We have yet to meet a novice trader who doesn’t claim support and resistance (SAR) as one of the skills they employ in their trading endeavors. Of course, the silence is usually deafening when we asked, “When the price reaches support or resistance what do you do?” In general, most people wait to see which direction the price is going to move and wait for confirmation of the move.
First and foremost, it’s important to use proper technique when drawing your SAR lines. We generally chart swing points for each directional move and you can generally spot, with a reasonable degree of accuracy, where support and resistance are to be placed. We believe the market generally stops at the same points on the market index continuum. It may not always stop in the same place each day, but there will be areas where the resistance will not allow any upward movement and where strong support will not allow any downward movement.
Yes, it is one thing to know where SAR exists and quite another to understand how to effectively trade it. One fact that may help you understand futures SAR is to realize that the trading is a zero-sum game. For every winner there is a loser; that’s pretty simple.
There ought to be a way to determine whether or not price action is going to pierce a line of resistance or bounce off that line. Have you ever taken time to observe your volume indicator in and around these SAR lines? Volume and SAR are like ham and cheese in that they complement each other perfectly. It doesn’t really matter if you like ham and cheese but we think you get the point. There is a strong relationship between volume and SAR.
In general, you can trade these lines as follows:
When the volume is substantially higher at an area of resistance the price will generally bounce off the line. Why does the volume increase in this situation? Quite simply, people are exiting their long trades and other traders are entering short trades; the net effect is higher volume since both the bid and ask are being worked pretty hard. Substantially higher volume generally indicates a bounce
That being said, the exact opposite is true if the price is going to continue through resistance. The volume stays low since most people are staying on one side of the contract. In short, there is no crossover buying or selling. Low volume generally indicates a continuation through SAR as there are very few sell orders at the point of resistance.
There you have it! When in doubt, look at your volume settings and you’ll have a good idea how to trade support and resistance.