Frequently, most novice traders are focused primarily on where they should open a position. At first glance, it seems quite reasonable action, because the process of getting money on the stock exchange associates with opening positions. But is it really so?
In fact, a good deal - is the result of a competent analysis of the market. The deal, which comes out of nowhere and has basically no causality is, simply, intuitive. Making this kind of deal is practically impossible to achieve a stable positive results in the long term.
At the heart of the trading system is a process that I call «CAP». It includes three elements:
C - Collection of information (what we see on the graph).
A - Analysis of market (where is the price relating to the volume; what do the recent events tell us about)
P - Planning (which way further movement will probably go )
At the same time, information gathering is the first and most important stage of the whole analytical process. The main objective of this phase aims to identify significant levels of support / resistance. This is the foundation, as knowing where the key levels are, we can not only determine the future direction of the market, but also find the best location to open / close trading positions.
The levels of support / resistance is an extremely important issue, which today's article is dedicated to.
What are the key levels? Personally, I identify 7 the most powerful support / resistance levels:
1) Maximum volume of the week
This is the level (specific price or range of prices) where most deals of the current week were made.
2) Level of fixing point ("fixing")
This is the appearance of a significant volume, followed by a very sharp price movement in the opposite direction. Such a sharp movement is called "reaction to the volume". The observed response of the price appears primarily due to the fact, that those positions that were opened by traders in the early movement, are beginning to close. Level of fixing point appears usually in the final stages of the trend movement, during climax, it is always much easier to close a big deal when there’s a panic in the market, high liquidity as well as when most traders are trying to open trading positions at unreasonable prices.
The volume does not have to be point, for example, cluster emission on the hourly chart. It may be a week-long accumulation. The main thing that a sharp move in the opposite direction was formed on the chart.
3) Boundaries of balance
The boundaries of balance are both cluster emissions, or the maximum volumes of the day, either "fixing", which outline a clear consolidation of the chart.
The boundaries of the classical balances are clearly visible also on the horizontal volume. This are empty non-volumetric areas where the rejection of the price occurs. Rejection tells us that market participants are not interested in the proposed prices. Typically, these zones are synchronized with point releases of volume on the chart.
Next, I'll talk more about subtle levels of support / resistance that I normally use on the hourly chart directly for finding an optimal entry point or partial closing of a position. I call these levels local. Local levels are also formed on the longer timeframes, they only occur much less frequently than on the hourly timeframe.
4) Local stop
These are the levels, that are very similar to the "fixing", but differ in the formation zone (they are usually formed at the start of the movement or within a pulse) as well as in the correction power (during local stop the correction is usually negligible, i.e. there is no explicit response to the volume). Following the resumption of the trend the local stop level is often tested.
5) Local correction
This is volumetric level, which occurs in the medium-term trend in the final stage of correction. Local correction is a good mirror level in the long term, ie in case of breakdown resistance becomes support, and the support becomes resistance.
6) Local push
This is the positioning of the volume in the direction of the previous movement. For example, the market began to grow, accumulated and positioned volume to buy, that is, upward movement continued. Often it is said that traders support the current movement. Accordingly, Local push with a high probability will defend itself during the test.
Local push may appear as at the start of the movement, as well as in the breakdown of the other more strategic levels, for example, when out of balance.
7) Local accumulation
Local accumulation is a dense consolidation on the graph (synchronization of the maximum amount on the horizontal scale with cluster emission). In the Local accumulation there’s no possibility to identify the boundaries of the consolidation with clusters.
Without an understanding of what is support and resistance levels it is impossible to move on - it is impossible to analyze the market and plan, to determine entry and exit points.
I hope that after reading this article, your idea about the levels of support / resistance has changed, and now, instead of randomly scattered volume areas on the chart, you started to see a more clear structure. Now you have the knowledge on which you can build your future trading.
In order to understand this lesson better, I recommend you to read the article several times and try to find all of these levels on the chart. Analyze how the market reacts at these levels. I'm sure you will do a lot of interesting discoveries for yourself. Cheers!