Best Thread Support & Resistance Explained

[Splitlink]

re: Support & Resistance Explained

However, I would say that if you draw s/r levels on an D1 and H1 chart and you don't get a reaction (i.e. a counter trend reversal or a rapid decrease in momentum) to within a few pips, the vast majority of the time, you are definetly drawing your s/r wrong.

Would you not say that it is better to wait for the reaction before you draw the s/r? Who is to say whether a line is correct or not? An s/r level is a zone, after all, not a definite spot on the chart and it can go through a lot of points before it reverses.

 

[bbmac]

re: Support & Resistance Explained

I broadly concur with Td's points 1-5 in his post No.18 above. The probability of whether a previous price pivot (ie a previous near-term obvious fractal swing hi (s) / lo (s) zone that implies a previous near-term obvious imbalance of supply/demand or demand/supply respectively,) will see break or see price bounce can be further guauged by the candles leading up to the zone and whether on the 2nd or 3rd attempt there are LH's leading down to a previous swing lo (s) or HL's leading up to a previous swing hi (s) zone, as well of course as price beahavious around it There are no absolutes, just circumstances/technical clues suggesting a greater probability exists over one outcome than another.

I would add;

a. Previous near-term fractal swing hi/lo's as suggested above are indeed zones and there is in my experience a definate relationship between such potential resistance/support strength in respect of where in the zone price is testing.

b. A previous swing hi (s) zone that has been tested and held as resistance 2+ times and then breaks to the upside, becomes a potentially styronger potential RBS zone (resistance becomes support) on any trend pullback re-test from the topside. The same is true of a previous swing lo (s) zone.

c. On a 15min or sub 15min trigger 1hr+ previous price pivots represent the potentially strongest relevant potential support/resistance zones...If using say a 1hr trigger I would be looking at 4hr and Daily.

d. Where an previous obvious near-term fractal swing hi/lo exists as such on the next higher t/f so much the better in respect of it's potential as resistance/support.

e. Fibs of 1hr + swings and trend lines on 1hr + are the 2 factors that can add confluence to support/resistance analysis.

By way of example the 1hr screenshot below is gbpusd...the red zones are previous near-term obvious fractal swing hi's on this 1hr t/f that exist as such on 4hr...the blue zones similarly for previous obvious near-term, fractal swing lo zones. The orange and purple zones are just such on this 1hr t/f...the fibs are relevant to 1hr swings as are the trend lines.



G/L

 

[trader_dante]

re: Support & Resistance Explained

Would you not say that it is better to wait for the reaction before you draw the s/r? Who is to say whether a line is correct or not? An s/r level is a zone, after all, not a definite spot on the chart and it can go through a lot of points before it reverses.

I'm not sure if I've understood correctly but what's the point of waiting for the reaction before you draw the s/r? The whole point is to be able to tell where price is going to turn ahead of time. I draw all my levels ahead of time. The market will tell you if your line is correct or not and when you get good at identifying them, the market will either stall or outright reverse right around it the large majority of the time.

I agree that levels are often zones but from time to time they are definite spots. I don't subscribe to the whole viewpoint, that when price shoots 100 ticks through your level before reversing you say, "well, it's a zone". That's no use to anyone that is trying to cut losers quickly. Most levels that you pick you should not see price go through them more than about 20 ticks absolute max.

 

[jefftheripper]

re: Support & Resistance Explained

I do tend to see the same stop running in FX markets. Especially intraday, you can see cable burst through SR by about 10-20pips before reversing. Perhaps this is stop running, perhaps it is just stops being hit unintentionally at those levels causing the spike.

As an example, one of the theories is that all the trades that went short at a support zone, wait for price to return to that short zone and then close causing the support, eg
(a) Level 100, I go short at 100 but price moves to 110 then comes back to 100. When it reaches 100 I thank my lucky stars and close out the trade (closing a short = BUYing) voting never to go short at that level again. (b) More buyers come in at that level also because that's where they think the buyers are going to be waiting.
With (a) I find it hard to believe everyone would hold onto their short trade for that long.
In FX, there is the supply or demand issue. I would suspect companies are far more likely to pick round number levels for their trades or Daily SR levels but I have no evidence of that.

If the round number is where orders are piling up then it'll show up as an s/r level when looking back on the charts. You will see price has reacted there before. Otherwise it might be 25 pips higher where the price reacts over and over and that is where you draw the s/r line.

As far as stop running, if I'm playing an hourly s/r level for example. Many times I'll look at a lower time frame chart (15 min) and place my stop beyond the next s/r level. That way it put's a barrier between price and my stop. If it hits that stop, then my trade was probably wrong, the s/r didn't hold well enough and I'm out. This also gives room for spikes since s/r isn't necessarily a line in the sand, but a zone.

 

[Shakone]

re: Support & Resistance Explained

I agree that levels are often zones but from time to time they are definite spots.

I consider it to be one level, not a zone. But people will enter ahead of the level, on the level, below the level, look how it is reacting around the level and then enter, creating a zone effect. But to me it is a line. Where price closes relative to that line, has a direct effect on what people then do. I realise this is contrary to what everyone says support and resistance are.

2) If the price has just bounced ahead of a the level the chance of it bouncing again if it comes straight back to it a short while later is dimished.

I've seen this many times too, and thinking about it, there are good reasons why it is weaker.

 

[bbmac]

re: Support & Resistance Explained

I consider it to be one level, not a zone. But people will enter ahead of the level, on the level, below the level, look how it is reacting around the level and then enter, creating a zone effect. But to me it is a line. Where price closes relative to that line, has a direct effect on what people then do. I realise this is contrary to what everyone says support and resistance are.



I've seen this many times too, and thinking about it, there are good reasons why it is weaker.

The zones in respect of previous price pivots (ie previous obvious near-term fractal swing hi/lo's) are for me, taking a fractal swing hi as an example the area between the top of highest candle wick and the highest candle body that makes up that fracatal swing hi...the example below are 2 fractal swing hi's that occurred on the daily gbpusd recently.
...
Now these aren't the most obvious fractal swing hi's as price did not sell down very much from them (ie is better to see that price went at least as far as the swing up0 to it in respect of distance travelled, but ther are fractal nonetheless...so price breaks through them to the upside and then retests them on a pullback from that topside and in both cases resistance becomes support....but look in both cases where resistance became suupport, ie in the area of the zone where most previous price action was found...I will draw them again to illustrate this example which I allude to in my post # 22, point a.:


Now it may be that in such zones there is confluence of other potential support/resistance factors elsewhere...ie fib (s) and/or trend lines in which case this may be the most likely area where another imbalancce of in this case demand/supply may have been realised. In any event it is othertech factors that will give us clues as to the likely probability of that, not least price action...That top potential RBS zone on the Daily saw price find fresh demand after the 5921-5668 precipitous fall on Thursday'...and what resullted (dare I say it) a 4hr pinbar...


So for me the potential supp/res zones are definate, although I agree sometimes price can go a few pips under/over them respectively, which I make the working assumption may have been a stop run If I get a set-up.

G/L

 

[Splitlink]

re: Support & Resistance Explained

I'm not sure if I've understood correctly but what's the point of waiting for the reaction before you draw the s/r? The whole point is to be able to tell where price is going to turn ahead of time. I draw all my levels ahead of time. The market will tell you if your line is correct or not and when you get good at identifying them, the market will either stall or outright reverse right around it the large majority of the time.

I agree that levels are often zones but from time to time they are definite spots. I don't subscribe to the whole viewpoint, that when price shoots 100 ticks through your level before reversing you say, "well, it's a zone". That's no use to anyone that is trying to cut losers quickly. Most levels that you pick you should not see price go through them more than about 20 ticks absolute max.

TD, the point is that there is no point. My opinion and no offence meant. I agree, as you say, that practice makes perfect, and there is no doubt that these lines do mark changes very often, but not often enough to convince me.

There are a lot of distinguished posters taking part in this thread and I don't want to go against you. Suffice to say that I don't think these lines are any better than a lot of other signals.

They are just a point on the chart and, getting it wrong produces the debate, "Why did you do that?"

What did Martin Luther King say?

Free at last!

 

[oildaytrader]

re: Support & Resistance Explained

Another factor in determining support and resistance is the stochastic on the 4 hourly and trend direction.If trend is up and stochastic is up,future support and resistance areas will be higher .A trader should also gauge the market sentiment and apply it to s/r.

 

[bbmac]

re: Support & Resistance Explained

Another factor in determining support and resistance is the stochastic on the 4 hourly and trend direction.If trend is up and stochastic is up,future support and resistance areas will be higher .A trader should also gauge the market sentiment and apply it to s/r.

I'm not sure that an oscillator reading on any t/f has any bearing as to where future support/resistance may lie in any market on any t/f. Potential supp/res factors either exist or they do not...however the slope/direction/reading of the indicator and the way price approaches the potential supp/res factors (ie in a strong trend or otherwise) can give us an indication as to the greater probability of a bounce or break at such pres-identified potential support/resistance factors.

 

[bbmac]

re: Support & Resistance Explained

Re: Splitlink's reply to TD in his post above.

Support/Resistance analysis like all other tech analysis is no holy grail but just another widely used tool, and we may as well use those that are most widely used in the market of choice purely because this gives us the greatest chance of being correct in our analysis, should there be a self fulfillinng element to the analysis we undertake.

Support/Resistance or should I say more accurately Potential future support/resistance can be represented by one or both of the following

a. A previous near-term obvious fractal price swing that shows us that there existed an imbalance of supply/demand or demand/supply at that area and such imbalance or even residual imbalance may exist again if price tests it in the near-term...ie whilst the imbalance is still visible on the respective chart.

b. Other factors widely used by the market that have historically resulted in price swings, ie fibs and trend lines.

Our analysis and plotting of such factors gives us areas in the market where other market participants may act and it is the behaviour of price around these 'zones' in which may or not be clearly represented the intentions of such market participants that can inform us of the greater probability - bounce or break, - but not always...a trading edge can be successfully derived from this.

G/L

 

[bbmac]

re: Support & Resistance Explained

Look at the 4hr gbousd chart below...a previuous fractal swing hi zone x 3...ie clearly strong resistance before the break to the upside, which when tested by a pullback from the topside found fresh demand...ie resistance became support (RBS)...Can we drop down a t/f or so and find a set-up / price action that tells us that the greater probability was that price would rise from this zone howsoever temporary in what was a decisive break in an uptrend? Well yes, and one could do so in the knowledge that trends advance and pullback-such is the nature of trends.

Just one example, but it illustrates the point about potential support/resistance...that it is a tool in our technical armoury that can with the right set-up/price action suggest that there is a greater probability of a one thing over another from the zone/factors identified.



G/L

 

[spreader_legger]

re: Support & Resistance Explained

When watching a random game such as Deal or no Deal (which I have the misfortune of watching sometimes ) you will find obvious trends as far as revelation of red or blue boxes are concerned .... naturally this does not mean that we would be any more likely to know when the trend will stop or even begin.

I believe they conducted tests on the market & they found that it does not necessarily follow a normal distribution or Gaussian pattern (statisticians out there plz help me out!) The tails in the distribution are slightly fatter & consequently the trends more pronounced.

I know this is slightly off topic as far as S/R is specifically concerned, but perhaps an interesting addendum to Scotty2Cues Coin flipping experiment

Initially, I wasn't sure about S&R and thought fibs were just crazy. Then someone explained the reason why they may possibly 'work'; it's because alot of other traders are using them and thinking the same. Im ALOT more skeptical on S&R, fibs when it comes to things such as FTSE etc than I am in Forex. I also wouldnt use fibs by themselves, they need to line up with S&R.

Attached is a random walk chart (coin flips). I can see S&R that would 'work' on there but its all just totally random....

Has S&R or fibs ever been statistically tested to see if the actually do 'work'?

 

[Scotty2Cues]

re: Support & Resistance Explained

When watching a random game such as Deal or no Deal (which I have the misfortune of watching sometimes ) you will find obvious trends as far as revelation of red or blue boxes are concerned .... naturally this does not mean that we would be any more likely to know when the trend will stop or even begin.

I believe they conducted tests on the market & they found that it does not necessarily follow a normal distribution or Gaussian pattern (statisticians out there plz help me out!) The tails in the distribution are slightly fatter & consequently the trends more pronounced.

I know this is slightly off topic as far as S/R is specifically concerned, but perhaps an interesting addendum to Scotty2Cues Coin flipping experiment

I thought just about all the academics think the markets are random. Isn't the Black-Sholes formula based on randomness or some kind of Brownian motion?

I have some faith in S&R in Forex as its mainly a speculators market and Ive read the big players use S&R. Im guessing something like FTSE is not a speculators market as its a combination of stocks and so the S&R is more random.

 

[SanMiguel]

re: Support & Resistance Explained

Im guessing something like FTSE is not a speculators market as its a combination of stocks and so the S&R is more random.

You'd think so wouldn't you but surprisingly not especially with the introduction of ETFs that buy a little of everything.
500 companies in the S&P and yet the levels still work.

 

[spreader_legger]

re: Support & Resistance Explained

To say that most academics believe in something does not necessarily make it so. The efficiency market hypothesis, which assumes all information is already priced in & participants have perfect information is an unrealisitic assumption IMHO (this would otherwise make arbing very difficult to accomplish).

Indeed George Soros in recent communications suggested that markets are imperfect and prone to bubbles .... the notion that everything trends towards equilibrium is plainly wrong. Rather than being purely driven by random events, the markets are also driven by the human emotions of greed and fear

I thought just about all the academics think the markets are random. Isn't the Black-Sholes formula based on randomness or some kind of Brownian motion?

I have some in S&R in Forex as its mainly a speculators market and Ive read the big players use S&R. Im guessing something like FTSE is not a speculators market as its a combination of stocks and so the S&R is more random.

 

[Splitlink]

re: Support & Resistance Explained

I have some in S&R in Forex as its mainly a speculators market and Ive read the big players use S&R. Im guessing something like FTSE is not a speculators market as its a combination of stocks and so the S&R is more random.

I'm trying to get my brain around this comment. Speculation is the art of buying cheaply with the buyers wisdom and experience that the market will rise---or the reverse---. Why would Footsie not be a speculators market, but Forex yes?

I think that we need to go back to the basics. If a country has strong exports it's shares will rise. The Footsie is a capitalisation index and the weakest of the 100 will be relegated-- this works like the football league-- this means that the strongest 100 stocks are always going to ensure the movement of the index, for better or worse.

In the currency markets if Footsie goes up, the GBP will too. This is because the GBP has to be bought to buy British goods. The two are tied and if the economy falls, the GBP will fall. The amount it rises falls or rises will depend on the strength of the currency that it is paired with.

I cannot see how randomness can be associated with one and not the other.

 

[Splitlink]

re: Support & Resistance Explained

To say that most academics believe in something does not necessarily make it so. The efficiency market hypothesis, which assumes all information is already priced in & participants have perfect information is an unrealisitic assumption IMHO (this would otherwise make arbing very difficult to accomplish).

Indeed George Soros in recent communications suggested that markets are imperfect and prone to bubbles .... the notion that everything trends towards equilibrium is plainly wrong. Rather than being purely driven by random events, the markets are also driven by the human emotions of greed and fear

Just a minute. Do you mean that because George Soros said that, markets do not trend towards equilibrium? I should suggest that they do and recent examples of bubbles have proved that.

 

[Scotty2Cues]

re: Support & Resistance Explained

To say that most academics believe in something does not necessarily make it so.

yeah, i wasnt saying 'therefore it must be true'

 

[spreader_legger]

re: Support & Resistance Explained

Sure, once bubbles burst, markets may revert back .... In actual fact fear could push markets below what many more level headed would consider Fair market value.

I think what Soros meant was that markets will be pushed away from equilibrium for extended periods of time due to man's over exuberance (sorry, didn't mean to bring back the ghost of Greenspan )

Just a minute. Do you mean that because George Soros said that, markets do not trend towards equilibrium? I should suggest that they do and recent examples of bubbles have proved that.

 

[FX Bandit]

re: Support & Resistance Explained

Another factor in determining support and resistance is the stochastic on the 4 hourly and trend direction.If trend is up and stochastic is up,future support and resistance areas will be higher .A trader should also gauge the market sentiment and apply it to s/r.

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You think that there would be a lot of competition for such a prize? Of course, but that post is miles ahead of the pack.