Friday, 12 February 2010

8. Locate Rate and Participate

“When executing trades, plan them out vigorously. Delve into any relevant information you need in order to make an informed decision, and take only the trades which fit into the framework of your profitable trading strategy. Lack of proper planning or learning to take trades based on weak or fundamentally incorrect information, or worse yet, “hunches”, is a quick path to failure. A lot of independent money gets lost due to a lack of proper planning.” – SteveW

Wise words from an experienced trader. As far as I am concerned pretty much everything you need to know to trade support and resistance is in BRV's pdf and on

Looking for confirmation and validation of our s/r levels is just as important as picking the most visually obvious price entry points in the first place. However whether a trade is a winner or a loser, all too often we cannot accurately answer the question, “Why did I take that trade?”

If like me you create a daily plan you will find it easy to incorporate actually rating your upcoming price levels based on other confirming factors into your routine. Recording that rating is critical, whether you have a written plan, an excel spreadsheet or simply add the rating to your charts, recording the probability rating has two major benefits.

Firstly, when price finally arrives at xxxx price (which may be several hours or even days later) you can very quickly see exactly why you were so keen on that level and take the trade without hesitation.

Secondly, rating system records help with post trade analysis and provide a simple way of fine tuning your trading strategy.

My approach is really quite crude and unscientific as the scale has no definitive calibration, but for arguments sake let’s say each confirming condition like a trend line or Fibonacci level is worth 10% (you may want to add greater weight to the more significant factors).

Therefore roughly speaking a trade that has seven confirming factors could be said to have a 70% probability.

As with all the other aspects of trading this is open to interpretation and you should really adapt this principle to what suits you. One thing is certain, the more confirmation we get the higher the probability of market consensus and it is market consensus that we crave for very best reversals and break outs.

These are some examples of what I look for: -

SBR/RBS - Support becomes resistance and vice versa.

TF - The higher the timeframe the more significant the level. This can also help us in our trade management. As trades taken from short term s/r will generally have a shorter run.

00 - Round numbers. We're human we like them. (traders are human too!)

23/38/50/61/78 - Fibonacci. Levels from two different timeframes can double the confirmation.

R -Reaction. How did price behave last time it was here? Wicks at a swing high/low or a strong break out suggest a strong reaction this time too.

S - Space. A nice big arc gives us lots of space and time around our trade.

TL - Trend lines are also s/r so they can be used on both sides just like horizontal s/r.

BB - Bucket bottoms. A favourite of mine, bucket bottoms are a point of very strong former s/r. SBR/RBS is here too.

SB – Spike base. See for an explanation.

HS – Head & Shoulders

QM - Quasimodo

FB – Fractal base

GY – Gartley

and so on, you could add or substitute your favourites.

There we go that's more than 10 conditions so you could say:-

USDCHF 11780-11831

We could call that 70% at least.

One final point, if possible I try to have set ups like this in both directions for the pairs I trade, that way despite my bias I have a bit more of a neutral approach to the market and I am more prepared for unexpected changes in sentiment.

For those that queried what the codes are on my charts - now you know.

As always criticisms and suggestions are welcome.

7. Entry Formula

How many times has price missed your entry by 2 pips? Ever been stopped out by 2 pips and wished you had entered at the back of your zone instead of the front? Here are a few suggestions to help avoid this.

An entry formula takes the guess work out of picking your exact entry price and allows you to catch any early turns but not let it compromise your stoploss position too much. Of course spreads affect the order fill as it is the sell price that must get hit in order to put you into a buy and vice versa. In my opinion just accounting for the spread is not enough so I add a little extra on too in case there is early selling ahead of s/r because of pending orders.

From a level like 16400 I might deduct 5/10 pips for any early turn and then half the spread to give me the mid price as it appears on my charts, so my entries are either:-

16394 which is -5(-0.5xSpread)


16389 which is -10(-0.5xSpread)

Which of these I use and whether I take them from the front or back of my trading zone depends on a few more factors:-

Trend trades and bounces off a formerly flat level e.g. bucket bottom or fractal tend to suit the front of a trading zone and the +/-5(+/-0.5xSpread) set up.

Counter trend trades and bounces from levels where price was V shaped are likely to go deeper into a zone so the back of the range would be more appropriate.

Similar to the above, price action and momentum on the final approach is also a good guide as to how deep price may penetrate.

Finally I will generally place an order earlier on levels from a higher timeframe. As I have already said in this blog you will often see price reverse 10-20 pips short of a daily level.

Profitable trading is a result of repeating a successful method over and over, planning your entries is an important part of that.

The distribution of orders means that price will rarely bounce to the pip, but there are a number of variables at work here so I suggest testing these principles out to find out what works for you best.