surfingthetrend
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Why a support and resistance weaken when they have several touches and the trendlines gain strength with every extra touch?
To analyze the support bases let us take a concrete example. A stable company with stable quotes was worth $ 10 when someday the price soar 50%. All investors who were hesitant to purchase up to that point and eventually saw the title go up so quickly got with $ 10 deeply marked in their minds, along with a sense of regret. All investors who bought at $ 10 and gained 50% in one day will record this value in their mind, along with a strong sense of satisfaction. This duality of feelings will make all the difference in a future approach to the price in question, and the stronger the feelings generated, the greater the strength of support / resistance.
The price rose over 100% on the following months, and as result of some profit-taking of investors who had bought on the $ 10 zone (among others), it reached a top and began to regress. After four months it returned to the $ 10 zone. All investors who made money with that rocket rise from $ 10 will remember that value and buy again in the same value. All who were not able to get in at the first time will look at this value and associate it with the lost opportunity. And on either side will appear purchase orders on that value, creating the base of a support. When the price goes down to that level, the various purchase orders will make it back up. And if inertia or the selling pressure brings back prices to the support zone, once again the price will be repelled.
But if selling pressure is maintained and the area of $ 10 is tested several times without a significant reaction to feed the euphoria, the purchase orders for those who wait anxiously for a new dazzling ascent will eventually run out, breaking down the support. This is the reason why a support gets weaker every time that is tested. Every touch represents a cleaning among investors eager to buy, weakening the structure behind the support.
And exactly the same applies to the resistance areas, but in reverse … When considerable losses happen, this will lead to conditioned behavior in the area where they took place, causing selling pressure, and so forth.
Without exploring this factor too deep, a support / resistance will be more or less powerful if the breakage occurred with more or less volume. The larger the volume, (usually) the greater the number of investors involved, which leads to a greater number of people trying to buy / sell when the prices reach a certain value.
As regards the trendlines, they do not work in the same way. These lines are, as its name implies, trend indicators, which tend to follow the exponential growth of a stock over time. Their origin is still unclear and there isn’t any consensual explanation to their linear evolution over months and, in some cases, years.
In my opinion, the development for "self-fulfilling prophecy" should not be set aside.
When someone makes an entry based on a trendline probably does so because he saw in a chart that there was a reaction to that line. As certain moving averages, which are historically seen as trend references, trendlines also work better in markets where a greater proportion of investors are based on technical indicators to make their decisions.
Each time a trendline is detected, the more investors look to her as a future reference. Not only as a trend reference but also as an entry/exit reference. And as a trendline gains consistency after one more touch, more investors have the opportunity to discover it, increasing the number of people who will be waiting for their development and thus also increasing the number of new orders available when an approximation is coming.
To be a considerable trendline, it must also be minimally obvious. If we have to draw it with too much art and gymnastics, and it is only perceived by those who designed it, the entire mechanism will be compromised.
It seems to me extremely important that everybody understand what’s behind the major technical indicators. It is this understanding of the market and of its "signs and symptoms" that will allow us to adjust orders and movements to the changing economic and financial reality in which we deal.
To analyze the support bases let us take a concrete example. A stable company with stable quotes was worth $ 10 when someday the price soar 50%. All investors who were hesitant to purchase up to that point and eventually saw the title go up so quickly got with $ 10 deeply marked in their minds, along with a sense of regret. All investors who bought at $ 10 and gained 50% in one day will record this value in their mind, along with a strong sense of satisfaction. This duality of feelings will make all the difference in a future approach to the price in question, and the stronger the feelings generated, the greater the strength of support / resistance.
The price rose over 100% on the following months, and as result of some profit-taking of investors who had bought on the $ 10 zone (among others), it reached a top and began to regress. After four months it returned to the $ 10 zone. All investors who made money with that rocket rise from $ 10 will remember that value and buy again in the same value. All who were not able to get in at the first time will look at this value and associate it with the lost opportunity. And on either side will appear purchase orders on that value, creating the base of a support. When the price goes down to that level, the various purchase orders will make it back up. And if inertia or the selling pressure brings back prices to the support zone, once again the price will be repelled.
But if selling pressure is maintained and the area of $ 10 is tested several times without a significant reaction to feed the euphoria, the purchase orders for those who wait anxiously for a new dazzling ascent will eventually run out, breaking down the support. This is the reason why a support gets weaker every time that is tested. Every touch represents a cleaning among investors eager to buy, weakening the structure behind the support.
And exactly the same applies to the resistance areas, but in reverse … When considerable losses happen, this will lead to conditioned behavior in the area where they took place, causing selling pressure, and so forth.
Without exploring this factor too deep, a support / resistance will be more or less powerful if the breakage occurred with more or less volume. The larger the volume, (usually) the greater the number of investors involved, which leads to a greater number of people trying to buy / sell when the prices reach a certain value.
As regards the trendlines, they do not work in the same way. These lines are, as its name implies, trend indicators, which tend to follow the exponential growth of a stock over time. Their origin is still unclear and there isn’t any consensual explanation to their linear evolution over months and, in some cases, years.
In my opinion, the development for "self-fulfilling prophecy" should not be set aside.
When someone makes an entry based on a trendline probably does so because he saw in a chart that there was a reaction to that line. As certain moving averages, which are historically seen as trend references, trendlines also work better in markets where a greater proportion of investors are based on technical indicators to make their decisions.
Each time a trendline is detected, the more investors look to her as a future reference. Not only as a trend reference but also as an entry/exit reference. And as a trendline gains consistency after one more touch, more investors have the opportunity to discover it, increasing the number of people who will be waiting for their development and thus also increasing the number of new orders available when an approximation is coming.
To be a considerable trendline, it must also be minimally obvious. If we have to draw it with too much art and gymnastics, and it is only perceived by those who designed it, the entire mechanism will be compromised.
It seems to me extremely important that everybody understand what’s behind the major technical indicators. It is this understanding of the market and of its "signs and symptoms" that will allow us to adjust orders and movements to the changing economic and financial reality in which we deal.
