EP162: How Far Should You Go Back with Zones History?

Truth About Forex

5 years ago

In this episode of Truth About FX, Walter digs into support and resistance zones and how far should you go back on your trading history to get the most accurate data. According to him, it all boils down to answering this two questions: what is your point of view?; and what are your beliefs? He also gives some insider tips on using extremes and what are these two important plans related to candles that you should carefully consider. And do you believe that the market has a memory? Find out more in this episode of Truth About FX Podcast.

Download (Duration: 06:40 / 16 MB)

In This Episode:
00:41 – for what it’s worth
02:03 – important ones
03:25 – switching to line chart
04:22 – big ones to look out for
06:10 – a little bit of discipline

Tweetables:
What is your belief? [Click To Tweet].
It takes a little bit of discipline [Click To Tweet].
Always use the extremes [Click To Tweet].

Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.

Hugh: Hi, Walter. Somebody wrote in and asked: How far back do I go when drawing support and resistance zones?

Walter: Now, everything I say is my point of view. Everyone listening to this needs to decide: what is your point of view? What is your belief? I am just going to give you my opinion and take it for what it’s worth but this is what I found to be useful for me because I use support and resistance, obviously.

What I like to do is I will always use the extreme high and the extreme low on the chart. I don’t necessarily have to scroll back 15 years to find the ultimate high and low because, let’s face it, the only real support and resistance zones that matter are the ones where the price are going to hit it like in the intermediate future. That’s all that really matters.

That is why I occasionally will just scrap all my charts, throw them all away, and start all over from the beginning and it’s more because I have all these little things. My old trades are kind of scribbled on my charts.

I’d like to change it up and have a different template. Sometimes black and white candles are cool. Sometimes red and green or whatever. It’s fun and you are always looking at the chart, you might as well mix it up a bit.

I just think you draw extreme high resistance, extreme low support and then from there, you go in and find as many as you can on the timeframe higher than the one that you are going to trade.

So, if I’m trading the D1 chart, I’d go to W1 and if I’m trading the H4 chart, I’d go to the D1 and so forth. That is what I’m going to do because what I’m trying to do is to find the very best support and resistance zones. They are so obvious on the higher timeframe.

The really important ones will be obvious on the higher timeframe. The minor ones will kind of just be hard to see on the next higher timeframe. That is what I want to do. Now, if your candles.. so there’s a couple of things to watch for here.

Two things I want to plan. If your candles are literally touching more than one support and resistance zone, then you have way too many zones on your chart. If you’ve been trading the D1 chart and you’ve got these and the daily candles are like 90 pips on average on this pair that you’re trading, and you’ve got like candles that are touching 2 or 3 support and resistance zones, that means that your zones are like 25, 30 pips apart. And that means, they’re way too close because it should be a rare event when the market gets to one of these critical level.

That’s kind of the way I look at it. This gets back to the question we were talking about in our last podcast where it’s like, “What if I don’t have enough trades?” Oftentimes, you’ll feel that way if you have the very best zones, support and resistance zones, identified on your chart. You’ll probably not going to have a lot of trades.

Why? Because the market doesn’t always reach these important spots on the chart so it is something to keep in mind. The last thing I want to mention here is when you draw these zones on… Let’s say, I’m trading D1, I draw them on the W1.

Sometimes, what’s going to happen is I draw my zones on the W1 and it looked really good. Switching to the line chart will really help you here if you’re not used to seeing these. Switch the line chart. Look for those bands in the charts.

I’ll post in the show notes a video that will walk you through how I do this. You may find it useful but essentially, you might have to readjust. People forget this. They think that they’ve drawn the zone on the W1 chart so when they drop down to the D1, it’s set on stone.

Not really because you need a little bit more precision when you’re on the D1 and you might have drawn in what looks like the perfect spot for that zone on the W1. But then, you go on the D1, it looks a little bit sloppy and the candles aren’t really respecting that zones as much so that might mean you just need to shift it down a little bit. Like, shift it down 20 pips or 30 pips or shift it up 15 or 20 pips or something like that. That is totally common and that’s totally cool.

It’s not cheating. As soon as you’ve lock them in on your D1 chart, bam! Your D1 chart is ready to go and you can trade it. That is basically my approach. The big ones to look out for are: it’s okay to slightly adjust these because they are general areas on the charts. They’re not a specific price point and the second thing is when you’re drawing these zones, you really want to make sure that it’s kind of a rare events that the candles hit it. You shouldn’t see the candles hit these zones every other candle unless, of course, it’s in a tight consolidation and getting ready to break out.

But usually, what will happen… For example just on average, my Euro chart might have a zone drawn every 130, 150 pips something like that. That will be about average and obviously on a pair like the GBP/JPY which is more volatile, maybe it’s every 220 pips or something like that. If I’m trading the EUR/USD and I’ve got zones drawn every 50 pips, something is really wrong. That is basically what I want to get across. Does that makes sense?

Hugh: Yeah, totally. I saw a Youtube video once where the guy made the point where you could really make a case for a support and resistance zone every 20 or 30 pips. I think, it’s really important to just practice and see what other people are doing. Kind of getting proficient and putting them in the right place.

Walter: Yeah. If this is what you believe that the market has a memory and it bounces off these areas — which is what I believe. Some people don’t believe that, of course, but if you believe that then just get really good at finding the best ones.

Let’s say, I traded the H1 charts. If I’m trading the H1 charts, I’ve probably gonna draw my zones on the W1 charts, maybe the D1 charts because I just want to find those very best turning points to take my trades if I am a swing trader.

That is kind of the key there. If you go to a lower time frame, it’s going to make sense. You’re going to see one everywhere and that is not going to help you. What you want to know are where are the important ones and that’s the critical thing. It just takes a little bit of discipline and once you get it down, it’s pretty easy.