Osi Price Action Support-Resistance Zones
This indicator attempts to find areas where the market pauses, based on price and volume action, in both quantity and speed. 3 time slots are defined by the user, and each time slot has its Support/Resistance zones determined as the day progresses. Once a time slot's end time is exceeded, the determined Support/Resistance is drawn to the end of the trading day. If you need the day divided into more than 3 time slots, you can always load multiple copies of the indicator.
This indicator is used to take action at places where the market seems to have paused. To be effective, we want to know why the market seems to have paused, and whether the probabilities favor a continuation or reversal.
Let us first examine why the market action seems to have paused. To simplify the explanation, let us examine a market that is going up, as for some reason most people can wrap their minds better around the action of a market that is going up.
- Let us assume that the market has been going up at a good clip. What is a good clip? It is whatever you decide it is, based on the Osi_PASRZ indicator reading of "Travel Per Minute" and the "Noise" in the current zone (in the lower right corner of the chart by default, but movable). Usually a good clip is when the "Travel Per Minute" exceeds the "Noise" indicating that the market is probably in a minor trend, as the market is moving faster than it is doing meaningless oscillations. The "Noise" is really just a measure of the average range within a noise envelope period. See how we measure it, at the end of this page.
- Now let us assume that the market "Travel Per Minute" drops below the "Noise" value. That can only mean that the market is trapped between a small oscillation range. We just need to know why.
- There can really only be 2 reasons why the market has stopped advancing:
- There is no further buying action because the market has run out of buyers, and so essentially there is no further interest, or
- Sellers have come into the market and are absorbing all the buying; providing selling equity to all the remaining buyers, so that the price cannot advance, as both buyers and sellers have a ready market.
- How can we tell which is which? By the volume.
- If the market has simply run out of buyers, and no sellers have stepped in, then it means that so few people are transacting business, that there should be very little volume.
- On the other hand, if the market is paused because there are multiple sellers stepping in to supply the buyers, then we should have a big spike in volume.
- Thus by the price speed and volume, we can come to a conclusion and mark the zone.
These considerations are the same, simply in reverse, if we started with a market that was declining.
Various commentators have indicated that they believe that there are usually 3 such periods in a day. The most often seen division marks these times as: 0900ET to 1100ET; 1100ET to 1400ET; and 1400ET to the close at either 1600ET or 1615ET, depending on the market and your preference. These are the time slots that we use by default. The Osi_PASRZ Indicator allows you to change them to whatever you want them to be.
Typical Usage Scenarios
We try to determine where the market will go after such a pause, by examining the Market Internals and the immediate price action. If the Market Internals indicate a trending day, we maintain a bias to the trend, and will usually have a confirmation because the bar on which the pause occurs will also probably be a bar in the direction of the trend (an up bar in an uptrend; a down bar in a downtrend). If the pause bar is opposite the trend, that should give us cause for caution. On the other hand, if the Market Internals are indicating a ranging day, we take the opposite tack, and expect the pause bar to be a reversal, which we confirm if the pause bar closes opposite the trend (down bar in an uptrend; up bar in a downtrend).
One should also take account of other indicators of support or resistance at the pause bar. These are such things as:
- Overnight Low
- Overnight High
- Previous Day High
- Previous Day Low
- Previous Day Close
- Pivot Points
- Value Area High, Low and POC
- The Osi_TimeSliceRange indicator, that shows the potential movement in each time slice of the day. It should ususally be set to show the range of each 30 minute time slice. It shows the average range of movement in that time slice over whatever number of days that the user specifies.
If, for example, the normal range for a particular time slice (say, 1300hrs to 1330hrs), is 10 ticks, placing a target 20 ticks away is an unlikely place for the target to be hit by 1330hrs.
The indicator is dynamic, in that it also shows the cumulative movement over the day, and uses that movement to show adjusted targets, in addition to the normal targets. Thus on a day when range expands, the projected targets expand, and vice-versa for days on which the range contracts. This makes it further useful, because anectodal evidence shows that on days that range contracts, the market tends to range, and counter-trend trades are indicated, whereas trending days usually show a range expansion.
The first 4 levels are all shown by the Osi_PeriodHiLo indicator, which can be set for either the overnight session or day session. to show both, you will have to load the indicator twice: once for each session.
Note: These a just some ways in which the indicator can be used. Different traders interpret things differently. The only real statement that can be made is that each trader must determine how they use what information can be extracted from the market, then continue to do that which works, until it does not.
How are we measuring the "Noise"?
We have a whole treatise on market noise, but here we can simply state that:
- We have the user define a period within which they consider the market movement to be largely noise. This is purely an individual decision, as different traders have different parameters. We use a default of 60 seconds. That is, we think that anything that happens in 60 seconds is usually just the market really doing nothing but measuring what smaller traders and scalpers are doing, trying to take advantage of minor oscillations in price. We know traders who think that anything that happens within 5 minutes is noise, and even some who say that 15 minutes is noise.
- The user also defines a lookback period, over which we shall take a measure. This measure is one of 4 user-selectable criteria.
- The "Travel Per Minute".
- The "Mean" value of the range. This is what most (non-mathematical) types think of as the "average".
- The "Median" value of the range. This is more often the correct measure of the average, especially if the values are widely variant, as it automatically ignores outliers, which can have a very untoward effect on the Mean.
- The "Mode" of the range. This is usually the better measure of the average if the values are clustered around a value with little variation.
All these measures of noise understate the actual value of noise, as they do not take into account the dispersion of price. However, we are traders, not mathematicians in this case, and this understatement is to our advantage because if scalping, then we are actually setting our first targets well within market noise, so more likely to be successful with that first target.