Hartle & Flow

Support and resistance is often thought of as a price level. For example, analysts and traders might discuss support for the E-mini S&P 500 futures contract is at the previous day’s low of 1343.00. As a trader, if you are looking for a place to go long would you wait for the market to actually trade at 1343.00 before taking a position? Should you buy one, two or maybe five ticks above the low and stop yourself out one tick through the low to manage your risk in the long position. If you wait for a test of support, you could miss a trading opportunity. The problem is thinking about support as a precise price level.

One solution is to use price zones for support and resistance instead of price levels. Here, we’ll walk through an example of support and resistance zones using TradeFlow bars.

The basic idea is to determine previous support and resistance levels, which are identified as turning points, for example, the previous day’s high and low, and any intraday peaks or bottoms. Then, use a rule for establishing the zone’s boundaries. The rule is important because then back testing the concept is possible.

In the TradeFlow chart, the aggregation is set to five ticks, so every TradeFlow bar is five ticks tall. The rule is the range of one TradeFlow bar will mark the support and resistance zones.

Let’s walk through the price action on the chart. The TradeFlow bar made on the gap up opening could be uses as the first resistance zone because the sell volume line of TF5VCross study climbed above the buy volume line, indicating sellers were dominating.

Bar A was a test of the resistance zone. The sell volume line was still above the buy volume line. Next, histogram bar B of the TF5Um5D study was lower the previous histogram bar. This study tracks the difference between the buy volume line and the sell volume line. That was an indication of selling pressure starting to increase. Next, the TradeFlow Volume histogram bar C was lower than the previous two, another sign that sellers were increasing pressure following the test of the resistance zone.

The support zone formed and for one bar the buy volume line crossed above the sell volume line. The market tested the support zone on TradeFlow bar D, which was nearly all green, a sign of traders lifting offers. The buy volume line was already above the sell volume line, and indicating buyers were dominating. The histogram bar labeled E of the TF5Um5D study turned up from the previous histogram bar. Also, the TradeFlow Volume bar labeled F climbed above the previous bar. All of this was evidence that buyers were coming into the market.

Support and resistance zone make for good entry points because the risk point is well defined. If the support zone or the resistance zone does not hold, then exit the trade. TradeFlow bars and the associated studies can provide evidence as to whether buyers or sellers are dominating or are starting to take charge from the other. Use this information as part of the trading decision.

This entry was posted Saturday, November 4th, 2006 at 1:54 pm and is filed under TradeFlow, CQG Studies, CQG Charts, TradeFlow (Introduction). You can leave a response, or trackback from your own site.