By Gabe Velazquez, Online Trading Academy E-minis Instructor
I just finished teaching a terrific E-mini class in our Northridge location last week. In class, we found some great set-ups and I left feeling that many of the students, after our five days together, were taking with them a good structural foundation for their future trading ventures.
As I do with any class, I begin by stressing the basic market underpinnings of trends, support, and resistance. Having a systematic way of identifying these core concepts is imperative. We start by assigning each level of support and resistance from most to least important. That is done by looking at the larger time frames and then working our way down the time scale.
Let's begin that process by looking at a 240-minute chart of the TF (E-mini Russell 2K) below; in it, I've highlighted all the major prior turning points.
Figure 1 The reason for looking at this chart is so that we can spot the "major" (larger time frame) buy and sell zones, as well as help in determining where the trends are likely to reverse vis-à-vis the smaller time frames. The space between these zones can also assist us in projecting profit targets. Since I look for bigger moves, I generally will look at 2 to 3 month time frames. Important to note here - for those of you interested in what the market is likely to do next - is the significant distance between 618 and the next higher resistance at roughly 644. This implies that if buyers are able to regain the 618 level, there is very little supply to impede their progress until the higher sell zone is reached. I refer to these areas as "air pockets." Therefore, the 618 level becomes a major resistance area.
When we zoom in to the 60-minute time frame, we can clearly see that "air pocket". In addition, although the trend is clearly down, shorting the TF (E-mini Russell 2K) when it's approaching a major buy zone (demand), doesn't make a lot of sense as the probabilities are high that a bounce, or perhaps a reversal, will happen from this level. Instead, shorting at a prior major resistance level would probably garner better results.
Figure 2 If we continue to narrow the time interval, we'll begin to spot specific entry and exit points. The chart below depicts these areas on a 5-minute chart.
Figure 3 Now I understand the skeptics among you will say that in hindsight, these areas look like great set-ups, and I can appreciate that. However, if you've ever attended any of my classes, you know that these buy and sell zones are plotted on the second day of a five-day class and are acted upon for the remainder of the week.
After distinguishing where the actionable levels are on the chart, the individuality of each trader will determine when to take action. For instance, if a trader's wheelhouse is candlestick patterns, he or she may look for specific candles to form before entering the trade, or maybe he or she prefers a specific indicator to confirm - you get the idea. Regardless of what's used as a call for action, the knowing WHERE part of the strategy is done.
The lesson here is that as an alternative to looking at support and resistance in the traditional manner, scout for the inflection points in the bigger time frames, then draw them as "zones." In my experience, these prior turning points tend to hold much better and move a greater distance than those minor pivots that everyone else looks at. It's also important to state that not all these areas will hold, and that there is a definite art and a nuance in spotting them. Moreover, and I can't stress this enough, successful trading is NOT as easy as simply buying at support and selling at resistance. If that were true, there would be a lot more than 10% of traders consistently making money in the futures market today.
Until next time, I hope everyone has a very profitable week.
If you have questions or comments, please email me at gvelazquez@tradingacademy.com
- Gabe Velazquez
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