Support and Resistance (SAR) is generally considered one of the cornerstones of technical analysis. In my personal trading, I assign SAR levels the highest level of scrutiny because most of the really good trades I have executed originate by judging the direction of the market price at SAR levels. Of course, this all sounds great but determining these significant price levels and determining their importance, relative to other SAR lines, is truly the meat and potatoes of learning to trade e-minis. Let me ask you this; how do you know which lines are the most important and which ones can be ignored? I'll try to help with this determination throughout the course of this short article.
One of the truest statements any trader has dared to utter centers on the idea that if you draw enough lines on a chart the price action is bound to stop on a given line. The idea is to identify useful lines and avoid the spurious signals created by market noise. Market noise is the basic operation of the exchange as non-professional traders enter and exit at random intervals. Note: I highly recommend a thorough understanding of randomness and market price movement. It is a topic that is generally ignored by trading educators.
Let's get a workable definition of support and resistance: the price movement of an e-mini contract generally is likely to stop, reverse or pierce pre-determined price levels. These levels are typified by several stop and reversals at the predetermined price. I am a reactive trader in that I do not use support and resistance lines that are derived from predictive SAR tools like; Murray math lines, floor traders pivots, any sort of calculated pivot line, or levels created through Market Profile. I like my lines to form through the course of daily trading where I can determine how, when, and why these lines are formed and the reason for their formation. I have real confidence in a price level when I can actually watch the SAR form, and I have a better understanding of why it formed at a certain point.
Once you have marked up the chart with SAR, then assign a preliminary importance to each line. I give highest priority to levels where I can identify a significant increase in volume, previous closes, daily highs and lows, and overnight high and lows. You will need to identify which lines are most important for your trading style; these examples are just basic to my personal trading style.
I hope that I have shed some light on this topic for newer traders. Support and resistance should be part of any effective trading plan.
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