re: Support & Resistance Explained
OK - so if we look at this, a few questions spring to ming
-- How well do they work?
-- granted, everyone can see them - but how many influential traders use them or even look at them ? I send about $150K US to Thailand every month and to pay for business expenses. People like me that exchange currency to facilitate trade pay the bills when they are due and simply get the accountants to book the currency exchange gain/loss. There's a lot of forex trading that is not speculative, after all.
-- If they work well and everyone uses them, why do they not stop working. As before, in my simple example of the buy Friday, sell Monday 'edge', it is clear that when a lot of people jump in at one point in a specific direction, that there will be issues finding a counterparty and so you have to jump in earlier and earlier which erodes the edge.
Any clues?
If they work so well, why does the edge not dissapear from overuse in FX ?
Depends what you mean by work. They will very often give an initial short term bounce, without penetrating the level very far (both bounce and initial penetration, lets say 5-15 pips, sometimes the bounce is to the pip). This gets you into the money quickly and with low risk. It may then turn around minutes later and go through the level, or it may have actually reversed and continue in your favour. The skill of then judging what is likely to happen next from price, whether to trail up the stop, take partial profits etc. will mostly determine whether you profit in the long run.
So this may not sound great as an entry. But comparing it to just a blind entry, you have entered at a point where with high probability you will get an initial push that will account for the spread or put you in the money, and if you are wrong, it won't cost you too much. Not great, but seems to be better than a random entry. It is a potential turning point that can be played with tight stop, so Support and Resistance areas present good risk reward opportunities. But although I found the initial push to be high probability, it actually being a longer term reversal point and going for a lot of pips without first testing that initial penetration and taking out stops was a lot less likely (less than 50% in my opinion).
Why doesn't the edge disappear from overuse? Well I'll take a stab at it. Consider what I just said about the initial bounce which I consider high probability. Suppose I am already short and we're heading towards a support level, but I still want to remain short long term. If I exit some on that level I can then re-enter 10-15 pips higher, and essentially I've made 10-15 pips minus spread. But I don't want to exit much higher than that level, I want to exit on the level or lower, because otherwise that's cutting into the pips I'm gaining. Secondly, it does happen that price will reverse a couple of pips above where the support level is, people getting in early and perhaps trying what you suggest. But then those that were short with target ON the level, didn't get to exit, so the number of people buying is a lot less, and the trade potential from doing that is decreased.
It is a two way market, and a lot of movement is from people exiting. So just because longs want to get in early at higher price, doesn't mean shorts do. And it is only good to be in early if the phenomenon exists and is unaffected by getting in early. In both this case, and the enter friday exit monday case, the phenomenon
is affected, therefore people don't enter early and the edge persists.
