sustain and resistance are the known cornerstones in Forex technical, wherein:
1. a current Forex rate (CFR) is surrounded by levels of:
a). resistance being superior to CFR;
b). sustain being inferior to CFR.
2. a level breakthrough triggers a jump to a consecutive sustain/resistance;
3. a false breakthrough is responsible for a rate backstroke (say, from resistance to sustain).
consequently, having data on resistance and sustain levels and being armed with R/S true/false criteria, a trader grows faultless-entry skilled to ensure smooth level-to-level trading.
To be found below is a graphic drawing of a flat followed by an R/S up/down breakthrough.
The chart 1. (For view picture see notes in end of article)
In actual sample GBPUSD trade dated January, 31, 2006 the sustain breakthrough has triggered a bullish in-session trend.
Simple, isn’t it? Affirmative at a to peek briefly, but 95% of traders losing their forex deposits are calling for natural questions:
1. What’s the reason, the world traders are getting entangled in so a seemingly simple regularity?
2. What’s the way of correct detection of R/S levels for currencies to use to jet off from?
3. What attributes are inherent to true/false breach differentiation?
It is, consequently, to be concluded that a trader will never unprotected to steady FX gains unless the answer is found to the above three simple questions.
CLASSICAL BOOKS ON RESISTANCE AND sustain LEVELS
Forex scholars’ books, when analyzed, are giving grounds why 95% of traders turn place-killers. The point is that under different technical scholars:
a). fairly different understanding is being attached to sustain and resistance;
b). no definite criteria (except Demark’s technique) is in service to finding a sustain and a resistance;
c). there is no clear-cut interfacing between R/S levels on different timeframes.
Below is sort of understanding classification:
1. A. Elder. R/S are understood by SOME SCHOLARS to be horizontal lines drawn along price highs and lows
sustain and resistance are horizontal (or almost horizontal) lines linking several minimums (maximums).
The chart 2. sustain and resistance (For view picture see notes in end of article)
b). J. MURPHY also indicates that “points 2 and 4 represent uptrend sustain levels. The figure depicts uprising sustain and resistance under an uptrend with points 2 and 4 being sustain levels which use to be coincident with earlier lows. Points 1 and 3 indicate resistance levels, which use to be coincident with earlier highs” (see: “Technical examination of the Futures Markets”
Fig. 3a and 3b. Uptrend and downtrend sustain-resistance levels (For view picture see notes in end of article)
2. SOME SCHOLARS believe sustain-resistance to be sloped lines drawn along price highs and lows (trend lines, truly) as below:
Fig. 4. Trend line-fact sustain-resistance pattern (For view picture see notes in end of article)
a). T. DEMARK
Fig. 5. Bid pivot points (TD-points) building up a resistance level (For view picture see notes in end of article)
The TD-points are disinctive of price values being not surpassed within 2 nearby days. The points are specially emphasized on the chart.
observe that the price movement above the TD-line is mirrored by same after the down break of this line.
Price projection Z is made by way of the following calculation:
– difference is taken between Y being maximum price above the TD-line and X being special price closest below the TD-line;
– the obtained value is subtracted from A-B line breakthrough price.
b). L. BORCELINO is also a user of inclined lines as sustain/resistance (view:
Fig. 6. Quoting L. Borcelino: “As apparent form these examples, trendlines, drawn across preceding highs and lows, constitute perspective sustain and resistance projection”. (For view picture see notes in end of article)
3. E. NAYMAN’S combined commitment of inclined and horizontal R/S levels (view: “Trader’s Minor EncyclopediaJ
“A resistance line connects market important maximums (highs, peaks)”, And further on: “R/S lines drawing should be preferably done by price concentration areas, instead of by highs/lows extremes” (???).
Per minimum price trend line (a sustain):
Fig. 7 (For view picture see notes in end of article)
Example of E. Nayman using resistance/sustain levels at trade stop:
Fig. 8 (For view picture see notes in end of article)
4. MOVING AVERAGES based resistance/sustain levels.
a). E. NAYMAN: “Bollinger Bands are sort of disinctive sustain/resistance lines
Fig. 9 (For view picture see notes in end of article)
5. ROUND NUMBERS being sustain/resistance levels
a). E. LEFEVRE (view: “Memories of an Exchange Profiteer” underlined: “Rates, having, for the first time, traveled 100, 200 or 300 points, are almost sure to cover additional 30 to 50 pips”
b). D. SCHWAGGER: “One is to be especially careful about dollar holdups. With USD 781,25 best working on T-bonds and USD425 – on soybeans, temptation is raising to find “optimum” holdup for each market. It is advantageous to establish a round number to comfortably use it all of the markets.
CLASSIFICATION OF ineffective AND STRONG R/S LEVELS AS VIEWED BY FOREX SCHOLARS
J. MURPHY classifies sustain and resistance (view “Technical examination of Futures Markets”, New York Institute of Finance è Prentice Hall, 1986) proceeding from: price in-domain residence period (1); quantity of trade (2) and price domain age (3).
1. The longer the price reciprocation period within a certain sustain/resistance area, the more basic the area. By way of an example, if a certain stagnation area observed a 3-week price up/down movement with later rally thereof, this sustain domain is more important than that having observed a 3-day price reciprocation.
2. quantity of trade is another method to estimate importance of sustain/resistance. If, say, a sustain formation did include a huge quantity of trade, it method a huge number of contracts passing from hands to hands, hence the sustain levels is ranking high and visa versa: the less the quantity of trade, the lower-ranking the sustain.
3. nevertheless another sustain/resistance importance indicator is its age in relation to the present moment. Since we are dealing with traders’ reaction to market moves and to locaiongs they have entered or have failed to go into, it is fairly clear, that the younger the event and the reaction thereto, the more important the event.
Seven years later (in 1993), A. ELDER has confirmed 2 of 3 J. Murphy’s postulates dated back to 1986. His classification of resistance/sustain levels is guided by:
– number of test tangencies it consistent (the greater the number – the stronger the level). Within a fortnight an immediate sustain/resistance is formed; within 2 months the level grows accustomed to by traders, consequently attaining medium strength; within 2 years truly a stereotype is built radiating strong sustain and resistance.
– price scatter dominating a sustain/resistance level (the wider the range thereof – the stronger the level). A wide-range turning-point price consolidation is similar to a high fence surrounding valuable character. A congestion zone equal to 1 % of current price (4 points with S&P500 at 400 level) yields insignificant sustain/resistance, while a 3% area is responsible for medium levels with a 7% area possessing sufficient strength to be a strong trend killer.
– The greater the quantity of trade in a sustain/resistance area, the stronger the levels. Huge quantity within a congestion zone is indicative of numerous emotional jobbers’ involvement. As opposite, minor volumes point out traders’ indifference towards the level being intersected, hence being attribute of the level’s deteriorated health.
ineffective sustain/resistance levels are capable of bringing a trend to a stop, while strong ones may appear trend reversers. Traders buy sustain and sell resistance, consequently turning their impact into a self-justifying projection.
SCHOLARS’ VIEW ON sustain/RESISTANCE SEATING POINTS
1. T. DEMARK recommends:
– plotting resistance upon bid TD-points
– plotting sustain upon ask TD-points.
2. D. SCHWAGER (view: “Technical examination. Complete Course”) insists on drawing resistance and sustain “in the vicinity” of prior lows and highs.
“sustain and resistance are to be viewed as approximate areas rather, than exact levels. It is to be emphasized that any past high is not at all a premonition of perspective prices dry up thereat or there under. Instead, it is indicative of a resistance to be expected near that level. By analogy, a past low is not at all illustrative of further price declines halting thereat or there above. Instead, it is indicative of a sustain to be projected close to that level.
presented below is a sustain zone governed by relative prior highs and lows concentration: gold, futures.
Fig. 10. (For view picture see notes in end of article)
Continued by D. Schwager: “Some technical analysts use to treat past highs and lows as being endowed with, sort of, holy significance. A past high, being 1078, is deemed by them a strong resistance. In case the market displays a spike higher, say, as far as 1085, they reason the resistance to have been breached. It’s not correct. sustain and resistance are but to be looked upon as cloud-shaped areas instead of exact levels.”
3. J. MURPHY resorts to plotting sustain and resistance in a local peak-wise fact (i.e. by local highs and lows): “A resistance level usually coincides with the past peak level”.
Fig. 11. (For view picture see notes in end of article)
Fig. 12. (For view picture see notes in end of article)
4. A. ELDER: “Resistance and sustain are to be preferably plotted (see Fig. 13) by congestion zone margins (CZM) instead of by highs and lows. CZMs constitute traders’ mind-changing areas, while highs and lows are only reflective of panic among weakest jobbers”.
Fig.13. (For view picture see notes in end of article)
Continued by A. Elder: “Beware of sustain/resistance false breaching, indicated as “F” in the above figure. Breaches are followed by amateurs, with professionals being opposite travel jobbers. Now, pay some attention to the chart’s right corner, where prices have bumped into strong resistance. It’s high time to hunt for shorting with a stop-loss to be placed slightly above the resistance level”.
To be noted is a distinct regularity, not referred to by A. Elder: the sustain/resistance levels drawn by past local peaks are not extended by him after false breaching thereof.
4. D. SCHWAGER gives the following explanation when resorting to projection of 2 (!) inclined sustain and resistance levels:
– “Standard lines are usually drawn by price extrema (highs, lows), attributable to traders’ emotions, consequently these points may not mirror the market’s real trend”.
– “An inner trendline is to be plotted closest to the bulk of relative lows and relative highs, ignoring extreme points”
D. Schwager himself is the recognizer of the subjective character inner trendline method, but in so doing he jumps to a very important conclusion that ordinary trend lines are:
– similarly subjective (!);
– far less helpful (!), than inner trendlines.
“One of inner trendlines’ shortcomings is their inevitably random character, already greater than that possessed by ordinary trendlines, being restricted by extreme highs and lows, at the minimum”.
“In practice, not rarely, several options prove obtainable as regards inner trend line plotting procedure (see Fig. 14). Nevertheless, my experience advises inner trend lines to be of greater avail than ordinary trend lines when seeing possible sustain/resistance areas”.
1. Each forex scholar offers his own interpretation of sustain/resistance levels, meaning different entities thereby (inclined, horizontal, inclined-horizontal, MA-based, round numbers-based, etc.).
2. There exists no clear-cut technique to define points to plot sustain/resistance levels by (except that of Demark’s).
3. In real time trading, that said, these levels discovery on Forex charts automatically entails absolutely different conclusions.
Fig. 14. (For view picture see notes in end of article)
TESTING AND functional INCONSISTENCY OF CLASSICAL sustain/RESISTANCE DETECTION METHODS
Jeffry Owen Katz and Donna L. McCormick have disclosed results of their testing of the above scholars’ recommendation procedures in their “Encyclopedia of Trading Strategies”:
TEST PROCEDURE 2
A channel breakthrough-operated system. Closing prices are utilized only; next day market price entry at session opening; commission and slippage being accounted for.
The above test has been performed exactly the way the past one, but with no account to slippage (3 ticks) and commission (USD15 per dealing cycle). Although the form displayed perfect operation with no account to dealing expenditures, it has turned out a complete fiasco in practice.
already the best-in-sample solution has proved loss-responsible only, and, as expected, the system’s beyond-sampling poor operation came into being.
observe: In compliance with E. Nayman’s theoretical outlook, a channel upward breach is alleged to be a STRONG (!!!) trading signal at an uptrend.
TEST PROCEDURE 6
It is a closing price breakthrough system with next day per stop-order entry. The form longs via a stop-order at the point of breaching a resistance appointed by recent highs and shorts via a stop-order at the point of breaching a resistance appointed by recent lows.
As expected, the system exhibited much poorer operation with low profit and deteriorated statistics within sampling. The form proved killer to the per-deal average of USD798, with profit rating being 37%.
TEST PROCEDURE 7
The procedure involved volatility punch with next-day opening entry. The form longs upon next-day opening with provision that today’s closing appears superior to the volatility upper edge. The form shorts in case of the price falling below the above edge.
The optimization period embraced 240 dealings only with 45% being profit-bringing.
TEST PROCEDURE 9
Involved is volatility punch triggering a per stop-order entry. The form effects a market stop-order entry closest after passing a breach point.
The sampling period incorporated 1465 dealings, each being of 6-day average duration. The system has ensured 40% profit with average gain of USD 931 each. Under all parameter combinations only longs were winning. Both shorts and longs proved losing outside sampling limits. Only 29% were winning out of the total of 610 dealings.
Testing data, supplied by Jeffry Owen Katz and Donna L. McCormick, constitute convincing grounds that forex scholars’ trading systems involving sustain/resistance breakthrough (the way these are described by the scholar) are rather likely to consequence in loss than in profit. This is one of the reasons for 95% of traders to turn their forex deposits killers.
In as much as the sustain/resistance related theory is so mixed up and subjective, it is only to be guessed what sort of sustain/resistance reading-matter may be offered by modern forex brokers’ websites.
Fig. 15 (For view picture see notes in end of article)
d). these recommendations aftermaths are apparent: the GBP has punched 1 point to 1,9001 and swiveled down to 1,8871; the EUR reached 1,2958 and reversed to 1,2853.
Brokers’ recommended sustain/resistance on the EUR/USD and GBPUSD as of June, 12, 2006 morning:
– EUR/USD: sustain 1.2780, 1.2740, 1.2685/90 1.2600, resistance 1.2890, 1.2930/40, 1.3000.
– GBP/USD sustain 1.8740, 1.8670, 1.8560, resistance 1.8890, 1.8940, 1.9000
EUR/USD sustain 1.2820 resistance 1.22940
GBP/USD sustain 1.8805 resistance 1.8950
The June, 12, 2006 information on technical levels of EUR/USD and GBP/USD is missing with the sustain/resistance levels themselves being quoted in minor point unsystematic fact.
– sustain: 1.2840, 1.2800, 1.2770/50, 1.2720, 1.2670, 1.2630, 1.2600/1.2580, 1.2540, 1.2500,
1.2460, 1.2400/1.2390, 1.2350, 1.2300, 1.2250.
– resistance: 1.2890/1.2900, 1.2960, 1.3000, 1.3040, 1.3100, 1.3150, 1.3200/10.
– sustain: 1.8840, 1.8800, 1.8740/30, 1.8700, 1.8670/60, 1.8630, 1.8590, 1.8535, 1.8500,
1.8450, 1.8400, 1.8360, 1.8300, 1.8270.
– resistance: 1.8870/80, 1.8915/20, 1.8940/50, 1.8990/1.9000, 1.9060.
RES 4: $1.2990 RES 3: $1.2965 RES 2: $1.2940 RES 1: $1.2915
CURRENT PRICE: $1.2890
SUP 1: $1.2830 SUP 2: $1.2795 SUP 3: $1.2755 SUP 4: $1.2685
RES 4: $1.9080 RES 3: $1.9000 RES 2: $1.8960 RES 1: $1.8915
CURRENT PRICE: $1.8895
SUP 1: $1.8815 SUP 2: $1.8725 SUP 3: $1.8725 SUP 4: $1.8515
Are You not getting mixed up? Each broker presents his own sustain/resistance levels different from others’. With the above varied of levels being recommended any true/false breach of any technical level proves out of question.
Should we attempt to simultaneously depict all the sustain/resistance levels furnished by various Forex brokers, we’ll ultimately find ourselves facing a picket fence thereof.
The arrangement is reminiscent of J. Schwager’s “Technical examination. Complete course”, raising a question: “Is technical charting to be referred to as a prediction engine or as folk arts?”
Probably, the best way out here is:
1. In view of huge number of Forex scholars’ opinions, let everyone answer this question independently with the purpose of finding out the way to faultlessly pinpoint sustain/resistance levels.
2. Let everyone decide whether he is going to believe the sustain/resistance levels, released daily by various Brokers and Dealers, provided that:
a). one has no idea of the definition principles thereof;
b). the above levels being offered at websites by non-traders or by ex-losers.
Otherwise the natural consequence will keep equal to 95% of losers worldwide.
sustain/RESISTANCE LEVELS CONSTRUCTION UNDER MASTERFOREX-V TRADING CONCEPT
1. sustain and resistance levels are to be divided into those of flat and trend:
a). sustain/resistance levels are horizontal when in flat;
b). sustain/resistance levels are inclined when in trend.
2. Various kinds of sustain/resistance are inherent to various trend types (if You are considering 4 trend types, You will confront 4 R/S grids; if 5 trend types are being dealt with, there will appear 5 R/S grids respectively).
3. A larger trend is of greater significance in respect to a minor one, while minor trend sustain/resistance levels are of more accurate character than those of larger one. This issue has not at all been touched upon either by forex technical “scholars”, or by modern “analysts”.
4. All the 4 trend-kind sustain/resistance detection procedure is elaborated in the fact enabling the Masterforex-V Academy hundreds traders to daily set up sustain/resistance levels with 1-2 points deviation, due to forex quotes difference from various Brokers. This aspect has not been considered by forex technical scholars either.
5. It appeared indispensable to simultaneously analyze the minimum of 2 ally currencies’ sustain/resistance levels (say, GBPUSD, EURUSD) since there is the formula:
“True R/S level breach by the forex pair 1 + False R/S level breach by the forex pair 2 = EITHER False R/S level breach by the forex pair 1 OR True R/S level breach by the forex pair 2”
This aspect has not been considered by Forex technical scholars either.
6. Minor timeframes intermediate R/S levels ARE DIFFERENT from those being manifested under Forex trendwise travel. This aspect has not been unprotected to investigation by Forex technical scholars either.
7. The obtainable technical examination scholar literature on sustain/resistance levels contains plentitude of helpful and … data. The objective is to effect independent combination of T. Demark’s, A. Elder’s, E. Nayman’s, J. Murphy’s, D. Schwager’s techniques with the above Masterforex-V principles in order to reach proper understanding of the way prior binary regularities tailor further movement perspectives.
8. A combination of 4 trends and more is helpful in 1-4 point-accurate detecting forex trading session local extrema.
With the above said, it proves strange to hear the statement of Ch. Lebau and D. Lucas (see: Computer-aided examination of Futures Markets, reading: “We do not believe in exact price prediction popular practice”.
– What’s the way the Masterforex-V Academy students manage to profit now and then?
– Do they independently establish sustain/resistance levels on multiple timeframes of numerous
– Do they check their established levels against a dominant source (wherefrom the Brokers’ analysts
use to crib a sustain/resistance)?
– Do they understand principles of true/false breaching of each level and of a bounce there from?
– Are they capable of calculating in-session currencies travel margins to a destination, where after
the above currencies bounce off and characterize corrective reversal?
Answers you can find in our web site.
complete text of this article and pictures of examples http://www.masterforex-v.su/001_013.htm
If you wish to be trained on Trading System Masterforex-V – one of new and most effective techniques of trade on Forex in the world visit http://www.masterforex-v.su/