Using Support and Resistance Levels to identify Entry Points

Below is an article that I wrote on the 20th January, and although we are currently not trading at
these particular levels, I think listed are examples that we can help to summarise identifying key
support and resistance levels.

20th January:

I was asked yesterday by the new group if I could write an email identifying and explaining the
support and resistance levels that I feel are currently in play. We are certainly seen a bit of a
reoccurring market set-up over the last week or so, with us being in a 1126 to 1148 range, but within
this range we have seen some strong momentum trading taking place each day. In terms of trading
this momentum, it has been near-on impossible to stand in the way of its moves by trying to pick
bottoms or tops without getting severely burnt to the bone.

This is a chart of the 1148.00 to 1125.25 range:

With our friend Harry hindsight, it has been a case of buying the 1125/1126 to 1128 area (with a
stop below the 1125) and then selling the top at 1146/1148 area and then reversing position, while
spending the day just sat drinking the champers and watching as the dollars roll in - easy?! But in all
seriousness, this has unfortunately been the case until now and may be frustrating for us since we
feel we should have taken bigger profits than we have. Although this big range may end soon, it has
certainly provided some good trading opportunities but only for traders going with the trend.
Therefore the support and resistant levels that I am going to talk about below, have been more
useful in terms of picking entry points to join the trend, as opposed to trying to pick entry points to
pick the top or the bottom (for a reversal) of the intra-day moves when we are mid-range and aren't
close to 1125 or 1148 area. I hope that this makes sense. Firstly, let’s just recap as to the 2 different
methods that I use to join a trend:

Entry Methods:

1. The Aggressive Entry:

We approach a key support or resistance level with speed and high volume and the market feels as
though it has plenty of strength in it to push much further in the direction of the trend. Perhaps the
move is driven by a data release or a fundamental news release. Let’s say we have an upwards
moving market and we want to join the trend once it has broken through a resistance level of
1134.00 - in this example below, we have the 200ma at 1134.00:

Now in order for a level to be broken then I personally would classify it as needing the market to go
through the level by 4 ticks, so for the market to go to 1135.00 in our example above. Once we have
hit 1135 then for me it has broken and if you feel that the move will continue up with speed then
you can simply click "buy" and get into the trade. In terms of a stop, well you would need (in my
opinion) to place the stop 4 ticks below the key support/resistance level that you have used as a
technical entry point. So, in this example, we have 1134 as the support/resistance line, and so we
need a stop at 1133 really - so you will have bought at 1135 and stop of 1133, an 8 tick risk. Now
because you are so confident that this move has plenty of steam in it then this is fine but in order to
make it a good risk:reward ratio then you really need to be taking 8 ticks profit as an absolute
minimum and really probably 10 to 12 ticks minimum because I feel it is quite a high risk trade. In
our example above, once we did break through the 200ma, shortly after the cash open then we did
see a strong move higher without a retracement at all. I hope this makes sense?

2. The Classic Entry Trade:

We are in a downward trending momentum market. This time we are approaching 1133 in a slower
manner and the market is perhaps less strong and less volatile. Perhaps we haven't had a data
release but the market is still going with the trend and you have the view that this trend will
continue for the time being but that we will have a momentum that is more like a pause and move.
(If this makes sense - very hard to put into words as to how the market reacts - this all comes with
experience as you progress throughout the course).

So, on this Classic entry point we wait for the 1133 level to break by it moving to 1132. Then we look
for the market to retest the 1133 but from the bottom side up. So the 1133 was a support level and
now that we have broken it then we feel the 1133 may well become a level of resistance and we see
1133 re-tested before we continue to move lower. Therefore the Classic entry for me is to look for
1133 to be retested and so to enter short here. However, in order to make sure of the fill on the live
market then the entry point would be 1 tick lower at 1132.75. In terms of a stop loss then this
doesn't need to be as big as the Aggressive entry since we can still have our stop 4 ticks below the
1133 at 1132. Therefore, a 1132.75 short can have a 5 tick stop at 1134.00.
Now I know that traders quite often get confused on the stop here on the Classic trade since they
feel it is a 4 tick stop and therefore they place their stop 4 ticks away from their entry point and have
this rigidly in place. In terms of a stop, my Classic trade stop is simple - have the stop a MINIMUM of
4 ticks away from the KEY support/resistance level you are entering off. This does not mean always
have a stop of 4 tick it means 4 or more! Therefore although you are short 1132.75 then the stop
isn't 4 ticks above here at 1133.75 but instead 4 ticks above the support level of 1133 so at 1134. In
terms of take profit then because you have risked 5 ticks then you need to make a minimum of 5
ticks on the live (6 ticks minimum on the sim please to represent the harder filling on the live) and
ideally you take 8 ticks to make a nice risk:reward ratio. I hope that these make sense and I must
stress these are techniques that I use and that you may have your own styles of entry points, and
that if these work well for you then great - stick with your method.

Secondly, now that we have identified how to join a trend in terms of support/resistance levels
giving us our entry points then let’s have a look at levels that we had in play yesterday and therefore
we can see if they come into play again today. Here is the chart of yesterday's session with the key
support/resistance levels highlighted in it. We also have a trend lines that worked well as
support/resistance too.

Key Support and Resistance Levels:

Let’s have a look at what gave us these key support/resistance levels then, starting at the bottom:

1125.00/1125.25 - The 1125.00 was the low on the 5th Jan (have a look on your 1 hour chart in
order to identify this). This was the last level of support in our band of 1128.50 to 1125 levels of
support.

1126.25 - The 50% Fibonacci of the high in 2007 and the low in 2009, so the 50% Fibonacci of the
whole recession move. This level was also the low of the day on the 19th Jan.

1127.00 - The low on the 6th and 7th Jan.

1127.50/1127.75 - We have seen this level hold well on a couple of days now as the low. This was
the low on 12th Jan and 15th Jan.

1131.00 - The low on the 8th Jan and each time we have got there since we have seen a
support/resistance level work in the short-term before the being broken. Have a look on the 5mins
chart yesterday and you can see that we couldn't get below there at the 15:05 attempt and that it
took until 15:25 to get through the level, once we had then we went down fairly quickly. Then on the
way back up yesterday and we couldn't get above 1131 from our first attempt at 18:50 until it finally
gave way at 19:35.

So the levels written above our really our band of support levels that we have seen at the bottom of
the big 1126 to 1148 range we have been in.

Now, let’s have a look at which levels worked well yesterday as recent levels during the sell-off. The
chart of this is shown below:
a) 1138.00 - held at 12:00 and then we didn't break through there by 4 ticks to 1137.00 despite
several attempts between 13:45 to 13:55 until 14:00.

b) 1135.25 - held well just after the cash open at 14:35 and 14:40. When it broke then we saw an
accelerated move to 1133.00. This was a time to use the aggressive entry perhaps because it was so
close to the cash open. Indeed on the love back up then we couldn’t get above here at the cash close
despite an attempt or 2.

c) 1133.00. This level has held well in the past, and didn't let us down again yesterday. It held well at
14:45 and you can see how strong it was from the doji candle at this time on the 5mins chart. Then
the next test at 15:00 saw this level hold. When we did break we went to 1131.00, before seeing a
retest of 1133 from the upside and it held again, making an ideal entry short at 1132.75 using the
Classic entry point method.

d) 1131.00 - held well at 15:05 and then once we had broken through here we couldn't get back
above 1131 despite several attempts between 15:25 and 15:50. So that confirmed it as a decent
level.

e) 1129.75 - 15:25 to 15:50 held well as support. And then at 17:10 and 17:15 we couldn’t get back
above this level and it caused us to move lower to 1126 area again.

f) 1125.25 - turned out to be the low of the day and the bulls protected the range once more.
Conclusion

- There are different entry methods for different market conditions.

- Identifying the support and resistance levels gives us our entry points for joining the trend and not
going against it.

- Going with the trend using these support and resistance levels as opposed to trying to use them to
identify a turning point has been the profitable way this week.

- When we get to the 1126 and 1148 areas then this is the opportunity to perhaps pick the bottoms
or tops but it is high risk and you need your stop above 1148 for the short or below 1125 for the
long. Therefore if doing this method then you need to take decent profit from the high risk taken on.
eg. I went long yesterday at 16:03 at 1126.50 with an 8 tick stop and booked it around 19:50 in the
evening at 1132.50, so a 6 point winner for a 2 point risk, a 1:3 risk:reward ratio.

- We are currently in a 1126 to 1148 range but within this range we have seen momentum moves.