This support and resistance trading strategy works consistently in today’s markets whether you’re trading stocks, Forex or futures. In this video I’ll demonstrate how to draw support and resistance lines that make excellent buying and profit-taking levels.
Support levels are used by technical analysts as one of the primary methods for determining where to buy and where to take profits in the financial markets.
There are tools available such as:
- Support and resistance calculators.
- Stock support and resistance websites.
- Support and resistance pdfs.
… and those tools can be great, but it’s best to learn how to draw support and resistance lines for yourself.
What are your favorite tool for support and resistance lines? Enter your answer in the COMMENTS section at the bottom of this page.
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VIDEO TRANSCRIPT:
Hey welcome to this video on Support and Resistance Trading Strategy. This is Barry Burns with Top Dog Trading, and have you ever wondered how to determine when the market will stop moving in one direction or another. Or whether they will continue to move, when it will bounce, etc.
Support and resistance lines can definitely help you with that and today I am going to show you a little bit beyond the basics. So we are going to a few different details, that will help you to understand not only how to apply these but why they work. That there’s an actual reason they work. I call market logic.
GETTING STARTED WITH A GOOD SUPPORT AND RESISTANCE TRADING STRATEGY
So first of all, here we have an intraday chart. And I am going to apply what are called floor trader pivots for our first support and resistance trading strategy. So there we go and these floor trader pivots, I consider to be very very good and important support and resistance lines. So that makes the first question why do they work? They work because a lot of people use them. That’s the market logic if you will.
There’s a lot of things out there, people will teach you saying, ‘oh trade this average moving crossover, trade this, trade that.’ And that’s all fine but you should always ask what, but why does it work. What’s the market logic, in other words, when I talk about market logic, I am saying the market participants are the ones who move the market up, move the market down. And they buy, they sell, they get excited. So what about the strategy that you are being taught would actually cause or reflect what the market participants are doing, people are actually doing buying and selling. Because that’s what creates tops and bottoms and little peaks and valleys.
WHY THIS SUPPORT AND RESISTANCE INDICATOR WORKS SO WELL
The reason that floor traders work is because they have been used for many many years, and a lot of people use them. So some people say to me, yeah but that support and resistance trading strategy is just a self-fulfilling prophecy. And my answer to that is, well what better reason for them to work. Of course they are self-fulfilling prophecy. That’s why they work. Don’t diminish that. Actually put an exclamation point next to that. That’s why everything works in the market, is because people are buying or selling. And so if a lot of people are looking at something, it’s more likely to have an effect on the markets.
SUPPORT AND RESISTANCE CALCULATOR
First of all I consider this a very very good tool, using support resistance because the numbers are static. In other words, the numbers are what the numbers are, there’s a mathematical formula, you can find a support and resistance calculator for floor trader pivots on the internet. And that mathematical formula produces solid numbers. So these numbers are going to be the same numbers everyone sees. So right here that’s the pivot point or this central pivot. And everyone who uses the standard formula at least is going to have that same number. That’s why this is such a great support and resistance trading strategy.
Yesterday’s close, there is yesterday’s close. And that’s going to be the same for everybody. That’s very very important. Yesterday’s low, that another just rock solid number. The low is what the low is. And you can check the exchange websites and you can get that number, if you need the official number. Support level 1, that is again a solid number, it’s not going to be different for different people, it’s going to be the same number for everybody. So therefore market participants will look at that and it will have an effect.
WHAT’S THE FORMULA FOR FLOOR TRADER PIVOTS?
Since creating this video and article, many traders have written and asked me for the mathematical formula for Floor Trader Pivots. So I came back to add it to this post. Here’s the one I use (the classic or traditional formula):
PP = (H + L + C) / 3
R1 = 2 * PP – L
S1 = 2 * PP – H
R2 = PP + RANGE
S2 = PP – RANGE
R3 = PP + RANGE * 2
S3 = PP – RANGE * 2
R4 = PP + RANGE * 3
S4 = PP – RANGE * 3
HOW TO DRAW SUPPORT AND RESISTANCE LINES
And then we have what’s called the mid pivots. So this is halfway between pivot point and S1. And I use those as well. Not everybody uses those now, I’ll be clear about that. I find them very helpful. So these type of numbers are very important. You just lay them over a chart and away you go. Alright, now that’s great. Let’s talk about another type of support resistance level, to put on top of this one. Because what we’re talking about today are clusters of support resistance.
Another common support and resistance calculator used is Fibonacci retracement levels. Many traders ask me how to draw support and resistance lines for Fibonacci. I would just draw from this high here to that low there. And this measures how far the market retraces back to the original points. So in this case, we are measuring an impulse move from this high, high of the morning to the lowest low of the morning before lunch time. And so that’s it. And then it draws these percentage retracements. How far does it retrace, retrace 0% to 0. 23.6%, 38, 50, etc… Now Fibonacci levels are also great because again a lot of people use them. However they are not as reliable a floor trader pivots. Why?
WHICH IS BETTER: FLOOR TRADER PIVOTS OR FIBONACCI LEVELS?
Because floor trader pivots are solid numbers for the day and everybody has the same numbers, they are a better support and resistance trading strategy. Fibonacci numbers are not going to be the same for everybody. Why? Because it depends on which highs and lows they use for drawing the Fibonacci retracements. So somebody might do it like I did here. Another person might do it from, oh say, here to here. Another person might draw it from a bigger term chart. Maybe a 5 minute chart, maybe a 20 minute chart, maybe a daily chart. A 60 minute chart. 30 minute chart. And so they will get different levels. And for that reason, they’re not as much of a self-fulfilling prophecy. That’s exactly why so many people ask me how to draw support and resistance lines when it comes to Fibonacci.
Here’s the best of both worlds: We draw both of them on here, and then we look for clusters. Clusters are where you get these levels coming together. Here we have yesterday’s low and the 23.6. The market came into there and here is a more significant one. 38.2 And the mid pivot. The market putting both of its little highs there. Now the market came down again through S1, came down to retest this low here.
HERE’S THE KEY!
When I went back up, now this is the key. How would we determine whether it’s going to hold S1, or not. Well it doesn’t really hold S1, it goes all the way back up here, it acknowledges it right. But it really goes higher than after acknowledging it. And it comes back up to the, what, cluster. Cluster between yesterday’s low and the 23.6 Fibonacci. By the way, lot of people don’t use this percentage. I highly recommend you do. And so now, this cluster works. Twice.
Why do clusters work? Because a lot of people talk about clusters, I am certainly not the only one who talks about that, and I certainly did not invent them. The reason that clusters work, again the market logic is that just like you’ll have lot of people looking at the floor trader pivots, and then you’ll have other people. Some people use them, some people don’t. But a lot of people use them. And then there’s a lot of people use Fibonacci. Some do, some don’t.
What you’re doing is, when you get a cluster, the market logic is to why they work, is you have two groups of people. Some are looking at the floor trader pivots, who’re yesterday’s high and low for example. It’s not really a floor trader pivot. It’s just yesterday’s low. A ton of people look at that. And then you also have another group of people, market participants who are watching the 23.6 Fibonacci ratio. So it creates more market participants watching that level and responding to it. They have that on their charts as a support resistance line. Therefore they will respond to it by either buying or selling or taking profits. The whole reason that clusters are such a great support and resistance trading strategy is because you have more people watching it and responding to it. And that’s the logic as to why these levels work.
SEE FOR YOURSELF IF THIS SUPPORT AND RESISTANCE TRADING STRATEGY WORKS FOR YOU
So hey, try it. Draw these support and resistance lines on a chart, look at a few charts, use it with other tools that you are using, and see what you think. See if you think this could be a good addition to your trading.
What are your favorite tool for support and resistance lines?
Enter your answer in the COMMENTS section at the bottom of this page.
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