Confirmation vs. S/R
- Thread starter RocknRide
- Start date
1. Best to trade "price only".
2. If you feel that you MUST use "indicators", one is better than two. None is better than one.
3. "Confirmation"? HOGWASH! ANY action can be a fake-out... "one big day", "huge reversal", "a few days counter"... "volume spike or no".
Big following for "volume". My experience, (longer than many ETers have been on this planet), is that volume is at best, inconclusive.... not reliable. Years ago I deleted volume from my trade considerations.
you're welcome
. I PMed you. You have the right idea and this should help.To throw my perspective on the subject into the ring:
I use fibonacci retracements and extensions as suggestions for where future S/R will occur (I don't personally put a lot of faith in traditional S/R, e.g. swing highs/lows as entry points). Although I draw these lines several times during a trading session, I rarely enter blindly with a limit order at a line touch during a pullback.
I mostly use fib levels as a tool for objectively measuring the strength of a trend, pullback, extention or reversal. I also use them as targets when counter-trend trading (retracements) or when trend-trading (extensions).
Most of my trades are entered on stops after a price action setup (e.g. what you're calling confirmation I think), and I enter tight price-based exit stops immediately after entry. For only two setups will I enter blindly enter at a fib line... the first 23% retracement of a sharp reversal, or the 100% extension of the third leg of an old trend (I do the 2nd very rarely). I use very wide stops for both scenarios, as I want the market to prove me wrong first. The key is to be stubborn when you're right, without being stupid.
The first pullback after a sudden change of momentum is the best scenario I know of in trading... the distance the market has to move against you to prove you wrong is minimal, the distance it can travel in your direction is hypothetically unlimited (although you can't go wrong targeting the next major S/R level after a trend extension). However, the first pullback after a significant momentum shift can be very choppy. I can't tell you how many times I've entered on a price action setup only to be whipped out with a tight stop, just to see price go my way again (I usually re-enter, but now part of my profits have to pay for that loss).
I don't personally understand how guys can enter blindly at a S/R level and also use a tight stop. I always assume the market wants to find out what's on the other side of the S/R level, and only after it founds out there's a whole lot of nothing there (e.g. no selling/buying interest) does it tend to move in the expected direction. That's why I use wide stops when fading a pullback or extension. The extra price you theoretically pay with a wider stop is reimbursed by the extra profit you'll make if you were right (than if you waited for "confirmation"). Given the fact that you'll also experience less whipsaws, I believe the wide stop in these scenarios has greater expectancy than a tight stop, but only if you have the discipline to manually take yourself out at a small loss on the next retracement in your favor should the market prove you wrong (before the wide stop is hit).
In summary, I believe both entry techniques are valid and appropriate when used at the right time. Just like everthing in trading, it's all about context and experience with your edge.
I use fibonacci retracements and extensions as suggestions for where future S/R will occur (I don't personally put a lot of faith in traditional S/R, e.g. swing highs/lows as entry points). Although I draw these lines several times during a trading session, I rarely enter blindly with a limit order at a line touch during a pullback.
I mostly use fib levels as a tool for objectively measuring the strength of a trend, pullback, extention or reversal. I also use them as targets when counter-trend trading (retracements) or when trend-trading (extensions).
Most of my trades are entered on stops after a price action setup (e.g. what you're calling confirmation I think), and I enter tight price-based exit stops immediately after entry. For only two setups will I enter blindly enter at a fib line... the first 23% retracement of a sharp reversal, or the 100% extension of the third leg of an old trend (I do the 2nd very rarely). I use very wide stops for both scenarios, as I want the market to prove me wrong first. The key is to be stubborn when you're right, without being stupid.
The first pullback after a sudden change of momentum is the best scenario I know of in trading... the distance the market has to move against you to prove you wrong is minimal, the distance it can travel in your direction is hypothetically unlimited (although you can't go wrong targeting the next major S/R level after a trend extension). However, the first pullback after a significant momentum shift can be very choppy. I can't tell you how many times I've entered on a price action setup only to be whipped out with a tight stop, just to see price go my way again (I usually re-enter, but now part of my profits have to pay for that loss).
I don't personally understand how guys can enter blindly at a S/R level and also use a tight stop. I always assume the market wants to find out what's on the other side of the S/R level, and only after it founds out there's a whole lot of nothing there (e.g. no selling/buying interest) does it tend to move in the expected direction. That's why I use wide stops when fading a pullback or extension. The extra price you theoretically pay with a wider stop is reimbursed by the extra profit you'll make if you were right (than if you waited for "confirmation"). Given the fact that you'll also experience less whipsaws, I believe the wide stop in these scenarios has greater expectancy than a tight stop, but only if you have the discipline to manually take yourself out at a small loss on the next retracement in your favor should the market prove you wrong (before the wide stop is hit).
In summary, I believe both entry techniques are valid and appropriate when used at the right time. Just like everthing in trading, it's all about context and experience with your edge.
These conversations about support/resistance levels or zones are often general, confusing or less productive because most do not explain their source of the support/resistance nor show chart examples to any general discussion of their entry signal. Such is understandable due to the nature of EliteTrader.com (there's many threads like this in the past that developed into a psssing match as soon as traders begin posting details with chart examples).
My point is that there are dozens and dozens of different ways to determine so called key support/resistance and then more different ways of applying them (e.g. some look for reversals while others look for continuation while others use both). Next, throw in one key variable like "trading experience" and you'll see two traders doing something differently at the exact same support/resistance level or zone (e.g. take opposite trades, different entries, different initial stops, different trade management after entry).
If the above is true than that's what this thread is about and why you started it along with the fact you're applying whatever type of s/r you're using to the Nasdaq 100 Emini NQ futures.
* Do you need more experience to be patient so that you're not easily shaken out because you're you're often re-entering at the same price ?
* Your initial stop/loss too tight ?
Thus, maybe your real question isn't about about support/resistance. Maybe it's about patience, initial stop/loss management or re-entry signals.
Mark
Regarding "Indicators" there's a guy around here who writes very much like you and he said:
"While computers allow us all to track gobs of data and indicators, I believe their real value is in organizing the data and filtering out some of the noise. I'm a firm believer in working to make things simple. I wouldn't like to use a system for trading which contained more than "price + 2 indicators"... find the 2 you like best and execute well.
Speaking of Simplicity, an old timer once told me, "no more than 2 or 3 indicators" (for making trading decisions)... "preferably 2".
I believe that's good advice.
Price... I confess to trading off of price action "alone". Sort of. I do keep short term RSI and Stoch, but don't take signals from them. Rather, I use them as a filter. That is, don't buy when indicators in top part of their range pattern, don't sell when in the bottom part.
When the indicators get high or low into their ranges, I start looking for a price reason to make a trade. After all, our objective is not to be in tune with Stochastic, but rather in tune with price... is it not?"
OP, read Justin Mamis, "The Nature of Risk". It is pretty much a book written about your question.
I love what BSAM said..."the markets do the same thing every time". It's true! If they don't, you are being too picky or precise in how you are characterizing the market action.
WRBTrader comments = gold
You'd do well to develop and use a little statistical tip-off to use as your entry, such as a bar with a tail. Even better is to develop a feel for the pauses and timing of how the price acts in your zone of choice. Yesterday's high/low is a great place to start (heck, you could spend your whole career there).
Here's my mixture of crap and brilliance from today:
10:00 the price is holding steady around yesterday's low so I go long. 10:02 it's moving up so I add. 10:17 it's starting to look like crap so I take one off. 10:19 it's starting to look good again so I add. It moves up and based on how it behaved down here in the pre-market and yesterday, it should not touch 2144 again so that's where I place my stop. About a half hour later it shows that things are different than yesterday. Over the next few minutes the little angel over my right shoulder says "Bulls make money; bears make money; pigs get slaughtered." The little devil over my left shoulder says "you can either get short now, or you can quit trading forever." The devil wins. I traded a successful breakout strategy back in 2005 and this reminded me of one of those setups that I would wait weeks for. I really feel like the goose is cooked so 10:59 is not "adding to losing position" its "getting a better entry price". Moves down have been swift and unforgiving lately, so I start putting some tight stops in once the move is about equal to down moves from the previous week.
I love what BSAM said..."the markets do the same thing every time". It's true! If they don't, you are being too picky or precise in how you are characterizing the market action.
WRBTrader comments = gold
You'd do well to develop and use a little statistical tip-off to use as your entry, such as a bar with a tail. Even better is to develop a feel for the pauses and timing of how the price acts in your zone of choice. Yesterday's high/low is a great place to start (heck, you could spend your whole career there).
Here's my mixture of crap and brilliance from today:
10:00 the price is holding steady around yesterday's low so I go long. 10:02 it's moving up so I add. 10:17 it's starting to look like crap so I take one off. 10:19 it's starting to look good again so I add. It moves up and based on how it behaved down here in the pre-market and yesterday, it should not touch 2144 again so that's where I place my stop. About a half hour later it shows that things are different than yesterday. Over the next few minutes the little angel over my right shoulder says "Bulls make money; bears make money; pigs get slaughtered." The little devil over my left shoulder says "you can either get short now, or you can quit trading forever." The devil wins. I traded a successful breakout strategy back in 2005 and this reminded me of one of those setups that I would wait weeks for. I really feel like the goose is cooked so 10:59 is not "adding to losing position" its "getting a better entry price". Moves down have been swift and unforgiving lately, so I start putting some tight stops in once the move is about equal to down moves from the previous week.