It’s not unusual to hear novice traders claim that they trade support and resistance. To be sure, it’s not unusual to hear just about any trader claim that they trade support and resistance (SAR). So I suppose we can take it for granted that just about everyone is trading SAR and accept that fact at face value. There is a problem with that statement though, if everyone were trading SAR, which is among the most effective e-mini trading strategies, how come we are still faced with an absolutely outrageous failure rate among traders?
As you might expect, I am a dyed in the wool support and resistance trader and it is very effective for me. Of course I am, since we decided in the 1st paragraph that everyone traded SAR. There is however, the matter of trading methodology as it relates to support/resistance and knowing when price action is going to move through our carefully plotted lines and when price action is going to a bounce off our carefully plotted lines. I often ask people how they decide which position to take when price action approaches SAR. As you might expect this is where the conversation gets a bit muddled and I get to listen to a wide variety of far-fetched trading methods, many of which I’ve not heard of, while each trader swears that their particular method is the one and only way to approach SAR trading.
At this point, I want to say that if your style of trading is working well than ignore anything that I might have to say. On the other hand, a quick perusal of tradingschools.org shows 70 or so trading room reviews and there are only 2 or 3 public traders that can actually verify their trading results. Most well-known traders’ skills are strictly word-of-mouth or inflated earnings claims plastered across their website. And guess what, they all trade support and resistance. Yikes!
What is the best way to trade SAR? Since e-mini trading is a zero-sum game it stands to reason that increased volume at SAR will cause a reversal at that point as traders move from long positions to short positions or short positions too long positions. On the other hand, if volume stays low there is a high probability that the price action will continue through your price level to higher or lower SAR levels.
In essence, to trade it SAR effectively you need to understand volume as something more than a panel on your trading chart that has varying levels of contract buy/sell orders. That’s where order flow analysis is awfully handy. I can watch, contract by contract, both sides of the contract fill up with orders. If price action is going to break through our price level most of the orders will pile up on the buy side, if you are trading resistance. (The exact opposite is true if you are trading support) I can also watch the volume rise on an ordinary volume chart. An ordinary volume chart works quite well, but watching each individual contract and the manner in which they stack up on either the bid/ask side (as is the case with order flow analysis) is far more accurate and resonates with my trading style at more comprehensive level. Said simply, it just makes more sense to me.
This is a frustrating article to write because I feel like I could go on for 40 or more pages and not repeat myself. My hope is that I have paid your interest and you will investigate the relationship between order flow analysis, volume, and price. It’s an investment that will pay great dividends.