3/1/10: How to Determine Where the Real Support and Resistance is Everyday

Understanding support and resistance levels is an extremely important skill in any market, and it's absolutely critical if you plan on trading the S&P and Nasdaq E-Mini markets. Professional Floor Traders are aware of an entire range of major and minor support and resistance levels before the market opens each day. They also know how to calculate new levels as the trading day progresses.

Knowing where the market may turn gives you an effective road map to guide you through the day.

Most traders calculate support and resistance levels incorrectly, and to make their job even harder, they generally don't know how to trade around them. Many traders will use an old high or an old low and assume they've found support or resistance. That just doesn't work. Think about it for a moment. If the market always stopped at old highs we could never have an up trending market, and if the market always stopped at old lows we couldn't have a down trending market.

These Are the Same Numbers Pro Traders Use Every Morning

Let's face it; we all want to catch the big trending days, days when the S&P moves 15 or 20 points without looking back. Unfortunately those big trending days just don't happen that often. Most days the market doesn't trend very much in either direction, instead it will move between known support and resistance levels.

Knowing the location of these price levels is important, but knowing how to trade around them can be the difference between success and failure. One of the simplest ways to do technical analysis is by using the pivot points. This method has been around for years and is described below:

A pivot point is approximately the center of today's price range. From there, calculate three different sets of highs and lows.
These pivots are then potential support and resistance, when prices have gone outside the Value Area.
 
            Pivot Point = (High + Low + Close) /3
            #1 high pivot = Pivot Point + (Pivot Point - Low)
            #1 low pivot = Pivot Point - (High - Pivot Point)
            #2 high pivot = Pivot Point + 2 (Pivot Point - Low)
            #2 low pivot = Pivot Point - 2 (High - Pivot Point)
            #3 high pivot = High + 2 (Pivot Point - Low)
            #3 low pivot = Low - 2 (High - Pivot Point)

This is Easy to Do By Hand Everyday, After the Market Closes, So You are Ready for the Next Trading Day

We do not use the pivot # for trading, only to determine the "sets" of pivots.  We do not use the #1 high pivot as support, if the market opens or trades above it, but use them as "envelopes".  Lets say the market opens above the #1 high, we'll look at the #1 low for support and the #2 high for resistance.

Generally, it seems that the #1 pivots work the best over time.  If the market gaps over the #1 pivot high, you'll have a #2 and #3 to work with.  You can either use limit orders to buy or sell at these pivots and use a money stop, or wait for the pivot to "hold" the market.  If the pivot "holds" the market, trade an engulfment, doji-star, tail or whatever you see, which is a more conservative entry.

How the Open Can Make or Break Your Day

As we all know, starting off with a winning trade at the beginning of the day gives you a confidence level that can propel you to an extremely successful trading day.

It all starts with your first trade of the day, and this method will show you how to get on the right side of the market minutes after the open.

The Open is actually one of the best times of day to trade if you know my special trick.

Markets Open in One of Three Ways

Balanced - if the market opens in balance many traders will stand aside looking for opportunities a little later in the trading session. This is the type of open many successful traders tend to stay away from. This open causes nothing but trouble for the average trader who tends to chase trends that may never materialize.

Out of Balance - to the Upside if the market opens out of balance to the upside, traders will look for a way to buy the market as soon as possible. This is the type of day where excellent trading opportunities can be found.

Out of Balance to the Downside - if the market opens out of balance to the downside floor traders will look for a way to sell the market as soon as possible.

"The people who succeed are the ones who remember they are angels in human form."

Good Advice for Traders (and anyone who wants anything).

Desire is the internal fire of motivation. Weak desire leads to weak results; strong desire translates dreams into reality.

Desire backed by a good plan and right action is the formula for success.

Some of your desires are conscious. Many of your desires are non conscious. You can recognize your non- conscious desires by what you manifest.

Your desires are moving you toward your mission or away from your mission.

Desire creates motivation, intention, passion, and focus. By consciously focusing on your desires you get what you focus on.

INTENTION + ATTENTION = MANIFESTATION

Affirmation — “Today I focus on what I want.”

Here's the LCVA FactSheet

Key Levels Video

Here's five trading rules that I agree with:

1. We're not interested in buying support on stocks with any type of news. We want to buy support when a stock is going down with the sector on a broad sell-off — and not because their CFO just got arrested. If you don't have access to a news wire just watch volume — when buying support long you don't want volume to be heavier than other stocks in its sector (the exact opposite of what you want when buying long break-out and looking for heavy volume to confirm the break-out).

2. Everything we note on the daily chart can be applied to the intraday chart. For example if a stock has support at 50 and has sold off from being at 60 in 3 days it has a better chance of finally bouncing with extreme oversold readings, coming down vertically. This is exactly what we talk about in terms of buying support on an intraday chart when we talk about not buying the base (buying break of base only applies to break-out longs and break-down shorts, the exact opposite of what you do in support longs and resistance shorts). Again, if you have no idea what we're talking about shoot us an email and we'll forward you some old newsletters explaining this in detail (and with hand-drawn charts).

3. The more oversold the market, the more interested we are in buying support from daily triggers. In a neutral market we look to buy support near alert levels on the intraday chart (especially the 20 EMA on the 5 minute chart).

4. The intraday chart is like a microcosm of the daily chart. Trade when the two come together (oversold daily coming into support meets up with oversold intraday coming into daily support).

5. And lastly, unless you're a veteran who really knows what you're doing (i.e., professional trader making income enough to support family for at least the last 5 years) then only buy on reversal from support with a stop just under the support against which you bought or a defined stop under support but still small enough not to ruin your day.