One thing that I learned early on in trading is to be wary of support and resistance levels that are established during “down hours.” That is, times during the day when the market simply isn’t very active because the three main market sessions (i.e., Asian, European, and North American) aren’t open (8PM-11PM GMT), or during the tail end of the Asian session – which precedes the open of the European session at 7AM GMT/2AM EST (3AM EST depending on the time of year).
These hours can be affected by parts of the world that have Daylight Savings Time in place (or where you adjust the clocks an hour ahead or back). But for optimal movement in the market, you’re normally best off trading around the European or North American session hours. I like the hours 2AM-12PM EST the best (10-hour window), or 7AM-5PM GMT.
Why did I just write all that? Well, for my first trade decision today, I was looking at the resistance 1 level of 171.700 on the GBP/JPY. Price had rejected it on the 1:20AM (EST) candle, which is one of those “off hours” times. When the European session got under way at 2AM EST, it began challenging up toward 171.700 on the 2:15 candle.
Normally, there is more volume in the market at this time than there is during the 1AM hour. The consequence is that when there’s more volume, technical imprints formed during the lower-volume time periods don’t hold as much influence.
As a result, I didn’t use that 1:20AM touch of resistance 1 as the initial bounce or as “confirmation” that resistance 1 looked strong enough to hold. If you have a more aggressive trading style, you might take this put option on the 2:15 candle. But after obtaining too many losing trades by putting my faith into these off hours support and resistance levels – or by using their rejections of daily pivot points as the initial confirmation of the level’s robustness – I used it as a lesson learned and vowed not to repeat that mistake in the future.
This trade would have also lost.
After the break of resistance 1, I had to wait another hour before I received some notable action at another price level. This came at resistance 2 – 172.018 – on the 3:25 candle, which in turn formed a doji (indecision) candlestick. I had anticipated getting into the trade on perhaps the following candle during a re-test of 172.018, but I had to wait a while here.
We were also at the 172.000 whole number, typically a support or resistance level in the market simply because of the fact that people are sensitive to them. And sensitivity to the whole number, instead of resistance 2, was displayed via a failure to get back up to the latter. But with all the resistance shown around this area, a put option definitely looked like it could be a pretty strong trading decision.
But I was able to get into a put option at my desired entry – resistance 2, a better entry by close to two pips over the whole number – on the 3:45 candle. This spent some time out of the money, but ultimately held for a 3-4 pip winner.
Resistance 1 didn’t show much sensitivity on the resultant move back down, although buyers came in and kept it elevated above 171.700 for 30 minutes or so.
But price fell about 50 pips in less than ten minutes just before 5AM EST. There was no economic announcement of sorts, so it was likely just a large financial institution making a big move, but the activity basically dwarfed what had already happened from earlier in the day.
Pivot was not touched on the way down, but instead began retracing back up to resistance 1. Price began to stall just before 6AM, a few pips shy of the level. This is good, as it shows that more sell orders are entering the market, working to keep price at an equilibrium. Namely, a place where price might be fairly valued for the time being.
The 6:05 candle touched 171.700 (resistance 1) and rejected. Again, good news for the sake of put option potential. But I didn’t get the re-touch immediately. Based on the reaction on the 6:10, it seemed like it would move back down toward the pivot. But price began to inch back up toward 171.700 before finally touching on the 6:25, where I got into the put option.
I kind of like the idea of a shorter trade here, given the 6:30 expiry. The initial failure of price to move down to pivot and the weak retracement off the first touch of resistance 1 signaled a lack of selling enthusiasm. So a short bounce would have been nice.
This trade did have some promise, as I was up by six pips at one point, but this eventually turned into nine-pip loss.
Price made a strong move up to resistance 2 right after the conclusion of the previous trade and touched on the 6:40 candle. Going about this trade set-up was a bit different than normal given that there was plenty of uni-directional movement in the market. The up-move had a lot of energy behind it and going against that certainly carries a high degree of risk.
A somewhat simple solution to going against a relatively strong trend or burst of movement is to simply gather more evidence that it’s actually going to slow down. In this case, after the initial rejection of resistance 2, I wasn’t keen to simply take the re-touch. With this type of movement it could easily blow through. The fact that there were top wicks on the preceding three candles that had produced the move up from resistance 1 at least showed that some sellers were awake. But if the market is continuing to go up, you still need to be careful, even if there’s something positive occurring with the price action.
But the 6:45 candle rejected resistance 2 as well, and it seemed like buying and selling had finally reached a balance point. I did take a trade here earlier, so there was also the influence of resistance from previous price history.
Upon the touch of the 6:50 candle, I got into a put option. While the screenshot above doesn’t capture the closing candle, given I took the screenshot while the trade was still in play, this did continue to trickle lower for about a 15-pip winner.
Fairly typical day, but one I can always be happy with at 2/3 ITM.