Nickajack Creek Trading Co., Inc.

Support and Resistance Day Trading

November 17th, 2007

Divergence Question

I wanted to know how long do you wait after you see divergence to enter a trade. Do you have any rules you follow? (e.g. where would you have entered on your 11/16 5m chart between 10 & 11AM) Please advise.

With divergences, I do not know I have a divergence until I have a confirmed turn in price or a cross of the stochastic lines. For a stochastic indicator cross, I wait until the 5 minute price bar close (or until it’s very obvious the cross will remain because price has moved far enough). You need to be careful because indicators will cross and uncross as price moves around. My confirmed price turns are similar to the Zig indicator where price needs to move a certain percentage before I consider that I have a price turn. On my chart, my turn bars are white, but they do not become white until the market has moved by my calculated percentage. The blue bars are the bars where the price turn is confirmed. The actual entries as similar to all my system entries; the break of the previous bar or the closest daily SR. 

Now with the 11/16 divergence, I would not take a trade with that divergence. Why? Two reasons, first price is not pausing or reversing at a daily SR. It’s too far away from the 13086 SR (10 points) for me to consider as a trade setup. Secondly, the stop would need to be set below the 13086 daily SR which would make risk way too large for me personally. Divergences often go back and test the swing low or high (and clear the stops) before making it’s trend change move. With the 11/16 divergence, the best trade is to wait for the first pull back (which is actually trade 3).

November 9th, 2007

Targets in Consolidations

I was asked a prophetic question this morning about whether or not I change my targets when trading in a consolidation.  The answer is yes, if I recognize that the market is range bound or moving slowly, I’ll use the previous swing high or low as my first target and the next daily SR as my second target.  If the market breaks out of the consolidation area, then I’ll revert back to using two daily SRs as targets.

November 6th, 2007

SRs and Tape Reading

I received a question about using SRs and tape reading:

Do you mainly trade with support and resistance? Also do you use time
and sales to determine if price gaining momentum for a possible long
or short?

Yes, I trade mainly with support and resistance. SRs provide a market structure from which you can define your risk for each trade. SRs are prices where the market as stopped before, so there are buyers/sellers who think that those prices are important and react to them when price approaches them.

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October 24th, 2007

Indicator Divergences

An indicator divergence is simply when price is moving in a direction opposite of an indicator.  I personally like using oscillating momentum indicators for monitoring divergences and have included a stochastic in my methodology for doing so.  In general, oscillating indicators follow price swings up and down which creates their own swings.  The direction of price and the indicator are best seen with lines drawn between two swing highs or two swing lows. 

Divergences are determined by comparing the slope of the line between the price swings with the slope of the line between the indicator swings.  If the slope of the price swings is up and the slope of the indicator swings are down at the same time, then price and the indicator are diverging.  Likewise, if the slope of the price swings is down and the slope of the indicator swings is up, the price and the indicator are diverging.

Why are divergences worth monitoring? 

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October 14th, 2007

SR Questions

I received an email with a couple of questions about SRs.

When you see the market unable to reach the next previous high and form a LH, say 10-20 point lower than next previous high, and go down to test low. Do you consider this LH as a SR level?

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October 4th, 2007

Methodology checklist

As I evolve and fine tune the trading methodology I’ve presented on this blog, I’ll post summaries or checklists such as this one to hopefully simplify and clarify the methodology.

Trade Setup
1. Price is near an SR.

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October 3rd, 2007

Which Trade Setups Should I Take?

Here’s another couple of questions I received in an email:

How do you identify the pause and how do you know which trade setups to take?

The “pause” is the easy part. 

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October 3rd, 2007

Major and Minor SR levels

I received a couple questions about strong and minor SR levels:

Some experienced traders talk about strong and minor SR levels. Do you differentiate your levels? If so, do you treat them differently in your trading?

There are major and minor SR levels.  Major SR levels can easily be seen on higher time frame charts (e.g. hourly or daily) where minor levels can usually only be seen on lower time frame charts (e.g. 5 minute).  Major levels also tend to act as support or resistance over and over again.

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October 2nd, 2007

Daily SR Questions 2

Here’s another question I received about Daily SRs:

Can the Daily SRs posted be used on daily charts for position trading? 

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September 30th, 2007

Daily SR Questions

I received an email with a few questions about creating daily SRs that I thought would be useful to answer in a post:

Do you include Premarket price action in your SR analysis?  Yes, especially if there are large premarket movements.  I usually determine the daily SR levels the night before. 

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