Calculating Support and Resistance My First Solution

Yesterday I wrote a post about the mathematical definition of support and resistance levels and why it is so hard to accurately define these levels in a way a computer can understand. We talked about several of the problems which affect this definition mainly the fact that most of the currently used approaches do not have any way of discriminating between the importance of different levels, something which has a devastating effect over system profitability. At the end of yesterdays post I also highlighted that there are mainly three steps that have to be taken into account to successfuly tackle the problem of mathematically defining support and resistance levels for forex trading :

• Defining the S&R levels
• Eliminating unimportant levels
• Defining S&R zones

On todays post I am going to tell you how I intend to solve each one of these issues and how I believe this will lead to a reliable definition of S&R levels.

The first problem seems to be the one people have worked the most on. As I said on yesterdays post there are several ways of defining these S&R levels but the technique I find the most reliable involves the use of the fractal indicator. Since fractals signal reversals, they are useful in determing the global position of S&R levels. This concept is not new and it is a quite typical way of defining support and resistance in a mechanical fashion.

Now the next problems are a little bit harder to solve. How do we discriminate between the importance of levels and define their zones ? From the definition of support and resistance levels it becomes quite clear that the importance of a support or resistance level is given by the number of times this level has been tested (either as support or resistance). Therefore, if we save an array containing all fractals and we then assign each fractal a frequency value depending on the number of times this exact level was tested then we will have a reliable indication of which levels are "strong" and which levels are "weak". Staying only with the strong levels will definitely allow us to trade S&R strategies in a much more reliable fashion.

Of course, several of you may be thinking that I wont be able to succeed with this tactic given the fact that fractals are bound to be many times similar but almost never identical. For example a level around 1.5343 on the EUR/USD could be tested 3 times to give fractals at 1.5341, 1.5343 and 1.5345, within my definition, these three levels would be discarded since they are all different and therefore "insignificant". The solution to this problem is the addition of a "tolerance" zone around each fractal to group them according to the zones they cover. For example, two fractals will be considered as belonging to the same support or resistance zone if their values are within X distance of each other. How do we define this distance ? Volatility seems to be the best candidate since this is the main factor which affects the width of S&R zones. We can define X as a given percentage (for example 10%) of the standard deviation of price within the last Y number of periods.

Then we have the problem of having only a "huge" important price level given that all fractals are bound to be close to another one. We need to define a "center fractal" for each level which will be defined as a fractal which has more than Y fractals within its tolerance zone. This takes care of the importance problem and level definition at the same time.

This simple grouping of fractals will let us define the important S&R zones and simulatenously the width of these zones which of course will be limited to +/- X% of the standard deviation (however they can still be smaller than this). The steps this S&R indicator would need to do are highlighted below :

• Calculate all fractal levels
• Calculate each fractals population within its tolerance zone
• Assign "level status" to fractals with the highest populations
• Determine the highest and lowest fractal within each central fractal population zone

In the end this indicator will give us each important S&R zone coupled with its width, a criteria which is bound to be extremely useful for the making of long term profitable systems based on S&R trading. I will start developing this indicator soon and hopefully youll be able to see some graphical results within the next few weeks. Do you have any suggestions to improve this technique ? Leave a comment and Ill be glad to discuss it with you. :o)

If you would like to learn more about the automated trading systems I have coded and how they were developed step by step please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Diposting oleh Unknown 13.15 0 komentar

Support And Resistance My First Attempt to Implement Mechanical Detection of Important Price Levels

The detection of important price levels - so called support and resistance - is one of the most difficult things to do in algorithmic trading since their detection by the human eye seems to be extremely discretional, something that just pops out at an experienced trader when he or she looks at the chart. Through the past few years several attempts have been done to detect important support and resistance levels but most of them fail due to the fact that intermediate levels -which are not important - are often detected and used by computers when their real relevance is minimal. The question then arises : Can we algorithmically detect support and resistance levels in a reliable way ? Moreover, can we actually make a computer "know" the importance of each level ? Can we then develop a profitable system based on this detection ? On todays post I want to give my first set of answers to these questions showing you my first attempt at the computational detection of S&R levels and the achievements this technique has had up until now when used as part of a mechanical trading system.

On previous posts I had talked about how we could approach S&R detection in forex trading by using the fractal indicator (not the default but one that doesnt repaint) and performing a historical evaluation of the accumulation of fractals in certain zones, assigning a particular importance to each of these levels. However this approach seems to be a little bit complex so I decided to implement a much simpler approach in order to first evaluate the concept behind this way of "detecting" S&R levels. What I did was simply to use the High and Low levels of past candles counting their presence amongst different zones and assigning a "percentage value" to each price level pertaining to the "population" of historical candle high/low levels around this area. Areas that are heavily populated by hourly highs and lows and prone to be important daily support and resistance areas owing to the fact that price tends to "hug them" failing to move "straight through them".
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The significance of these levels is then easily evaluated by the percentage population of each price level and we can easily measure if price is moving towards a zone with a high population or outside a zone with a high population. When price is trading within a highly populated area it will have a tendency to remain there while when price trades in a "population scarse zone" it will tend to go to a zone where more trading has happened in the past. As it is shown on the image above, we could create a system by entering a position after we "breakout" of a zone that has a high population value. It is good here to note that we dont use levels but zones using a given amount of space to gather a given high/low population, this is done due to the fact that in forex trading support levels tend to be "spread" over a given area instead of pined to a given level (this is a consequence of not having a central exchange).

What is the result of implementing this S&R "tactic" on an expert advisor ? Eventhough the results of my first analysis are not absolutely incredible, it does reveal that the above given way of measuring S&R level and entering trades has some merit and - at least - a positive mathematical expectancy and some potential for profitability. The below image shows you the equity curve of an S&R system implementing the above explained criteria for entering breakouts of S&R levels (10 year backtesting period Jan-2000, Jan-2010).
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The system does most of the time what I intended it to do, entering trades after breakouts of S&R zones like it is shown on the image below. However the problem now becomes to know which period needs to be used to evaluate the S&R levels and what percentages are going to be required for any given S&R level to be considered important on different timeframes. As you may see, the population is an absolute number and we need to do a deep historical analysis to see what this number should exactly be to call a level "important or unimportant". Nonetheless I consider this step a very important achievement since there is now a way to measure the population of a given price level and some mathematical criteria to establish its importance. I will continue to develop and improve this S&R technique and there will most certainly be an EA with it in the future :o).
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If you would like to learn more about automated trading and how you too can learn to use, design and implement your own likely long term profitable systems based on sound trading tactics please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Diposting oleh Unknown 13.31 0 komentar

Defining Support Resistance Levels Mathematically A True Challenge for Automated Systems

I have always said that there is a lot of importance and potential in the trading of support and resistance levels in trading in general, and particuarly in forex trading. However it is true that the creation of long term profitable systems for automated trading based on the definition of S&R (support and resistance) levels has been difficult up until now due to the inherent problems of defining these levels mathematically. On todays post I want to talk about some of the approaches used to define these levels and the short commings each one of them has. On tomorrows post I will talk about what I think is the solution to the problem, a concept which may lead to the development of an automated system based on S&R levels which is able to gauge S&R level importance and trade the many techniques which can be derived from these levels in a profitable fashion.

So what is so difficult about the definition of support and resistance levels ? Theoretically a support or resistance level is an area (not a specific price value !) in which price finds a natural difficulty to continue to move in its previously acquired direction. So for example, if the EUR/USD is in an uptrend and there is a resistance level at the 1.3500 zone, price will get to this level and then it will bounce from it or consolidate around it until it either continues its previous trend or tests a lower support level.

Notice how many of the definitions of support and resistance are vague. What is a zone exactly ? how large must these zone be ? What parameters determine its size ? How could we know this level exists before price reaches it ?

The fact is that these questions have no straightforward answer. There is no rules for the size of the S&R zone, nor is there a way to accurately determine the levels before they happen. The previous attempts at coding automated trading system using S&R levels have tried to infere future S&R levels by taking information about previous levels in the past. The reality seems to be that a previously found support or resistance level will behave as either support or resistance in the future depending on from where it is attacked by price.

So the problem seems to be to find S&R levels in the past somehow and then use them in the future. If price faulters around a support or resistance level, then an intuitive way to define them is through the high/low criteria. A resistance is reached on the high of a candle followed by a candle of opposite direction and a support level is reached on the opposite situation. Another way to define these levels would be to use the fractal indicator. Since fractals determine patterns which signal reversals then the high or low of a fractal may indicate a resistance or support level.

The problems inherent to these very common approaches and other similar approaches is evident. All Support and Resistance levels are given and absolutely no importance is given to some over others. Another problem is that several fractals or high/lows may happen on similar levels but interpreted as different S&R levels when in reality they represent the same support or resistance zone. Since there is no discriminations between the S&R levels defined, these techniques of defining S&R almost always fail since they trigger trades on "not so important" price levels which make the strategies lack a positive mathematical expectancy.

So the steps to define S&R levels in a reliable fashion seem to be the following :

• Define all S&R levels
• Discriminate important from unimportant levels
• Define Zones of S&R
  

On tomorrows post I will talk about how I intend to tackle each one of these problems and how I believe this will lead to the definition of reliable automated trading techniques based on S&R trading. If you would like to learn more about what I have done with automated trading and how you too can learn how to design and trade autoamted trading systems profitably please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

Diposting oleh Unknown 20.16 0 komentar

Support and Resistance Trading Starting a Journal

I have received significant interest from several people regarding the post I wrote on Oct 17 about a dynamic support and resistance trading system I use to trade the forex market manually. This trading system is based on support and resistance levels. It is completely discretionary and is therefore almost impossible to be made "systematic" or perfect for "anyone" to trade as other much more rigid trading system, as the turtle trading system, which have very specific and inflexible sets of rules.

However, I do recognize that other people, as well as me, may benefit from a deeper description and evaluation of the system as this will bring up the systems faults and strengths and will most likely improve my performance with it in the future. I have therefore decided to start a "trading journal" in which I will describe trades taken using this system. I will publish a demo account statement using mt4stats in which I will include the updated performance of my manual trading.

In order to avoid saturation of the blog for people who are not interested in manual trading I have decided to keep the journal as a text file on an ftp. This file can be downloaded at ftp://fxreviews.exavault.com (username : journal, password : trading )and it will be updated with notes on the trades I have taken, the reason why Ive taken them and analysis on the outcomes of trades that went the wrong way. With this, people will be able to see the logic I use when trading and why it may be wrong or right. You will also be able to see the way in which I handle money management and how I carefully select my TP, SL and lot size to adequately manage my risk.

I use this trading system in a long term fashion so you may see that I usually open 1-5 positions every month. I also rarely have more than one position open at a time and sometimes it may take even two weeks for a single position to close depending on the actual targets I may set.

For all of you to know, I trade this system using renko charts which provide much cleaner charts with a strong reduction of market noice (as far as support and resistance goes). I wrote a post a few days ago with a video on how to accurately display renko charts on your metatrader 4 platforms. These charts can also be displayed on trade station or ninja trader for those of you who use these trading platforms.

If you are interested in this system please bookmark this page and check the demo statement/trading journal at least once each week, this way you may be able to follow my analysis and better understand my trading decisions. If you would like to learn more about automated trading systems and how you can profit from them with real profit and risk targets please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

Diposting oleh Unknown 23.00 0 komentar