You don’t have to have been trading too long to realize that a good portion of daily price action is random in nature. Having said that, why would a serious e-mini trader base his or her trading philosophy on a non-random measure? Because casual observation of a chart nearly always results in a trader noticing that there a various points on a chart where price action starts and stops. Obviously, there are some non-random elements to chart reading.
These non-random lines are support, resistance, and in some instances, floor trader pivots. Support/resistance lines form at points on a chart where supply and demand are in equilibrium. In the case of support, a price level will find support, or temporary equilibrium, at a certain level as price declines. It’s not uncommon to see some traders initiate long trades at a known support level, hoping for a “bounce” trade. Since this a counter trend type of trade, and entails trading against a known trend; I can’t recommend the “bounce” trade as a good strategy.
On the other hand, resistance is the exact opposite of support; resistance is a price level where price will stop, or find at least temporary equilibrium, as price rises. Traders use the same “bounce” trade at points of resistance, and I still don’t recommend the trade. Of course, my general philosophy, and also of most profitable traders is: Trade With the Trend.
Pivots points are predictive price levels based upon a formula: (this formula is the standard floor trader’s calculation methodology, there are other formulas for various different pivot point systems)
R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C) / 3
S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)
S= support levels
R= resistance levels
P= pivot points
H, L, C= high, low, and close
In my experience, pivot point trading can have days where it is precise and very accurate, and there are other days when they are completely irrelevant. The predictive nature of pivot points, combined with a mixed bag of success relegate them as important, but secondary to established support and resistance lines. Some would argue this point, but my experience is that known support/resistance lines are more accurate than predictive pivot points.
One of the questions I often field is: How do I know which pivot or support/resistance line will the price pause or reverse? The answer is a simple one; I don’t know which lines will be relevant on a given day. However, some observation of price movement, especially which lines are being used at stopping points, will give strong indications of that areas importance for the rest of the day. The point of this article is a simple one: One of the first things you should familiarize yourself with is the support and resistance present on any chart you are trading.
In summary we have defined support/resistance and pivot points. I have made personal observation of both and prefer support and resistance as primary. Except in unique situations, pivot points need solid confirmation to hold the weight of support and resistance. We have also discussed the difficulty in confirming which line the market will honor as price action fluctuates.
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