Quote from NoDoji:
Feng, you need to put in the time to come up with a "this works more often than not" trading plan. When you figure out your own plan, you'll be more comfortable with it and more likely to follow it than if someone hands you their plan and says "Just do this."
Sometimes S/R holds and sometimes it doesn't, but it's NOT a crap shoot.
For example, in a trend, when price pulls back or consolidates following a new high or low, S/R holds more often than not. "More often than not" is a statistical edge. How you trade that edge is up to you.
I personally handle it one of two ways: I watch to see if S/R holds and I let renewed strength or weakness sweep me into a trade (with a stop order just outside the consolidation range, channel, or the last pullback bar before price pivots back in the direction of the trend), or I place a limit order in the price zone where S/R should hold and place a tight stop in case it doesn't.
Look at ES leading into Friday's open. Once price established some tested support in the 1260's, buyers stepped in and there'd been a well-defined uptrend for several days. Friday's overnight session was narrow-range consolidation with S @ 1312.50 and R @ 1317.50.
What happens in a well-defined trend after a period of narrow range consolidation more often than not? A breakout in the direction of the trend.
Once the initial 5-min bar closes following the market open Friday morning, what do you know? Price is heading down toward the consolidation range low.
Is there an intraday trade signaled at the close of this bar? There's a low-risk trade signaled. If you take a long position at the close of that bar (1313.75), your stop loss is less than 2 points.
You prefer confirmation before putting on the trade? Then wait for the next bar to close. What do you know now? Nothing more than you knew following the close of the 9:30am bar. Wait for the next bar to close. What do you know now? Buyers stepped in near the range low and bid price halfway to the range high in a single bar and that bar closes at its high.
Is a trade signaled at the close of this bar? A long trade is signaled, and a confirmed entry trigger would be a break of the 9:40 bar's high and you want to see very little retracement. The consolidation range has been in play for so long that during regular trading hours it should break out for trend continuation; otherwise the up trend may be getting tired.
Maybe your trading plan says to only enter on an actual break out of consolidation. In that case, your buy stop to go long is 1317.75 or 1318.00.
In a defined trend, always think continuation.
Would you have a sell stop below 1312.50? No.
Why not? Because an initial break of narrow range consolidation in the direction opposite the trend is not confirmed trend reversal. You're more likely to get trapped selling a low tick as buyers look to take advantage of liquidity when stops getting triggered.
If price broke the low of the range with some conviction, then pulled back up to it and stalled, that means previous support may be turning into resistance and a trend reversal is coming. But until that happens, think continuation.
There are various levels of S/R. There's trend/channel S/R, moving average S/R, range S/R and previous pivot S/R (previous swing high/low). Price reacts differently to each of these based on the context of price action leading into the approach.
If price has been trading in a wide range and approaches a previous S/R level, do I want to buy or sell a breakout of S/R? No. I want to watch how price reacts to the range extreme and if it breaks out, I'll look to buy or sell in the direction of the breakout on a pullback. But until that happens, I want to trade the range or wait for a trend to emerge.
If price has been rising or falling in a well-defined trend (such as higher lows/higher highs) or consolidating in a narrow range in a well-defined trend, do I want to buy or sell a breakout of S/R? Yes, in the direction of the trend.
If the breakout fails, my stop loss limits my loss, and I look for a trend reversal setup. The small loss of a failure will be paid for easily by the next winner.
Feng, you'll never find certainty in trading, but it's far from a crap shoot.
every now and then I see something wrong, I point it out. 