AMZN LAST-1 min 10/04/2000" 0-36.000 *UGP%

e:5l 8:56 9:01 g:oa 311 -1 a-~

Figure 7.15 Addition of only n single bar completes the pattern required to plot Cntegory 3 resistance. Note thnt there are three bars following the high bar thnt hnve lower highsthanthe resistance bar. Chart created with TradeStation® 2000i by Omega Research, Inc.

lower than the high of the highest bar in our seven-bar sequence, thereby completing all requirements for a Category 3 resistance formation. In this case, automated software has pinpointed the completion of our formation. The resistance point of critical importance at this point is now defined at $33.313, the high of the center bar of our seven-bar formation. Our trading strategy will place a buy stop slightly above this level to enter us into the trade automatically should our resistance point be violated by market activity. It is important at this juncture to emphasize that the resistance point of interest on this formation is the high of the center bar of our formation. The black dot directly above our pivot bar is significant only in that it specifically identifies the high bar of interest. The price level at which the dot appears has no significance regarding the placement of trading stops. The critical level, when using our six categories of support and resistance, is always the high or low of the bar in question. Although we will not always use these exact values as our specific entry points, for reasons that will be explained later, the calculation of the point we will eventually use for actual trading begins with the high or low of the center bar in the formation.

The important issue here is that the significant price level from this formation was not identified until three bars were plotted following the high bar. Often, when one is examining historical charts, the mistaken impression is that these support and resistance points become obvious as soon as the bar associated with the identifying black dot has completed its formation during actual real-time trading. The lesson to be learned here is that, although the specific points may appear to have a significant time separation from the current market price, in actuality one has much less time to use these points in actual trading than seems to be the case from the observation of historical price charts. This situation is further illustrated in Figure 7.16.

In this chart, two more bars have been printed. A horizontal line has been manually added to the chart to mark the resistance point at $33.313, identified by our Category 3 resistance formation. Note that the very next bar printed following the completion of our resistance formation traded up through our identified resistance point, filling

AMZNLAST 1 r.ir 10 4 20 1 C=3ij.000 t*-.43.7...*1.*.!!6*.1..

4.LMI

51 6:66 6 01 9:06 3.11 9:16 e:21 B:26

Figure 7.16 The bar printed immedintely nfter the confirmntion of Cntegory 3 resistance has broken through the resistance point established by previous market action. Although it nppears on n historicalchartthntthetrnder would hnve had severnlminutesto act upon this resistance point, in nctunlity the trnder would hnve hnd less than one minute to utilizethisimportantprice point for actunl trading.

Chart created with TradeStation® 2000iby Omega Research, Inc.

our stop order and creating a long position in the market. Therefore, a trader wishing to utilize this resistance point for the placement of a buy stop would have had less than one minute to place the appropriate order after the resistance point in question had been identified. Granted, had the order not reached the execution arena by the time the first bar after the completion of the formation had been formed there would have been time for the order to have been filled since the next bar in the sequence also traded through the placed stop price. Figure 7.17 further illustrates the necessity for timely action when these important points are identified.

Figure 7.17 covers the activity ofAmazon.com f°r the next 10 minutes of the trading day Note that our position has produced an open profit at this point of over $1 per share. Again, the emphasis here is that, even though the significant resistance point on the chart appears to have been placed at 9:26 ajm, it was actually not present, on a real-time basis, until three minutes later. If one had not acted in a prudent manner in this instance, one would have soon lost the opportunity for a profitable trade. The danger of missing the trade is even more evident on this chart when one considers the trading environ-

ii?? TradeStation Chart (AMZN)Ama.

9JMZN LAST 1 min 10/04/2000 C=35 000 +5.837 +1975%;

JU1 9:06 9:11 9:

9:21 9:26 9:31

Figure 7.17 Adding 10 more bars illustrates the necessity of close observation when using resistance points for stop placement. Chart created with TradeStation® 2000i by Omega Research, Inc.

merit present on the chart for the several minutes prior to the formation of our resistance point and the eventual breakout of the market to the upside. Recall the wandering, sideways mood of the market noted prior to the development of our pivotal resistance point. The tendency is always present to be complacent when this boring, sideways action presents itself. Had one not been observing the market closely, which could certainly have been the case here, a good trading opportunity could have been lost.

Incidentally, note, at the termination of the chart, the formation of a second Category 3 resistance formation. As was the case with our first such pattern, the bar immediately following the completion of the chart formation traded through the resistance point, again affording the trader precious little time to act upon this new information.

VISUAL VERSUS AUTOMATED RECOGNITION

It is certainly possible to rely on your own observation of price charts for the recognition of support and resistance points. Visual chart monitoring is especially effective for the trader using longer-term time frames such as 30-minute, 60-minute, or daily bars for trading, since there is ample time between the formation of successive bars for interpretation.

However, those using the more rapid-paced one- or five-minute charts, for example, may find that there is not sufficient time in which to first recognize the appropriate formation and then formulate an accurate trading strategy utilizing this information. In this case there is a decided advantage in the use of a computerized charting package that allows the user to create and apply various custom trading strategies and indicators.

CHAPTER REVIEW

1. The understanding of short-term support and resistance is vital to effective trading.

2. Calculated support and resistance levels are used for both trade entry and exit.

Three categories of support and three categories of resistance can be applied to charts of varying time frames to accommodate both short-term and long-term trading strategies. Multiple support and resistance formations may exist simultaneously at certain chart points.

Support and resistance formations may be recognized and interpreted either visually or with the use of computerized charting software.

SUPPORT AND RESISTANCE IN ACTUAL TRADING

In the previous chapter a significant amount of space was devoted to the detailed explanation of the construction of several chart formations resulting in the definition of various support and resistance points. In this chapter you will discover why this issue is being emphasized so heavily.

I am firmly convinced that the concept of support and resistance as it is used to set entry and exit levels for actual trading is the most important single concept that an individual must master if he or she is to be a successful trader. Period.

I am also as firmly convinced after teaching this concept in almost every conceivable manner and situation that it is without a doubt the most difficult strategy for most traders to both understand and properly implement.

The identification of these points on a chart can be vital to the success of a trader, hence the heavy emphasis on the construction and recognition of these chart formations in the previous chapter.

Using support and resistance to determine the exact entry and exit points for each trade could easily be the most powerful tool that you have at your disposal to increase the accuracy of your trading