resistance, and it’s first test was rejected almost immediately. Finally, during all of this an important area of Resistance was formed at the red arrow. Price tested this area several times and was unable to break through this area (Low of price bar was not able to make it above the Resistance).
The next part of the day we are reviewing contains multiple areas, so on the image we have given each arrow a name and will discuss each based on their name in the following list:
- Support #1: This area of Support occurred while price was trying to break the Support from Example #3. You will notice that when price first tested this area, price was unable to break it (High was not less than the area), but the Low of the bar was several ticks below the exact level of Support. It wasn’t until 9 bars later that the High was less than the area. Once that occurred, this level of Support became a level of Resistance where price was continually rejected (also note how about 6 highs were within 1 tick of this new level of Resistance).
- Support #2: This area of Support formed while price was trying to break through Support #1 (when it was acting as Resistance). This area was not touched by the market until Support #4 was formed and since Support #4 was formed while this area was being tested (along with the logic in Support #4) this should be a good indication to us that Support#4 is going to be a relatively strong area.
- Resistance #1: This area was formed several ticks below the Opening Range Pivot Point, so we can consider the Resistance area as the area from the green Resistance #1 (line) all the way up to the Pivot Point (white line). If we did not view this Resistance area in this way, you will notice that in just a few bars the Low of the price bar was above the green Resistance #1 line, but it was still below the Pivot Point (white line). Price tested the Resistance area, and even “chopped” around the area for several bars, but each time it tried to break the Pivot Point (white line) it was rejected.
- Support #3: This area was put into place after price was rejected from Resistance #1 (for the second time). You will notice that as price tests this area of Support, it is immediately rejected and then tests the Resistance #1 green line and is also immediately rejected. After price is rejected, from both levels, price consolidates into a very small range for about 3 bars and then breaks to the down side where Support #4 is created.
- Support #4: This area is similar to Resistance #1 in that this area was several ticks away from the Opening Range Pivot Point S1, so we can say the area of Support is from the Support #4 red line to the S1 (blue line). You will notice that price tested this area several times, and even “chopped” sideways in the area, but was never able to break this level.