Trading S/R Areas

[markl67 10]

After having thrown away every indicator from charts many months ago and deciding to strictly trade ranges I have a question for more experienced traders. Would you share how you trade around s/r levels? My main problem seems to be setting stops. For example, resistance is at lets say 1100 on the ES. I set an order to buy just above 1100 on what appears to be an up-trending move and get filled, only to get the usual head fake and watch price decline below 1100 and continue to decline, then get stopped out only to watch price reverse in my direction. And, of course, if I hadn't put on the order at all then price would blast thru without me on board, etc.

 

I know there's no cookie cutter answer or solution, but any suggestions are welcome - thanks.

[Dinerotrader 10]

After having thrown away every indicator from charts many months ago and deciding to strictly trade ranges I have a question for more experienced traders. Would you share how you trade around s/r levels? My main problem seems to be setting stops. For example, resistance is at lets say 1100 on the ES. I set an order to buy just above 1100 on what appears to be an up-trending move and get filled, only to get the usual head fake and watch price decline below 1100 and continue to decline, then get stopped out only to watch price reverse in my direction. And, of course, if I hadn't put on the order at all then price would blast thru without me on board, etc.

 

I know there's no cookie cutter answer or solution, but any suggestions are welcome - thanks.

 

Couple questions/thoughts.

 

What S/R levels are you using to trade with on what time frame chart. S/R can be determined using weekly, daily, minute, and tick charts and then the question is what time frame chart are you using to trade one of those levels.

 

An annotated chart of a trade you took would help also to see what you are doing, how the S/R was determined, where the trade was entered. Just post a couple charts from the last day you traded. The more information you give the easier it is for other to give useful help.

 

There is some great threads on TL about S/R trading but I'd direct to different places based on how exactly you are trying to trade it.

[brownsfan019 17]

For me, stops have to make sense - that is, they have to be placed somewhere that is not likely to be hit easily on little gyrations. If you are using arbitrary stop levels (based on a fixed loss), then that's asking for trouble esp on the ES.

 

Your comment is a little odd too - you say you are buying resistance? I would normally buy support and sell resistance, so not sure what you mean there.

 

Stops are there to get you out when the market has proven you to be wrong, not just a random number you may have picked out of the air. So if you are buying support, your stop needs to be below that level and above when selling resistance.

[markl67 10]

Thanks - hopefully attachment works. (5 minute chart from yesterday)

 

Note at 1100 how price breaks thru but then quickly retreats. I was buying the breakout of resistance with target at next level of 1101.5. I'm determining the levels by scrolling backwards to view what price did previously at these levels and picking out what appear to be key levels.

[brownsfan019 17]

Thanks - hopefully attachment works. (5 minute chart from yesterday)

 

Note at 1100 how price breaks thru but then quickly retreats. I was buying the breakout of resistance with target at next level of 1101.5. I'm determining the levels by scrolling backwards to view what price did previously at these levels and picking out what appear to be key levels.

 

Well, price did exactly what you thought - it retraced on resistance. It may not have been a big retrace, but price did find a reason to test the level and then retreat.

 

So really you are talking about buying a break of a level, which is fine and very tradable. Exactly how you do it will take testing on your own to see what you are comfortable with. It's easy hindsight trading, but that looks like a pretty nice pullback to your 98.50 level.

 

It's also a function of the market you are trading - the ES is excellent at finding some loose stops and then resuming the move. While you test the ES, also test some other different markets such as Oil, Gold, Bonds, and the Euro. Take a look and see if your levels are better respected there.

[SIUYA 11]

what you did was buy the break out. You did not buy support.

buying support=>: the instrument is breaking to the upside, you determine the trend is up.

Watch for retracements of the rally to support eg; the last swing high and place a buy order here.

You will most likely not pick the exact bottom, it might fall a little first, but if the trend holds the rally will continue. Also not everything retraces and you will moss some orders getting set and hence some large moves....such is life.

 

The rest of the equation is then for how long you will run it.

 

Buying breaks and buying support can be very different.

[AmCan1 10]

Markl67,

 

I used to trade in a similar fashion. I also used to love to fade when the market got close to obvious resistance. It worked great, until it didn't. What I have learned is that it is better to not do what the herd is doing and to try to trade original ideas and setups. Who wasn't trying to buy the breakout at 1100 on the ES? Well, I wasn't for one, but that's not my point. I rather trade for high percentage targets based on reliable trade setups. But then again, that's just me and that's what makes a market.

 

Sometimes I get setups based on my trade method that seem very awkward. They either bump up against obvious s/r levels or I have to break through one to get to my calculated target. At first this was very difficult for me and it was easy to feel like that cliched to death, proverbial deer caught in the headlights of an oncoming car. Analysis paralysis will kill your trading. Still though, one must respect s/r levels, to some extent.

 

I came up with hard and fast rules that have since worked very well for me. For one, if my entry is close to an s/r, I'll make a minor adjustment to get around it. I'm talking 1 to 3 ticks only. The reason is that headfakes happen all the time, and even an adjustement can get you triggered into a trade and still wind up losing, and with a slightly bigger loss, due to the adjustment. In the end, I came to realize that s/r levels are broken all the time. If not, there would only be sideways markets, right? So the easiest answer for me was this: Trade my plan. If I have a setup that forces a break of an s/r, I'm going to trust my system and take the trade. I know that my system puts the odds in my favor on every trade and it gives me a winning edge in the market. If 'this' trade loses, so what. 35% of all my trades lose anyway. I have to get through those to get to my 65% winners. If I am scared of a trade because of an s/r level, I will get hit by that oncoming car.

 

Who knows if any trade will win or lose? No one. We have no control over that. All we can do is put the odds in our favor on every trade, trade our system as intended, and control our risk. That's it. Luckily, that's enough to prosper at this difficult business. So I guess that's a long winded way of saying, try something different.

[markl67 10]

Ok - thanks for the replies everyone. Yes, I must change my approach. Trading breakouts fuels my lack of patience and my need to be right.

[boomerangas 10]

Mark, as from expirience from the trading just es for a 7+ years i could say you my truth. Don't even look at the indicators, keep in mind s/r BUT trade context. In 80% of the time, and it is THEIR edge, sup/res will be violated. Let's say price is rising and is flirting with a 1100 level currently trading at 1099. I could ensure you that this level would be violated and maybe not from the very first chance but from the second one. You could ask why? Because at the 1101-1102 there are large quantities of retail stops, and your too and this level must be violated by professionals to unload long inventory, which was accumulated from the ~1160 ot 1180 level to shorts covering. That's true and every professional knows that. Intraday sup/res is very often just a lot of stops and are used for the inventory unloading. Basically it's very often just a last phase of the intraday trend. My strategy would be selling on the resistance violation at ~1103 and stop would be at 1105-06 because it's more probably than not that the resistance would be retested or there was just a fake break out to unload longs.

[AmCan1 10]

I think Boomerangas makes an excellent point. I would also add that if the price comes up, after failing on three attempts, the 4th attempt might give you better odds that the level will finally be broken and the uptrend will resume. Of course, nothing is 100% certain but I like those odds most of the time.

[bathrobe 10]

After having thrown away every indicator from charts many months ago and deciding to strictly trade ranges I have a question for more experienced traders. Would you share how you trade around s/r levels? My main problem seems to be setting stops. For example, resistance is at lets say 1100 on the ES. I set an order to buy just above 1100 on what appears to be an up-trending move and get filled, only to get the usual head fake and watch price decline below 1100 and continue to decline, then get stopped out only to watch price reverse in my direction. And, of course, if I hadn't put on the order at all then price would blast thru without me on board, etc.

 

I know there's no cookie cutter answer or solution, but any suggestions are welcome - thanks.

 

hello, I will add my thoughts but you should know first I have been trading the es for a long time and have lost a great deal of money with different strats in the beginning.

 

I look for s/r to be rejected, I never trade with the trend in the es (I think this is a formula for disaster) and after toying around with different stops for years I do not use fixed stops any longer. Many will say I am crazy for this. I exit at a point when I have been proven wrong this may be 3 ticks back or 4 points it depends on the trade and the amount of risk I am willing to take.

 

I would not recommend not using stops if you are not ready but enter a trade and have an idea as to where you are no longer right, the es has some very strong levels that are tagged and rejected every day and provide awesome opportunities, but a 1,2,3 point stop for all trades is not the correct way of going about this

 

When figuring S/R remember whatever arbitrary time period you choose to plot price and S/R is just a representation of the ongoing auction, I would not get too hung up on time period or the levels the time period produces

 

I do use a disaster stop for power outages and what not

[AmCan1 10]

Thanks for that bathrobe. I can see what you mean with the ES. I have approached the ES in the past, with a similar method/way of trading. Personally, I don't really like the ES. I rather trade the other eminis. So many times I have hit my projected target, only to wait in a long cue to get filled. Then the price backs off 3 or 4 ticks, and now what? I hate that dilemma. It is such a thick market. I don't like the 1/4 point ticks either because of what I just said. That's not to say it can't be accounted for or traded profitably. It obviously can be. I just don't want to deal with that extra layer of complexity. I could trade other markets and get filled easier and with less slippage. That's just my view and I'm sure there are many who will disagree.

Edited June 17, 2010 by AmCan1
typo

[markl67 10]

Thanks for that bathrobe. I can see what you mean with the ES. I have approached the ES in the past, with a similar method/way of trading. Personally, I don't really like the ES. I rather trade the other eminis. So many times I have hit my projected target, only to wait in a long cue to get filled. Then the price backs off 3 or 4 ticks, and now what? I hate that dilemma. It is such a thick market. I don't like the 1/4 point ticks either because of what I just said. That's not to say it can't be accounted for or traded profitably. It obviously can be. I just don't want to deal with that extra layer of complexity. I could trade other markets and get filled easier and with less slippage. That's just my view and I'm sure there are many who will disagree.

 

Yep, I have seen the same thing on the ES which surprises me given the extreme volume. Like today, I had an order to buy at 1102.5 (prior low) and I couldn't get filled on 1 contract after several failed "touches" so I moved up 1 tick and got filled. But on the Russell with far less volume I seem to get filled almost instantly most of the time...

[bathrobe 10]

fwiw I use limit at bid or limit at ask ordes

[AmCan1 10]

Yeah, I think the Russell is much easier to trade. Especially due to the 1/10th of a point ticks vs the 1/4 point ticks. Bathrobe has a good idea and I'm sure that helps elliminate some slippage. My bigger problem is exiting a trade, though, not entering. I hit my target, I want to get out at that target. I worked hard for it, right? If I get a 1/4 point of slippage due to the way the ES normally trades, that represents too large of a bite out of my total profit objective. Over time, it really adds up. Especially when a 1 tick slip turns into a 2, 3 or 4 ticks of slip. My thoughts are, "I don't need to put up with that." Let the big boys battle it out. On paper, my system works great on ES charts. In real life, the issues we've been discussing, dramatically impact the results. For me, it's just not worth it.

[jashanno 10]

After having thrown away every indicator from charts many months ago and deciding to strictly trade ranges I have a question for more experienced traders. Would you share how you trade around s/r levels? My main problem seems to be setting stops. For example, resistance is at lets say 1100 on the ES. I set an order to buy just above 1100 on what appears to be an up-trending move and get filled, only to get the usual head fake and watch price decline below 1100 and continue to decline, then get stopped out only to watch price reverse in my direction. And, of course, if I hadn't put on the order at all then price would blast thru without me on board, etc.

 

I know there's no cookie cutter answer or solution, but any suggestions are welcome - thanks.

 

Jonbig04 trades breakouts of s/r levels and he uses tiny stops. Go to his journal and look at his trades. Basically if you are trading a breakout and it doesn't move in your favor immediately then you are wrong and need to get out even if you are in the green. A breakout of a s/r level should make a strong move with almost no heat and no pause at all. You have to be able to tell when it's breaking out v.s. when it's testing s/r. If it looks like it's breaking out and then you find out it's just testing then you need to bail.

 

Now if you are entering on a breakout and find that you are constantly getting stopped out then what does that tell you? It tells me that a lot of times when support becomes resistance (which is what a breakout is) it will test it at least one more time.

 

So what do you do? I would let it break out initially and then look for an entry when it retraces to test the old support/new resistance area.

 

I will use your example...

 

1100 ES you are buying at resistance. I would wait on the resistance to break... ok it does now it is trading at 1110. I would anticipate the market coming back and testing 1100 again and probably going a little below it. Ok, now the market is at 1099.00...1098.50...1098.00... now put in your limit order to buy at 1100.00. You want it to be far enough away so that it's not filled by noise but instead a direction change but close enough to give you a nice small stop. Sometimes you can move the limit order with the market (I guess it's the same idea as a trailing stop) because the s/r levels will bend a bit sometimes.

 

Again, with this method you still have to be able to tell if old support became new resistance or was it a test w/ a little bit of a bend (i.e. taking out stops or a 2b) because there's a different approach between the two (at least for me).

 

You mentioned... "And, of course, if I hadn't put on the order at all then price would blast thru without me on board, etc.". If this tilts you then I would lean towards the way JonBig04 plays breakouts because if you do what I suggested you will find yourself waiting for the retracement and it never comes or price gets to 1110.25 and reverses without you on board.

[boomerangas 10]

Personally myself have gained some edge on es these days and became profitable after i forgot following herd and to trade the trend. Here is my 2c what one should do to be profitable on es:

 

1. Throw away all the time-based charts, instead use fixed-ratio range, renko, volume or tick charts. They eliminate 70% of the noise.

2. Throw away sup/res from traditional charts. Instead use MP levels, it works really really great especially when Europeans are trading. They are good enough at the local usa time too but you can get false breakouts more often.

3. Don't day trade till 17:15 it will kill you. Instead, day trade, but leave position overnight if there is some reason to do it.

4. I'm heavily using worst-recognized techniques as the martingale but it just works fine for me, so you must have at least 10000 bucks in your account to leave position overnight and to add to the losing position. You can research historical data, and you'll see that there is 95% of time when next day's bar overlaps previous day bar by at least 3-5 full points. Here is a statistical edge if you are not correct with you entry. 1 basic rule - never martingale downtrend market there is always some chances to get a day like May 6, 2001/09/11 and so on. 2 basic rule - never martingale market till 17:02 if you are not correct with the entry and shorts are covering. Just try to add when everyone got margin call. You could see, how locals will correct this market in next 13 minutes till the close.

5. Try to learn not sup/res but where do big players want to see this market in next few days and trade just this direction, inventory really matters and where someone need to unload this inventory. These principles are very well desribed in wyckoff studies.

It seems thats all really will be happy if it helps in your trading.

[AmCan1 10]

Thanks boomeranga for your insights. I appreciate it. Your style of trading is a lot different than mine but it makes a lot of sense and I find your approach very interesting. Can you please explain what martingaling is? I believe I know and I guess it's just a google click away but if you have the time for a brief explanation that would be great. I'm feeling the urge to revisit the Wyckoff materials too.

[markl67 10]

Personally myself have gained some edge on es these days and became profitable after i forgot following herd and to trade the trend. Here is my 2c what one should do to be profitable on es:

 

1. Throw away all the time-based charts, instead use fixed-ratio range, renko, volume or tick charts. They eliminate 70% of the noise.

2. Throw away sup/res from traditional charts. Instead use MP levels, it works really really great especially when Europeans are trading. They are good enough at the local usa time too but you can get false breakouts more often.

3. Don't day trade till 17:15 it will kill you. Instead, day trade, but leave position overnight if there is some reason to do it.

4. I'm heavily using worst-recognized techniques as the martingale but it just works fine for me, so you must have at least 10000 bucks in your account to leave position overnight and to add to the losing position. You can research historical data, and you'll see that there is 95% of time when next day's bar overlaps previous day bar by at least 3-5 full points. Here is a statistical edge if you are not correct with you entry. 1 basic rule - never martingale downtrend market there is always some chances to get a day like May 6, 2001/09/11 and so on. 2 basic rule - never martingale market till 17:02 if you are not correct with the entry and shorts are covering. Just try to add when everyone got margin call. You could see, how locals will correct this market in next 13 minutes till the close.

5. Try to learn not sup/res but where do big players want to see this market in next few days and trade just this direction, inventory really matters and where someone need to unload this inventory. These principles are very well desribed in wyckoff studies.

It seems thats all really will be happy if it helps in your trading.

 

Yes, a little more explanation would be appreciated - I can't picture exactly what you're describing, but I do like the 95% overlap statistic...thanks.

[wrbtrader 10]

Yep, I have seen the same thing on the ES which surprises me given the extreme volume. Like today, I had an order to buy at 1102.5 (prior low) and I couldn't get filled on 1 contract after several failed "touches" so I moved up 1 tick and got filled. But on the Russell with far less volume I seem to get filled almost instantly most of the time...

 

You must backtest your method on all futures markets to determine which specific market your method produces the best results. With that data...you can determine which trading instrument to trade. Thus, it's possible your method is more suitable for another trading instrument in comparison to the Emini ES. In addition, the goal is to be profitable. Therefore, it's not uncommon that your backtest results will reveal that you should be trading another trading instrument that's not your preferred market for trading (e.g. your method may perform better on Oil CL futures in comparison to S&P 500 Emini ES futures).

 

My point is that too many newbie traders follow the herd via getting married to a particular trading instrument without backtesting to determine if their method will perform better on another trading instrument in comparison to the Emini ES.

 

Never get married to a particular trading instrument because if you're trading something you shouldn't be trading...the divorce will be ugly (e.g. account blow up, not reaching profit goals). In fact, the few profitable traders I've met and watch trade in person...they all are trading something that's not at the top of their list of favorites...they are trading something because it generates the most profits along with allowing them to reach their profit goals.

[AmCan1 10]

I think Wrbtrader makes an excellent point. Backtesting plays an essential role to success but you also have to understand its limitations. It is great for learning your method, going through the internal changes you inevitably go through as you assimilate experiencing the wins, losses, and how the two relate to the overall growth of the equity curve. It reinforces discipline, helps refine your trade rules, and gives you a broader vision of your market, etc. You also should have some way to read all the backtested trade data and that can be real tricky. There's great stuff in there so getting proficient at excel is important too, I think. There's some good tools out there that are worth the investment many times over.

 

But how do you know you can execute accurately what you are backtesting? It's one thing to post trades in the comfort of a static, non-moving chart. It's quite another thing to do it in real life. This is where I believe, the value of sim trading comes in. Prove you can execute your plan and do it a whole bunch of times until you can do it on 'auto-pilot.' It won't be perfect and should not be confused with real trading. But it will help you practice the physical moves you need to make to execute your trades and it will also sharpen your fast decision making skills. Prove you can be profitable in a sim account and continue to track your trades, adding them to your backtest results.

 

If you can maintain the same winning edge, and execute your plan without making mistakes, you have gone a long way in laying the foundation for your trade business. You're probably going to be in the best position to succeed if you have learned your lessons well from the above excercise. Through all this, you might just discover that you're better off in a different market than your initial thought. That's what has worked for me anyway and going through the above steps turned my trading around in a big way.

[SIUYA 11]

When it comes to backtesting - there is backtesting and there is backtesting

It seems to me that a lot of people try and back test using a computer and then try and manually trade

 

If you can accurately and properly backtest an automated system, and you know the data is accurate (this is tough enough), the system very accurately reflects reality (slipppage etc) and you can go back far enough with this data, then ideally just have an automated system going..... not impossible

Otherwise

the backtesting really is a walk forward testing with market replay data whereby you are trying to train your mind, and work out what does work (without the binary inputs and details of a computerised system) via setups, context, triggers, trade management etc being slightly different each time.

Both to me are very different and each have their own issues.

 

(probably a slight deviation from the original thread, and a bit of a rant - so apologies - its been a long week)

[markl67 10]

You must backtest your method on all futures markets to determine which specific market your method produces the best results. With that data...you can determine which trading instrument to trade. Thus, it's possible your method is more suitable for another trading instrument in comparison to the Emini ES. In addition, the goal is to be profitable. Therefore, it's not uncommon that your backtest results will reveal that you should be trading another trading instrument that's not your preferred market for trading (e.g. your method may perform better on Oil CL futures in comparison to S&P 500 Emini ES futures).

 

My point is that too many newbie traders follow the herd via getting married to a particular trading instrument without backtesting to determine if their method will perform better on another trading instrument in comparison to the Emini ES.

 

Never get married to a particular trading instrument because if you're trading something you shouldn't be trading...the divorce will be ugly (e.g. account blow up, not reaching profit goals). In fact, the few profitable traders I've met and watch trade in person...they all are trading something that's not at the top of their list of favorites...they are trading something because it generates the most profits along with allowing them to reach their profit goals.

 

Yep - thanks, I've recently found that out, for example backtesting has shown the ES reacts well fading the prior day highs and lows whereas the Russell - not so much, however, the Russell reacts better with the prior day close.

[AmCan1 10]

SIUYA makes a good point. I personally don't believe that automated backtesting is terribly useful in the context of what we are discussing though. You can not get a feel for your market and the dynamic relationship between the wins and losses and the equity curve, trade after trade unless you can live through those trades, one by one. To me, that is essential. I believe you have to set your charts up at some random date in the past, and begin clicking forward, looking for your trade setups at the right edge of the chart. As they setup and trigger in, record it in your spread sheet and manually build up a record of trades. To me, you gain SO MUCH from this excercise that there is just no way to duplicate the benefits in any other way. It's exactly how I turned my trading around. Is it a lot of work? Ahhh... Yeah! Harder to recoup lost trade capital though. And what you learn is priceless information.

[markl67 10]

SIUYA makes a good point. I personally don't believe that automated backtesting is terribly useful in the context of what we are discussing though. You can not get a feel for your market and the dynamic relationship between the wins and losses and the equity curve, trade after trade unless you can live through those trades, one by one. To me, that is essential. I believe you have to set your charts up at some random date in the past, and begin clicking forward, looking for your trade setups at the right edge of the chart. As they setup and trigger in, record it in your spread sheet and manually build up a record of trades. To me, you gain SO MUCH from this excercise that there is just no way to duplicate the benefits in any other way. It's exactly how I turned my trading around. Is it a lot of work? Ahhh... Yeah! Harder to recoup lost trade capital though. And what you learn is priceless information.

 

Yeah, I've been backtesting going back to Jan 4th various different strategies for weeks now - 8 to 10 hours a day. I feel like my eyes are gonna roll out of my head. I'm really hoping one of these days to actually find that edge...