Objective support and resistance

As with any aspect of trading, specific definitions and research can help separate subjective guessing from objective hypotheses. The information could provide the basis for a testable rule that might be applicable for intraday trading.

Say you wanted to find out if the early-session high was likely to be a valid resistance level to sell against intraday. Researching the daily price action could lead you to define the current conditions as: The previous day had a lower low and lower close than the preceding two days; 2) the market did not exceed today’s high by (specify the time).

If the historical analysis shows, say, that 85 percent of the time the market will not trade above the intraday high under these conditions, the early-session high could be a viable level to sell against during the trading session.

Other aspects of trading with support and resistance could be tested in similar ways. Assume a currency pair has just made a three-month high. You could research what has happened in the past when the market has made similar highs: Did these levels function as resistance? How close did subsequent highs come to this level? Were they subject to minor penetrations that did not result in full fledged breakouts? Were there clearly definable signals for what constituted valid breakouts?

Did price fall below the resistance level after breaking out? Analyzing support and resistance this way will provide more useful information than by simply “eyeballing” charts.