In “Evidence-Based Support & Resistance” article, author Melvin Dickover introduces two new indicators to help traders note areas by identifying pools. Here you can find the support-resistance technical indicator called "Freedom of Movement".
The indicator takes into account price-volume behavior in order to detect points where movement of price is suddenly restricted, the possible pools. These points are also marked by Defended Price Lines ( DPLs ).
DPLs are horizontal lines that run across the chart at levels defined by following conditions:
* Overlapping bars: If the indicator spike (i.e., indicator is above 2.0 or a custom value) corresponds to a price bar overlapping the previous one, the previous close can be used as the DPL value.
* Very large bars: If the indicator spike corresponds to a price bar of a large size, use its close price as the DPL value.
* Gapping bars: If the indicator spike corresponds to a price bar gapping from the previous bar, the DPL value will depend on the gap size. Small gaps can be ignored: the author suggests using the previous close as the DPL value. When the gap is big, the close of the latter bar is used instead.
* Clustering spikes: If the indicator spikes come in clusters, use the extreme close or open price of the bar corresponding to the last or next to last spike in cluster.
DPLs can be used as levels. In order confirm and refine them, FoM (Freedom of Movement) is used along with the Relative Indicator (RVI), which you can find here:
Clustering spikes provide the strongest DPLs while isolated spikes can be used to confirm and refine those provided by the RVI. Coincidence of spikes of the two indicator can be considered a sign of greater strength of the DPL.
S&C magazine, April 2014.
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