OHLC is just a line in the sand for Support and Resistance

In spite of my interest in OHLC, there are plenty of other ways to create very clear and potent daily levels of support and resistance within the meantrades method.

Let's compare several of them and see the results from last week.

Using 10 pip CRB's we can track the progress of each method of Support and Resistance. It's starting to become fairly obvious that no matter how to create your "line in the sand" on your chart, every day the results will vary. Thus, for posterity's sake, let's compare the results. Keep in mind when we look at historical trades, we are very mechanical in our entry, although in real-time you can be less so, taking into account the velocity of the markets (the rate of bar change) to help you decide if one of the primary rules of meantrade could be overlooked for the sake of a great risk to reward setup. For example, perhaps price has already violated the keltner midpoint and you still want to take the reversal from the S/R level. There are so many good trades which don't set up perfectly. This requires a traders vision and resourcefulness and is the reason most great mechanical systems cannot be hardcoded into a black box to ride off into the sunset and make us all millionaires in a month.

Traditional Pivot points (using the daily close at 5pm as the starting point for daily calculation):

11/14-11/19, Keltner touch exit: +30
11/14-11/19, Supertrend exit (note: when using the supertrend exit, we move stops to break even once we touch the opposite keltner band from entry, it creates a high percentage of break even stop outs, but allows for a few really big wins throughout the trading week): +31

Fibonacci Levels based on the first High Low close of the day:
(One of the true benefits of this method of creating intra-day S/R is that it does not have levels after the market breaks out, in a sense, it only looks for reversals within the expected daily range)
11/14-11/19, keltner touch exit: -28
11/14-11/19, supertrend exit: +102

With this method we also have the option of trading with the trend only after price has broken the last fib extension level. As you can see in the screenshot above, this creates some very high probability setups.



ORB Fib levels based on Asian session range:
11/14-11/19, keltner touch exit: +87
11/14-11/19, supertrend exit: +114


Finally, OHLC levels:

11/14-11/19, keltner touch exit: +51
11/14-11/19, supertrend exit: +114

Quite interesting that the OHLC S/R levels performed exactly the same as the ORB Fib levels. Fine with me, it proves Meantrades was ok the way it is originally. I like having that validation. Most people in back-testing circles refer to that mental condition as positive expectancy. With positive expectancy we can take every signal without trepidation.

One more method for creating S/R levels I learned from a guy on elite trader a long time ago who claimed, with about 5 years of trading futures under his belt by this time, that if you adjusted your fib ratios to 3.77, 5.12 and 7.80 instead of the standard, 1.618, 2.618 and 4.236, you would have more accurate targets for the daily range. I tested it a while back and it was true...sometimes!

If we take the opening range and use these ratios, as well as high low and 50% of the ORB and then applied these ratios for last weeks trading this is what happens:

11/14-11/19, keltner touch exit: +113
11/14-11/19, supertrend exit: +206

Looks like a winner.

Keep in mind that this is based on a single brokers data. Your results will certainly vary. In fact, I invite anyone to get in touch with me on yahoo at "mezarashii" and I would be happy to teach you how to set up your charts to get you going on meantrades..., well, I'm not sure what we should call the last method of creating S/R levels. I'm open for suggestions.

So what did I discover here in the end. Almost certainly pivots are a waste of time when trading horizontal support and resistance levels. But then, this I knew for years. I'm not sure why it does not work in forex but I'm assuming it has a lot to do from what time you plot them and the end of trading for one market is not the end for another. Perhaps re-plotting based on the opening price of each market would yield more active S/R lines but at this point I will leave that discovery to someone else. I prefer ratios and you can see why with the results from last week. Imagine getting a yield like that week in and week out. Most of these winning trades came on 2 or 3 days only. The beginning of the week was a real dud and sitting on a negative balance was quite challenging. But with positive expectancy, you can continue to pull the trigger with total confidence. That is what I took from this weekend analysis.

Meantrades Redux V

Taking my lesson from the Perfection Trap, a bold look at what works and does not in Meantrades trading. After accepting that horizontal lines based on some secret Fibonacci on Gann type formula are at best random and accurate less than 40% of the time, I took a second look at what is important in support and resistance trading: where were there buyers and where were there sellers. There are 4 undeniable price points everyday, all else is anathema.

Open


High


Low


Close

With that in mind we can take these price points and potential support and resistance lines for each day. Meantrades have always been about finding price points for entry where one would consider the market at a disequilibrium. If we are to trade at previous closing prices which printed on the chart, we can assume there is some intrinsic value at these price points.

From Friday's London session we saw two ideal setups.

These price points are not guaranteed levels of reversals but they are relevant almost every day. Markets push and pull, give and take, they never break out without retracement. We just need to catch a single wave each day to become rich.

Applying our traditional mean trade setup(with one small adjustment, we only take the reversal after price crosses the supertrend level*), testing of the preset levels for the day, there are very nice trades coming out with these OHLC levels.

How simple, how elegant.

One added bonus of shifting this method of creating support and resistance lines is that the first trade of the day happens MUCH earlier than all previous versions of meantrade. Most days there is a very powerful signal during the Asian session, which is quite convenient.

Here are the results on GBPUSD from last week:

Monday: -1
Tuesday:  +55
Wednesday: +11
Thursday: +20
Friday: +19

*the benefit of using the supertrend "crossover" (basically just the price reversing strong enough to crossover the supertrend stop line) as opposed to previous methods of stopping is the use of leverage more effectively. Taking small losses allows trading in multiple markets simultaneously without any additional account risks. Bad trades are exited efficiently. There is no overnight exposure. All the typical benefits of an intraday system are now employed, another positive effect of refining systems and the mental escape from The Perfection Trap.