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I suppose if you analyze my e-mini trading style, it revolves primarily around support and resistance. While I am intensely aware of order entry, tick data, and standard deviation analysis; the engine that powers my trading centers on support and resistance. The question I am often asked is: how do you know when the price action is going to pierce given support and resistance versus stopping and/or reversing at support and resistance points? Is it possible to accurately predict when price action is going to continue through support and resistance (SAR)? I don't know that there is any single indicator that will definitively indicate a price behavior around support and resistance lines, but there are some notable indications that you, as an e-mini trader, should be intensely monitoring when price approaches support and resistance. For the purposes of this short article, I am going to assume that you understand the basic principle of SAR. Further, most texts insist that the number of times price action “bounces off” SAR is a strong indication of the relative strength of that particular price. Of course, to fully understand SAR you need to understand the context in which you are trading. In the stock market, there is unlimited supply of an individual stock issue so that supply and demand issues are of lesser consequence than in the futures market. In e-mini trading however, we are working with finite supply. Why is there finite supply and demand in e-mini trading? In futures trading, and specifically e-mini trading, for every buyer there is a corollary seller. This is called a zero-sum game, and presents a different set of trading rules to follow as opposed to the trading stocks on the New York Stock Exchange. In e-mini trading, when the buying or selling dries up, the price struggles to move higher or lower (depending upon the direction of the trend). The market can only move when buyers and sellers can be matched together to form both sides of an e-mini contract. So, to be clear, e-mini trading is a zero-sum game and this must be recognized and understood at all times. But zero-sum games are not all bad; in order for the market to change direction some very distinct actions have to occur. We can identify those actions and make reasonably accurate predictions about how the price action is going to behave at a support and resistance point. How? For example, if the market is moving in an upward trend and approaching known resistance, there are some secondary market actions that we can observe. In order for the market to change direction, the traders that were in the buying mode have to stop buying and a new group of e-mini traders will enter the market on the sell side. As the sellers begin to overtake the buyers, the buyers will voluntarily or involuntarily be forced to abandon their long positions. These two actions will have an effect on of volume. Specifically the combination of buyers exiting the market and sellers entering the market will cause the volume to rise. When we see significantly higher volume at a known resistance point, you should be aware that the possibility exists for a reversal. On the other hand, in the same upward trend we described in the previous paragraph, the volume may stay very low. Low volume at a resistance point would indicate that sellers have not entered the market and the possibility of the e-mini price action to continue through the SAR point is a distinct possibility. In short, the buyers keep buying and new sellers did not enter the market. So, we can say: High volume at SAR = a strong possibility for reversal Low volume at SAR = a strong possibility for a continuation move in In summary, we have discussed the difference between unlimited supply markets and zero-sum markets. The rules for trading these markets can be quite different, especially at SAR points. For reasons described above high volume and low volume at SAR points can result in either a reversal or a continuation of a trend. Finally, I would note that there are exceptions to this general rule and it is wise to observe the price action before assuming either a reversal or continuation move. Real Live Trading Doesn't Lie. Spend 3 days with me, in my trading room, and see if you are one of the many that can profit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by clicking here.
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e-mini trading, price action, resistance point, support and resistance,
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