FX TRADING SYSTEMS
entire data to find the number of neighbors that existed in a 10 pip range (5 pips above or 5 pips below). For example if when examining low data the level 1.010 gave a 20 neighbor count then it means that from 1986 to 2017 there were 20 lows in the price action data that were between 1.005 and 1.015 – so price bounced up from this zone 20 times. If a level acts as support then the neighbor count for that level should be higher. Since S&R levels are generally experienced as “zones” more than perfectly defined levels the above better describes how traders most commonly view these levels. If real S&R levels do exist in the real daily data according to this definition – meaning that past levels influence future levels and we tend to see price return to the same levels outside of random chance – then we would expect this to show as a marked difference between the frequency distributions of the neighbor counts for high and low levels between the real and random data sets. To obtain an entire picture of the possibilities available within the random data I performed the above experiments across 100 random data series for each case.
Figure 2 shows the results of this analysis when looking at high levels. We can see that the neighbor count does show that some levels seem to
show significant amounts of
repetition. For example in the EUR/ USD high neighbor count graph we can see that there are around 25 cases where a price level has more than 15 neighbors. Tis means that there are some high prices that are touched frequently within the data,
60 FX TRADER MAGAZINE October - December 2017
showing what visually looks like resistance zones in the EUR/USD daily candlestick chart.
However these pooling in the real data falls surprisingly close to the mean in random data, suggesting that the
Figure 1. A random data series showing some apparent support and resistance levels that are the result of randomness.
Figure 2. Comparison between candlestick high neighbor counts for different real data sets and their random series. Real data results are shown in blue, random data results are shown in pink.
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