Price, (Volume), Support, Resistance, Demand, Supply . . .

[blackcab]

But within any single volume bar the ratio of buys to sells isn't 50:50 is it, the MMs don't keep perfectly flat books within short timeframes. On say an EOD chart, I don't see how you can say that the high volume at the bottom of a decline is due to exhausted sellers and aggressive buyers IF every buy & sell are matched - if they were matched and vol is high, there's still a ton of selling. They get matched of course but over time is what I'm getting at. Maybe this is getting OT and I should get my thoughts clearer.

 

[dbphoenix]

But within any single volume bar the ratio of buys to sells isn't 50:50 is it, the MMs don't keep perfectly flat books within short timeframes. On say an EOD chart, I don't see how you can say that the high volume at the bottom of a decline is due to exhausted sellers and aggressive buyers IF every buy & sell are matched - if they were matched and vol is high, there's still a ton of selling. They get matched of course but over time is what I'm getting at. Maybe this is getting OT and I should get my thoughts clearer.

There can't be a buy without a sell. What moves price is not buyers but demand. If buyers aren't willing to pay what sellers want, then sellers have to drop their price. Otherwise, no trade takes place.

This is a biggie, so don't try to swallow it without chewing on it for a while.

 

[Salty Gibbon]

Dbp - I have read your stuff before and have always been impressed. You were the one who actually inspired me to take a long, hard look at price, volume, supply, demand etc.

I have done this and believe that a good appreciation of the interaction of price, volume etc. etc. is basically all that is required to become an adept trader.

However in order to do this, one has to move a little away from the theoretical aspects of the subject and put together a practical, workable method / system based on price and volume with maybe a little sprinkling of assistance from indicators.

I have been spending the past few months on this and have now reached the stage where I can say that I do have a workable system based primarily on the interaction of price and volume, which usually gets me into the market quite easily but keeps me out on days like today where there is not a great deal of direction.

Price and volume is NEARLY everything for me and I cannot now look solely at a price chart. I need the accompanying volume chart in order that I can read the unfolding story.

A good book to read is "Techniques of Tape Reading" by Graifer & Schumacher. This has helped me a great deal and is one of the very few books that I would give any credence to.

Thanks dbp for starting what will certainly become a great thread. I liked the " No indicators" thread for a while but it seemed to lose its way somewhere.

 

[Porks]

Hi,

Great to see you here dbp, and I hope this thread really gets going.

My understanding is you can identify whether voume is majorly 'buying' or 'selling' volume by the resulting price action, ie what occured on the price bar as a result of the volume, did it close higher or lower, is the spread wide or narrow ?

For example if volume is steadily higher than the previous few bars and the price bar spread is wide, closing on the highs, and the bar is up, this is demand overcoming supply, the price is marked up during the price bar because there's more demand(buy) orders chasing fewer supply(sell) orders. The MM's know this, they can see the orders on both sides of the market and mark the price up accordingly.

However, the same up bar (spread wide, volume high) but closing on the lows is probably supply overcoming demand, the price was marked up but closed on the lows due to supply swamping the demand. A sign of weakness before the market turns.

A real red flag I look for is an up bar with high volume and little price movement (narrow spread), for me this can only be supply swamping demand on the way up, and a sign of distribution.

These and other tape reading studies are useful, but I'd love to hear how you go about creating specific criteria for entering and managing a trades.


Porks

 

[neil]

It might help some of you to look at the charts on the site below which deals with price and volume. I do not endorse the products but you might be interested in the free content ( Charts) on the below link.


http://www.tradeguider.com/chart2.asp

 

[dbphoenix]

These and other tape reading studies are useful, but I'd love to hear how you go about creating specific criteria for entering and managing a trade.

My experience has been that rushing into the premature creation and definition of setups is a serious mistake, though not everyone will agree with this. Trading via price and the interpretation of buying and selling pressure requires a certain way of seeing and nearly always requires that a great deal be unlearned.

This is not to say that one just ought to stare at charts being formed all day, every day, day after day, with no objective other than to endure the experience. However, it's important to note how price moves, and to try to figure out why it moves that way.

To a large extent, that's where S and R come in, so perhaps one of the first steps is to develop an understanding of S and R.

 

[brys]

dbp

Hi,

It's good to see you around here.
I hope we are going to get into a discusion on price action with no volume to take into consideration (FX) soon.

All the best to everyone.

 

[dbphoenix]

I hope we are going to get into a discusion on price action with no volume to take into consideration (FX) soon.

You'll probably want to investigate point & figure charting. I'm sure there's a thread on it somewhere.

 

[Porks]

Dbp,

Here's my take on S and R

- Floating supply must be removed to penetrate resistance.A move up through resistance mainly occurs not because of increasing buying but because of an absence of selling
- It takes professional money to penetrate Resistance, and higher volume with movement in the price action to confirm a valid penetration

- A market will only fall through a support area when there's an absence professional buying
- Again increasing volume with price movement within the bar confirms a break through support

When prices are approaching both support and resistance on decreasing volume this shows a lack of interest from professional money to participate at these levels and prices are more likely to reverse.

Porks.

 

[dbphoenix]

Dbp,

Here's my take on S and R

- Floating supply must be removed to penetrate resistance.A move up through resistance mainly occurs not because of increasing buying but because of an absence of selling
- It takes professional money to penetrate Resistance, and higher volume with movement in the price action to confirm a valid penetration

- A market will only fall through a support area when there's an absence professional buying
- Again increasing volume with price movement within the bar confirms a break through support

When prices are approaching both support and resistance on decreasing volume this shows a lack of interest from professional money to participate at these levels and prices are more likely to reverse.

Porks.

You seem to be equating R with supply and S with demand. You may have better luck by equating R with selling pressure and S with buying pressure. Buying, selling, support, resistance, demand, supply are related, but they are distinct.

For example, if there's an "absence of selling", there can't be any buying. In order for a transaction to be completed, there must be both.

Similarly, volume has nothing to do with whether a penetration of S or R is valid or not. Volume often comes later, if at all. And of course, if S or R don't provide S or R, then they aren't, though they may have been at one time.

 

[Porks]

dbp,

Would it be more correct to say :

A move up through former resistance mainly occurs not because of increasing buying but because of an absence of selling pressure.

A move down through a former support area occurs when there's an absence of professional buying pressure.


Given your point on volume is correct, how would you judge whether a move towards former S and R areas is likely to continue through, by price action alone ?

Porks.

 

[Trader333]

Porks,

A move down through a former support area occurs when there's an absence of professional buying pressure.

Why the emphasis on "Professional" can it not just be absence of buying pressure regardless of who it is ?


Paul

 

[triplepack]

A support or resistance level can be described as a point of argument between buyers or sellers.
How well the battle for supremacy of this line in the sand is, is decided is by the aggression of the players.

These players could be many in number or few ( relatively speaking) . But it is the nett of either the buyers or sellers and their interest in pushing their objective. One institution may have a big pocket, but hundreds of other traders may have a bigger will to counter this.
Or at that moment in time the interest in this skirmish maybe such that an opportunist may see that the opposition is weak i.e. not interested or not having their eye on the ball .
This would give the opportunity for the s/r resistance to be pierced as Paul says by lack of buying or selling pressure.
There may well not be much buying pressure but there is even less selling pressure. But the difference gives us the result, an up move.
How to see that in real time I suppose its back to the time and sales screen. watching the orders whether on the ask or bid and trying to fathom the nett difference of buyers and sellers ,not whether it is on the bid or ask because we have both buyers and sellers in both of these transactions. It then brings us back to the difference of stock/contracts available for sale at that price otherwise known as supply and demand.
But it is the "Difference" at that moment in time which gives us the movement , and then onto the next price and moment in time to discover availability of stock there.
I dont know if anybody has looked or used it but www.marketdelta.com seems to deal with this . Check it out it might be a useful tool for determining this difference /delta.

Cheers

Richard

 

[dbphoenix]

dbp,

Would it be more correct to say :

A move up through former resistance mainly occurs not because of increasing buying but because of an absence of selling pressure.

A move down through a former support area occurs when there's an absence of professional buying pressure.


Given your point on volume is correct, how would you judge whether a move towards former S and R areas is likely to continue through, by price action alone ?

Porks.

A move through "resistance" occurs because buying pressure is greater than selling pressure. An absence of selling pressure in and of itself may mean no movement at all.

As for the "professional" part, I'll side with Paul. What difference does it make? You make or lose money over price movement, not as a result of who's moving it.

As to whether or not the move is going to continue, nobody knows. There's no way TO know. That's where your rules come in.

I'll reiterate that demand, supply, support, resistance, buying pressure, selling pressure are all related, but distinct. Unfortunately, the meaning of demand and supply have become corrupted, like "overbought" and "oversold". Supply, for example, does not refer to some hoard somewhere that is drawn upon in order to satisfy and overwhelm demand, like a trainload of avocados. Thinking of it in this way is not productive, or even useful, and it can lead to errors in perception which can lead to further errors in strategy creation, trade entry and trade management. For example, thinking of supply as a pile of something can lead to expectations that it will eventually run out. These expectations may not occur if one perceives the activity as selling pressure instead. Selling pressure can last for a good long while.

 

[djnsfc]

Reactions are important when trading support/resistance

Identifying Support and Resistance is fairly straight forward enough to do on all chart timeframes IMHO. The key is the price reaction at those areas. At it's simplest anytime there's a rally the base of the rally can be called Support on the chart, Buyers supported that area by buying. Vice versa for selling. The more times the support/resistance area is retested the more valid your support/resistance is. Please note that I see Support/Resistance as areas and not one price.

I find the harder part to my trading is to know how to trade that support/resistance. There's always the old chestnut of "Buy at Support and Sell at Resistance" but you never really know if it's support until after you've bought and there's also the chance that support won't be fully tested so you're not in a position to buy. Maybe It should read "Buy at or near Old Support and Sell at or near Old Resistance" but I do believe that it's the best place to buy or sell as it gives me natural areas in which to place stops i.e. under said support if buying.

To help get a feel for market direction I look at the price reaction at those support/resistance areas that I've identified. If I see the market go up 70 points in 2 days from the support area and at resistance only goes down 20 points in 3 days. I'd say that demand was present at support but didn't see supply present itself in such a fashion at resistance. Therefore my outlook for that timeframe would be more bullish than bearish. I would feel more comfortable buying at/near support than selling at/near resistance. I also find that timeframes are very important to my trading as what often appears to be a major support area on a daily chart might be nothing more than a correction on a weekly/yearly chart. The longer term support/resistance areas are most important to my trading. e.g. Support on a 5 minute chart is nowhere near as important as on a yearly chart. If support/resistance areas tie up on more than one timeframe then you have a tradable market IMHO. For each timeframe I decide whether I'm Bullish, Neutral or Bearish and it's often the case that I'm Bullish on the weekly chart and Bearish on the daily chart for the same equity.

I personally find that once the resistance area is broken a very profitable area to enter long is at the retest of that old area, hence the adage "Old resistance becomes new support" and vice versa for Resistance.
There's a number of questions that need to be answered when I trade off support/resistance and as with anything the more I trade the better/more confident I get at answering them. I'd also say that my approach is very subjective and I have to make many "Judgement Calls" on what I see around the support/resistance areas. I would love to find a non-subjective system but have yet come across anything which does not require the trader to use his/her judgment when deciding to buy/sell.

I hope this helps,
Dan

 

[dbphoenix]

For a practical example, I've attached a chart which may help illustrate this S/R business.

There are dozens of swing points in this chart, thousands with a shorter bar interval, but these are enough for the illustration.

Note at 1 that price reverses. You don't know why. Doesn't matter. But it reverses, making a swing point. It's not support. Not yet. Just a reversal due to changes in the balance between buying pressure and selling pressure. At 2, however, this level now becomes support. Ditto for 3 and 4 re resistance.

When this R is penetrated, a new swing point is created at 5, though it's not yet R; it's just a swing point. At 6, that old R level is tested and now becomes S. When price balks at 7, that level now becomes R.

More later.

Edit: Note that S is "broken" at 8. However, price quickly rebounds above this level, confirming its importance. When price is unable to reach R, suggesting less buying pressure, breaking this line again generates more of a selloff. The line is broken again to the upside, re-confirming the importance of this level, and when selling pressure gains the upper hand for the third time, a substantial selloff ensues, down to 10. Buyers love this level, tho, and push price all the way back to 11. The next day, this carries implications for the move to 16.

Another edit:

There are maxims that we come to believe as though they were principles, or even laws, though they barely qualify as guidelines.

For example,

S once breached becomes R, and vice-versa.

Buy S, sell R.

The more a given level is tested, the stronger it is.

Big volume on breakouts or breakdowns is good (assuming you're on the correct side of the trade).

And so on.

However, in order to determine whether or not any of this is true, one has to go back to the point where these old reliables gained currency.

That could take a great deal of time, however, and probably wouldn't be of much interest, much less practical use.

So for now, perhaps we could settle on the concept that S and R represent those levels at which one can expect to find profitable trades. Unfortunately, it's next to impossible to determine in real time whether those profits are to be found on the short side or the long side. The idea that S, for example, becomes stronger the more it's tested does not bear close scrutiny. In fact, if S has been tested twice and price returns there yet again, sellers assume that there's a reason and they prepare to short that return. Some have created yet another maxim -- Third Time's The Charm -- but this doesn't stand up under close scrutiny either. As with everything else, it just depends.

So what does one do at these so-called S/R levels? As Mark Douglas counsels, "be available". Don't assume one side of the trade or the other, but be prepared to take either.

 

[djnsfc]

Great post DB,
I like the chart. I think it shows nicely that S/R appear on all timeframes. I'm guessing that it's a 5min intraday chart you posted? I also like the fact that you've replaced a maxim with another maxim "if S has been tested twice and price returns there yet again, sellers assume that there's a reason and they prepare to short that return" but you have a valid point that all trading rules/assumptions/maxims are broken. It's impossible for a trader to be profitable 100% of the time and therefore that means that sometimes our assumptions as traders are incorrect. But as a trader you have to deal with that and the key is to have a strategy in place for when we are incorrect i.e. stops. S/R areas need to be monitored to gauge the reaction of the market, you're able to form opinions of the market dependant on those reactions. Once you've formed opinions of the market you're in a position to trade the market.

This is a great thread which brings a great deal of information to the table and reminds me of a snip from the classic book Reminiscences of a Stock Operator where a brokerage firm runner goes to his boss and says that he's got the low down on a certain stock and that the big players are buying. The boss then calls the floor and sells 1000 of said stock. "What" the runner says "Did you not hear me right? They're buying". So the boss picks up the phone and says "Sell 1000 more". At this point the runner is getting quite irate. "Boss they are buying and all you are doing is selling. Do you not trust me?". The Boss then studies the tape and sees that his orders have not budged the market. He then picks up the phone and buys 10000 of the same stock. "You see boy, if your information was incorrect my selling 2000 would have made an impact on the tape. It didn't move it one bit so therefore that confirmed to me that someone was absorbing my selling so your information was correct. thank you very much". Please forgive me that it's not word for word but I think it demonstrates nicely that the boss identified the market support by selling 2000 lots of the stock in order to gauge the market reaction. He saw that the market absorbed his order easily therefore he knew the big players were buying (supporting) and was in a position to go long.
Cheers, Dan

 

[barjon]

djnfsc

mmm, your story demonstrates that it's who is waiting in the wings that counts (major buying or selling) whereas recorded volume for the period only indicates equal activity twixt buyers and sellers. Using your story again (loosely) let's say the boss's selling created a volume spike leading to a high volume nrb for that period, the next period there was not much supply offered so a low volume nrb resulted. Two nrb periods with different volumes maybe interpreted differently by analysts, but both resulting from the same "waiting in the wings" buyer who is soaking up whatever supply becomes available at the price.

 

[djnsfc]

Barjon,
Exactly right it's the soaking up of that supply which causes those in the know to get long. The big players will defend their position by absorbing the supply and adding to their position along the way. The market shows a lot of effort (volume) for little result (small price range), which is a tip-off to those looking.
These players are happy for the market to flow between Support and Resistance, but they control the range by buying at/near support and selling at/near resistance. Adding to their position near support and taking a little off near resistance, but they will still remain net long. It's hard for the big players to mark-up the market quickly with the number of contracts/lots they require and getting a good price through-out. It's the controlling of these price ranges (S/R) which allows them to satisfy their objectives (getting long/short at a decent average price).

 

[dbphoenix]

I also like the fact that you've replaced a maxim with another maxim "if S has been tested twice and price returns there yet again, sellers assume that there's a reason and they prepare to short that return" but you have a valid point that all trading rules/assumptions/maxims are broken.

It's impossible for a trader to be profitable 100% of the time and therefore that means that sometimes our assumptions as traders are incorrect. But as a trader you have to deal with that and the key is to have a strategy in place for when we are incorrect i.e. stops.

As to the "maxim", I was only explaining the Third Time's The Charm, since the reasons for these things tend to get lost over time. Price can bounce along S five or eight times if it likes. What matters is what happens at the time and as a result.

As for having a strategy in place for when we are incorrect, there's more to choose from than stops. At the very least, one has to "be available" and consider taking the other side. This idea has been corrupted to a large extent by the Parabolic SAR indicator, but in it's original form, the idea is sound. Whether one is successful with a self-reversing tactic or not depends on how well he defines the setup, but it's there for consideration.