Dynamic Trading Tools
Profiting with Support, Resistance & Trendline Breakouts
For MetaStock 7.0 (and higher)
User’s Manual
Version 2.0
All Rights Reserved
Copyright 1998-2004
Printed in the U.S.A.
Equis International, Inc.
90 South 400 West
Suite 620
Salt Lake City, UT 8410
Equis and MetaStock are registered trademarks of Equis International. Microsoft Windows, Microsoft Windows 95,
and Microsoft Explorer are trademarks of Microsoft Corporation. All other product names or services mentioned are
trademarks or registered trademarks of their respective owners.
Contents
Getting Started 1
Welcome ....................................................................................................................................1
Installation..................................................................................................................................2
Why Support and Resistance Develop .......................................................................................3
Why Trends Develop .................................................................................................................4
How to Use the Tools 5
Drawing the Lines Automatically with the Custom Indicators ..................................................5
Filtering Securities that have Broken Out ..................................................................................7
Getting More Info with the Expert Advisors .............................................................................8
Creating and Applying Templates for Easy Formatting.............................................................9
A Sample Strategy 11
Run the Exploration .................................................................................................................11
Study the Charts and Indicators ...............................................................................................12
Look at the Expert Commentary ..............................................................................................12
The Decision ............................................................................................................................14
Troubleshooting 17
Frequently Asked Questions ....................................................................................................17
Dynamic Trading Tools Contents • i
Getting Started
Welcome
Trendlines and Support/Resistance lie at the very heart of technical
analysis. As Steve Achelis (Founder of Equis International) said in his
book Technical Analysis from A to Z, “Wise investments aren’t made
with Ouija boards, they are made using logical approaches that minimize
risks and maximize opportunities. Most investors spend their time
looking for easy money (which is not an easy search) instead of learning
the key factors to security prices—supply and demand.”
Because technical analysis in general and particularly the drawing of
trendlines and support/resistance levels are considered somewhat of an
art, it is difficult for a computer algorithm to exactly draw the lines as a
human would. In fact, given the same chart, and two people, each person
would likely draw these lines in different places.
We have made every attempt to calculate and draw these lines as
accurately as possible. In most instances you will find them to be very
accurate. In some case, you may find the accuracy of the lines to be
adversely affected by extreme volatility.
The tools for drawing the automatic versions of the lines include a
“dynamic” variable that allows them to be drawn on any type of security,
be it a stock, bond, future, mutual fund, or index.
Your package includes the following:
• Four Support/Resistance custom indicators: Support (longer
term), Support (shorter term), Resistance (longer term),
Resistance (shorter term). There are and
versions of each of these.
• Four Trendline custom indicators: Trndline Up (longer term),
Trndline Up (shorter term), Trndline Dn (longer term), Trndline
Dn (shorter term). There are and versions of
each of these.
• Two Support/Resistance explorations: Equis – Support &
Resistance (longer) and Equis – Support & Resistance (shorter).
• Two Trendline explorations: Equis – Trendline Breakouts
(longer) and Equis – Trendline Breakouts (shorter).
Dynamic Trading Tools Getting Started • 1
• Two Support/Resistance expert advisors: Equis – Support &
Resistance (longer) and Equis – Support & Resistance (shorter).
• Two Trendline expert advisors: Equis – Trendline Analysis
(longer) and Equis – Trendline Analysis (shorter).
• One MetaStock DLL: This is a program file containing the
mathematical logic used in these tools. During installation, this
file is copied to the “External Function DLLs” folder beneath
the MetaStock folder.
Installation
To install the Support/Resistance and Trendline tools:
1. Insert the Program CD into your drive. The setup starts
automatically.
Or if the auto-run feature of Windows isn’t enabled on your
system, click the Start button and choose the Run command.
Type “D:\SETUP.EXE” in the Open box and click the OK
button. (Note that “D” represents the letter assigned to your
CD-ROM drive. If your drive is assigned a different letter, use
it instead of “D”.)
2. Carefully follow the on-screen instructions.
2 • Getting Started Dynamic Trading Tools
Why Support and Resistance Develop
There is nothing “magical” about the effectiveness of trendlines and
support/resistance. These fundamental tools of technical analysis are
based on the widely accepted economic principles of supply and demand.
Support levels occur when buyers and sellers have repeatedly (two or
more times) agreed that the price will not move lower. At a support
level, prices are unable to move lower since fewer traders are willing to
sell at the lower price. Not surprisingly, the number of buyers (supply)
increases at the low price. To equalize these forces of decreased supply
(sellers) and higher demand (buyers), prices move up thereby forming a
trough on the chart.
Resistance levels occur when buyers and sellers have repeatedly (two or
more times) agreed that the price will not move higher. Prices are unable
to move higher since fewer traders are willing to pay the high price. Not
surprisingly, the number of sellers (supply) increases at the high price.
To equalize these forces of increased supply and lower demand, prices
move down thereby forming a peak on the chart.
Horizontal lines, called Support and Resistance lines, are drawn near the
levels (peaks and troughs) at which prices repeatedly bounce.
The following chart shows how the custom indicators named “Support
(longer term) ” and “Resistance (longer term) ” are plotted
on a chart of McDonalds. Note that the lines automatically adjust several
times during the period. This illustrates the “dynamic” characteristic of
these lines. As new data comes in, the lines dynamically adjust to reflect
changing support and resistance (i.e., supply and demand levels).
Dynamic Trading Tools Getting Started • 3
When support or resistance When the expectations of these buyers and sellers change, support and
is broken and prices quickly resistance levels are penetrated and prices often move rapidly to adjust to
move away, then come back new expectations of supply and demand. In the chart of McDonalds, this
and bounce off the support occurred in late March as increasing numbers of buyers overpowered the
or resistance level, it is
called “trader’s remorse.”
weaker sellers and resistance at $48 was penetrated. Notice too, how this
resistance level at $48 later provided support in April, June, and July.
This is a common phenomenon.
Why Trends Develop
A trend is defined as successively higher or lower prices. An uptrend can
be defined as a rising support level—the bulls are in control and pushing
prices higher. Conversely, during a downtrend, resistance levels are
falling and the bears are in control, pushing prices lower. Straight lines
(called trendlines) can be drawn along the peaks and valleys to help
visualize the trend. An up trendline is drawn along the valleys, whereas a
down trendline is drawn along the peaks.
As Steve Achelis notes in his book, Technical Analysis from A to Z, “A
trend represents a consistent change in prices (i.e., a change in investor
expectations). Trends differ from support/resistance levels in that trends
represent change, whereas support/resistance levels represent barriers to
change.”
The following chart shows how the custom indicators named “Trndline
Up (longer term)” and “Trndline Dn (shorter term)” are plotted on a chart
of Proctor & Gamble.
Securities trend because there is an overwhelming consensus of
expectations about the value of the security—either bullish or bearish.
However, when these expectations change, as was the case in April in the
chart of Proctor & Gamble, the trendline is penetrated and prices often
reverse and begin a trend in the opposite direction.
4 • Getting Started Dynamic Trading Tools
How to Use the Tools
This plug-in includes custom indicators, explorations, and expert
advisors that focus on drawing, finding, and explaining support &
resistance levels and trendlines. All of the tools are based on the same
underlying algorithms, yet each provides a unique way of analyzing the
results.
Drawing the Lines Automatically with the Custom Indicators
The custom indicators are used to plot the lines on the chart. MetaStock
is able to automatically determine (using sophisticated pattern
recognition techniques), where support and resistance may exist, and
where current trendlines should be drawn.
To plot the lines on your charts:
1. Open a chart.
2. Click the Indicator QuickList on the toolbar and scroll the list
until either the “Support,” “Resistance” or “Trendline” custom
indicators appear. Note that custom indicators are sorted
alphabetically at the bottom of the QuickList (after the pre-
defined indicators).
You can plot multiple 3. Position your mouse pointer over the small icon to the left of the
indicators simultaneously desired indicator. Note how the mouse pointer changes to a
by choosing Indicators from hand.
the Insert menu.
4. Click and hold the left mouse button and drag the indicator until
you have it positioned on the chart’s price inner window. The
color of the price bars will change to inform you that they will
be used to calculate the indicator.
Dynamic Trading Tools How to Use the Tools • 5
5. Drop the indicator by releasing the left mouse button.
6. When the Scaling Options dialog appears, choose either Merge
with Scale on Right or Merge with Scale on Left.
If nothing appears on the chart when you plot one of the indicators, this
simply means that no current trend or support/resistance level was found.
If the y-axis of your chart is scaled in semi-log, your trendlines may
curve, particularly if the trend is steep and covers a wide price range.
Typically, you will find that the most currently detected support level is
below the most currently detected resistance level; however this is not
always the case as can be seen in the following chart.
For the first two-thirds of the chart, support is below resistance (as
expected), however, in April the support level moved above the
resistance level. Exxon had extended its breakout from the previous
November and entered a trading range with detected support around 50.
Later, in July, the lines got back into a normal mode as a new resistance
level was detected around 65.
As you would expect, the shorter term support and resistance levels,
represented by the dashed lines, responded more quickly to the changing
conditions.
6 • How to Use the Tools Dynamic Trading Tools
Filtering Securities that have Broken Out
The explorations are used to search through your securities and report on
the status of the current price in relation to support/resistance and
trendlines. The explorations filter securities that have broken through a
support/resistance line or trendline. The number of time periods that
have passed since the breakout is provided, along with the change in
volume on the day of the breakout.
To filter your securities for breakouts:
1. Choose The Explorer from the Tools menu.
2. Click the Options button and make sure Load Minimum
Records is selected.
3. Choose the exploration to run (e.g., Equis – Trendline Breakouts
(longer) ).
4. Click the Explore button.
5. Choose the folder of securities you wish to explore from the
Select Securities dialog and click the OK button.
After your exploration is complete, display the report to view the results.
You can easily sort a report The report for Support & Resistance (longer) is shown in the following
by clicking directly on the illustration. The report for Trendlines is similar. You may find it helpful
column heading. to sort the report on the “Break Up” or “Break Dn” columns so that the
securities that have broken out more recently are listed first.
An “N/A” in the report means that the corresponding trendline or
support/resistance level was never found. A “0.00” value means that it
was found, but the breakout condition is no longer true. In other words,
Dynamic Trading Tools How to Use the Tools • 7
the breakout did occur, but the closing price has since moved back
above/below the line, invalidating the breakout.
Getting More Info with the Expert Advisors
The commentary in the experts explains the status of your chart in
regards to its trendlines and support/resistance levels. Note that the
commentary is the only active component of the experts. It does not
include expert trends, highlights, or symbols. Therefore, your chart will
not change appearance when you attach the experts.
Note: Due to the complexity of the calculations, the commentary reflects
the last day loaded on the chart , even if you have selected a different
bar to analyze.
To display a chart’s expert commentary:
1. Open a chart.
2. Right-click anywhere within the chart’s inner window. The
chart’s shortcut menu appears.
3. Choose Expert Advisor and then Attach.
4. Choose one of the Trendline or Support/Resistance experts.
Click the OK button.
5. To quickly display the commentary for the attached expert,
right-click on the chart, choose Expert Advisor and then
Commentary.
8 • How to Use the Tools Dynamic Trading Tools
Creating and Applying Templates for Easy Formatting
You may find it convenient to create templates that automatically plot
A template is a file that and format the lines to your liking. For example, you may want to create
contains reusable chart a template that plots the four types of trendlines, using one color or line
attributes, such as style for the shorter term and another for the longer term.
indicators, scaling, colors,
etc. The chart below shows Proctor & Gamble with a template applied. Note
that the longer term trendlines are solid and thick and the shorter term
trendlines are thin and dashed.
The chart below shows a template applied to a chart of the British Pound
that plots the support and resistance custom indicators.
To create a template:
1. Choose Open from the File menu.
2. Select a security and click the Open button.
Dynamic Trading Tools How to Use the Tools • 9
3. Plot the four trendline custom indicators or the four support &
resistance custom indicators.
4. Modify the color and/or line styles of the lines to your liking.
5. Choose Save As from the File menu.
6. Choose Template from the Save as Type drop-list.
7. Type a name for the template (i.e., Trendlines, Support &
Resistance, etc.).
8. Click the Save button.
To apply a template to a chart:
1. Right-click on the chart.
2. Choose Apply Template from the shortcut menu.
3. Choose the desired template from the Apply Template dialog.
To click through your charts:
Once you have your templates created, a great way to visually scan
through your charts and look at the support/resistance levels and
trendlines on each, is to use the Change Security commands.
1. Display the first security in your folder and apply the newly
created template.
2. Choose Options from the Tools menu.
3. Make sure that the Use Smart Charts checkbox is unchecked in
the Chart Options page of the Application Properties dialog.
You can also change from 4. Now click the Next Security button on the chart toolbar to
chart to chart by pressing quickly change from one chart to the next.
ALT+Right Arrow.
10 • How to Use the Tools Dynamic Trading Tools
A Sample Strategy
Run the Exploration
For our example, let’s assume that we are bullish on the market as a
whole and therefore are looking to establish a longer term position in a
highly capitalized stock, such as a stock belonging to the S&P 100.
1. First we want to make sure that the data we are working with is
updated and clean.
2. Now we’ll run the “Equis – Support & Resistance (longer)”
exploration on a folder containing the 100 stocks in the S&P
100 index.
3. The report below shows the results for 11/28/97. Note that the
report has been sorted on the “Break Up” column in ascending
order.
Since the most reliable breakouts are accompanied with
significantly increased volume, we will concentrate our focus on
two stocks from this report– on Wal Mart and Johnson &
Johnson. Although it’s been a while since these stocks broke
out (nine days, as indicated in the “Break Up” column), they
both broke out on fairly heavy volume of 46 and 54.96 percent
above normal (as indicated in the “Up Vol%” column).
Dynamic Trading Tools A Sample Strategy • 11
Study the Charts and Indicators
4. The next step is to examine the charts of these two securities.
Select both “Wal Mart” and “Johnson & Johnson” in the report
and click the Open Chart button.
5. Now let’s plot the custom indicators named “Support (longer)
” and “Resistance (longer) .”
6. Let’s also plot the custom indicators named “Trndline Up
(longer) ” and “Trndline Dn (longer) ”.
The chart of Johnson & Johnson is shown below.
Note that the upside breakout of the resistance line at 62.125
coincided closely with the upside breakout of the down trendline.
This adds even more validity to the breakout.
Look at the Expert Commentary
7. Now let’s look at what the Expert Advisor has to add. Choose
Expert Advisor from the Tools menu.
8. Select the expert named “Equis – Support & Resistance
(longer)” and click the Commentary button.
12 • A Sample Strategy Dynamic Trading Tools
The expert commentary confirms what the exploration reported,
namely that an upside breakout occurred nine days ago on above
average volume. We are also reminded that this broken
resistance level may now provide downside support. It also
suggests that a protective stop loss should be placed just below
the 62.13 resistance level if we decide to trade.
9. Now let’s look at the other stock, Wal Mart. Since we have
already opened the chart, we simply need to activate it by
choosing it from the Windows menu.
Repeat steps 5 through 8 (above) for Wal Mart.
The expert commentary for Wal Mart is shown below.
Dynamic Trading Tools A Sample Strategy • 13
Like the expert commentary for Johnson & Johnson, the
commentary for Wal Mart reports that upside resistance was
broken nine days ago on above average volume and that the
previous resistance may now provide support. A protective stop
is also suggested.
The Decision
If we are forced to make a decision on which of these two stocks to buy
based strictly on the analysis so far, the edge would have to go to
Johnson & Johnson. Johnson & Johnson’s breakout is impressive since it
coincided with a trendline breakout. In addition, the volume on the
breakout was a bit heavier than Wal Mart’s.
Interestingly, the most recent resistance level for Johnson & Johnson
coincides with the left and right shoulders of a classic head & shoulders
pattern, with the left shoulder forming in May, the head in June, and the
right shoulder in October.
14 • A Sample Strategy Dynamic Trading Tools
The breakdown of the head & shoulders topping formation gives us
further confidence in making the trade. When placing the trade, we will
place a protective stop just below the resistance level at 59.50. This
provides some room for prices to retreat down to the broken resistance
level (which now serves as support).
Dynamic Trading Tools A Sample Strategy • 15
Troubleshooting
Frequently Asked Questions
Q: Nothing plots when I drop the indicators on the chart. Why?
A: The most likely reason is that the indicators were not able to find any
current support, resistance, or trends. Remember, even though the
algorithms for determining line placement are quite good, they will not
exactly duplicate where you may think the lines should be drawn.
Q: Prices are currently far above the most recently drawn Resistance
line. Why is this line still called “Resistance”?
A: The chart below shows a good example of this. In the August to
October time frame, prices were far above the most recently determined
Resistance line near 41.50. Yet MetaStock continues to extend the
Resistance line out since it is the most recent one. This has its
advantages, since a common occurrence is for a penetrated Resistance
line to later provide Support. This Resistance line (although penetrated
in June) provides Support later in October and November.
Q: I can plainly see where a support/resistance line should be drawn on
my chart, yet nothing is drawn. Why?
Dynamic Trading Tools Troubleshooting • 17
A: There are two basic factors in the formulas used for drawing the
support/resistance lines--the peaks and troughs and their proximity
(price-wise) to each other. In the case of Resistance lines, the most
recent peak is compared to the second and third most recent peaks. If
two of these peaks are relatively close to each other (price-wise) then
they will likely qualify for use in determining the resistance line.
However, what the computer is able to qualify as a “peak” or “trough”
can sometimes differ from your own determination. The computer only
considers a peak to be a “peak” if the percent move is a certain minimum.
This percent move is automatically determined in the case of the
“” indicators based on a formula that analyzes the price volatility.
The “” indicators allow you to adjust this percent factor.
Q: My exploration sometimes shows an “N/A” or a “0.00” in the
columns. What do these mean?
A: An “N/A” in the report means that the corresponding trendline or
support/resistance level was never found. A “0.00” value means that it
was found, but the breakout condition is no longer true. In other words,
the breakout did occur, but the closing price has since moved back
above/below the line, invalidating the breakout.
Q: The trendlines and support/resistance indicators have “longer” and
“shorter” versions. What is the difference?
A: The “longer” versions require bigger percent price moves when
determining the peaks and troughs. And since bigger peaks and troughs
take longer to form, we call these “longer.” Conversely, the “shorter”
versions require smaller percent moves. Therefore, these are called
“shorter”.
Q: After attaching an expert to my chart, the commentary window does
not change to reflect the new bar that I have selected. Why?
A: This is due to the complexity of the calculations. The commentary
only reflects the last day loaded on the chart , even if you have selected a
different bar to analyze.
18 • Troubleshooting Dynamic Trading Tools