S/R Levels - When Do They Become Invalid?
I produced a few articles on
general S/R theory a couple of years ago.
Plus an article demonstrating the
trade opportunity available when S/R changes polarity (S becomes R):
And a recent blog post which
demonstrates how I define my S/R levels on my higher timeframe:
At the very least, please read
the recent blog post prior to this article.
Now, in writing all of the above,
one thing I don't appear to have ever discussed is when I will invalidate a
level and remove it from my chart.
The S/R marked on my charts are
defined as follows:
It's easy to find those that have
not yet been broken. Moving higher from the current price we mark swing highs,
areas of congestion or gaps. And moving lower we mark swing lows, areas of
congestion or gaps.
For those that have been broken, it's a lot more subjective. We have
to ask whether or not it's a level still fresh in trader's minds. Are traders likely to
still be trapped from the break of that level? Or was it recent enough for
them to recall the pain of the break of that level? Remember, price action is a
result of orderflow, and orderflow comes from trader decision making. If a level
still recalls emotional pain, then it will influence orderflow again. If it's
forgotten, then it will have no influence.
If a level occurred 18 months ago (to use an extreme example) it will have no
influence at all now. But if an area of support was broken only half an hour ago
and is now being tested again for the first time... it's still valid.
So, without being able to give a hard and fast rule, as a generalisation we
expect recent levels to be more relevant, and especially so when they're
involved with an emotional incident such as breaking of the level. A good
example of this is the common occurrence of support becoming resistance, and resistance becoming support.
So, those are my valid levels:
Therefore, to invalidate a level, it has to have
been:
Sorry I can't provide more hard and fast rules. It's a subjective thing... as is
so much of chart analysis.
Let's look at an example though,
which I've lifted out of the
YTC Price Action Trader (which discusses S/R in
much more detail, by the way).
In this example, we're using the
30 min chart to identify our higher timeframe S/R. Moving upwards from current
price we have resistance at 1.5575. Moving lower we have support at 1.5510,
1.5495 and 1.5440. Simple.
Now, let's say price moves lower,
as shown below, slicing right through the 1.5495 level without any pause at all.
Which levels are still valid?
The unbroken levels are simple.
1.5575 resistance and 1.5440 support are still untested, and remain on our
chart. However 1.5510 and 1.5495 have been broken. Are they still valid or not?
Are they still significant in other traders minds?
If I was trading this, I'd leave
1.5510 as potential resistance, but remove 1.5495 as no longer valid.
Why?
Because price showed a stall at
the 1.5510 level before crashing lower. People bought here. Some will have lost
money; others will still be holding on in desperate hope of a breakeven exit.
The level is recent and is a source of emotional pain. It stays on my chart.
1.4595 provided almost no support
as price slid straight through. There was likely to have been little buying
here, and therefore a lot less emotional pain. This one's gone!
So, hopefully that helps you with
your S/R levels.
Let's wrap it up with a summary:
These are my valid levels:
To invalidate a level, it has to have
been:
Cheers,
Lance Beggs
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