“We are about to hit a key HTF S/R level and depending on how price behaves around there, we could see a major breakout or a consolidation back into the trading range.”
What’s an HTF S/R Level? Why does price behavior matter there? What are trading ranges? Where are all these things located on a chart? A complete TA novice would hear a statement like that and feel like a fish out of water. But, by the end of this article, even the freshest novice will be able to easily visualize this statement.
Support and Resistance (S/R)
Support and Resistance (S/R) both consist of different price levels that halt or reverse price trends. They work in opposite directions.
Support is a level where buying at that price is strong enough to stop or reverse a downtrend.
Resistance is a level where selling at that price is strong enough to stop or reverse an uptrend.
To spot levels of support and resistance on a chart, look for zones where the price is congested into a trading range rather than on an upward or downward trend.
Support and resistance levels together create a sort of sandwich we call a trading range. Assuming no other catalysts, the stronger the S/R levels, the longer price will be within the range.
A price trend is made clear when it disregards at least one of the S/R levels and keeps trucking in the same direction. Some price trends disregard both S/R levels at the same time, though this is often short-lived.
S/R Levels and Time Frames
Most indicators, including S/R levels, are much more significant in higher time frames (HTF). Yes, trading is becoming more and more automated. But, humans are still the ones controlling the parameters for bots and writing the algorithms that develop computerized strategies and analyses. Applying this notion, we can understand S/R levels, trends, and ranges as a reflection of market memories. They act as signals of decisions made by market participants buying and selling in the past.
Higher time frames allows us to better understand the relative strengths of these areas and levels. For example, the 5 minute chart might point you cause you to assume a trend exists or is forming. However, when you zoom out to the HTF (Weekly, Monthly, Quarterly) charts this assumption is completely discounted. The 5 minute price moves are shown to be clearly range bound.
As we explore more and more trading concepts, indicators, signals, and participants, we will come to realize trades are being made in different time frames. Because different time frames can present conflicting signals, good trading involves knowing when to acknowledge or ignore the conflicting signals. It isn’t easy and illustrates the problem with trading with technical analysis alone.
Michael Marcus, a man who turned $30,000 into $80 million* (as of 2006, in 2022, and who had multiple consecutive years of triple digit returns laid out his criteria for a good trade in his interview with Jack Schwager in Market Wizards, which is a fantastic book that I cannot recommend enough.
“The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone.
- The fundamentals should suggest an imbalance in supply and demand, which could result in a major move.
- The chart must show that the market is moving in the direction that the fundamentals suggest.
- When news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news.
If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances.”
*Michael acknowledges that markets today are much more difficult to trade in than in his hay-day (the 80’s which had a glorious commodity OnlyUp bull run, which he was trading in), and the criteria he listed he established for traders in 2006. Since then, Michael has had successful years, even making $100 million in one year according to Schwager in a recent interview with Patrick Boyle.
Now, if you are like me and Nassim Nicholas Taleb lives rent-free in your head then you know not to trust based only results. I think Marcus lays out some strong, fundamentally sound principles in the above quote that deserve consideration.
So, what does our opening quote mean to you? Can you understand it now? There are definitely plenty of examples of trends and S/Rs on the HTFs ATM. Tweet us your best examples @lrn_fi!
If you haven\\\’t read the previous entry in this series, check it out! On that note, see you next week!