You don’t have to have been trading for very long to realize that a good deal of daily price action is random in nature. Having said that, why would a serious e-mini trader base his trading philosophy on a non-random measure? Because casual observation of a chart almost always results in a trader noticing that there are multiple points on a chart where price action starts and stops. Obviously there are some non-random elements to reading charts.
These non-random lines are support, resistance, and in some cases, floor trader pivots. Support/resistance lines form at the points on a chart where supply and demand are in balance. In the case of support, a price level will find support, or temporary equilibrium, at a certain level as the price falls. It is not uncommon to see some traders enter long trades at a known support level, hoping for a “bounce” trade. Since this is a type of counter-trend trading, and it involves trading against a known trend; I cannot recommend “bounce” trading as a good strategy.
On the other hand, resistance is the exact opposite of support; Resistance is a price level where the price will stop, or find at least a temporary equilibrium, as the price rises. Traders use the same “bounce” trade at resistance points, and I still don’t recommend trading. Of course, my general philosophy, and also that of the most profitable traders, is: Trade with the trend.
Pivot Points are predictive price levels based on a formula: (this formula is the standard floor trader calculation methodology, there are other formulas for several different pivot point systems)
R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (A + L + C) / 3
S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)
Where:
S= support levels
R= resistance levels
P = pivot points
H, L, C= high, low and close
In my experience, pivot point trading can have days where it is accurate and very accurate, and there are other days where it is completely irrelevant. The predictive nature of pivot points, combined with a mix of successes, relegates them as important, but secondary to established support and resistance lines. Some would argue this point, but my experience is that known support/resistance lines are more accurate than predictive pivot points.
One of the questions I usually answer is: How do I know which pivot or support/resistance line will pause or reverse the price? The answer is a simple one; I don’t know which lines will be relevant on any given day. However, some observation of the price movement, especially which lines are used at the stop points, will give strong indications of the importance of those areas for the rest of the day. The point of this article is simple: one of the first things you should become familiar with is the support and resistance present on any chart you are trading.
In short, we have defined support/resistance and pivot points. I have made personal observation of both and prefer support and resistance as primary. Except in one-off situations, pivot points need strong confirmation to bear the weight of support and resistance. We have also discussed the difficulty of confirming which line the market will follow as price action fluctuates.
