Day Trading & Forex Forum

dbphoenix

You're on the right track, but allow me to make a few modifications.

S/R are not points where demand overwhelms supply or vice-versa. They are rather points or levels or zones at which the movement of price might be affected due to the fact that price was affected there earlier by demand overwhelming supply or vice-versa. In other words, a swing high occurs because supply overwhelms demand, at least for the time being, but one cannot assume that a swing high is going to act as resistance simply because it's a swing high. It must also act as resistance in order to be resistance. If it doesn't, then it isn't. Again, this is not to say that highs, lows, round numbers are not potential S/R. But they are not actual S/R until they actually provide S or R.

As for the expert part, I'm just looking for the truth, and I've learned that the truth is to be found in price. Understanding the behavior of price is the real trick.

dbphoenix

If the "resistance" level has demonstrated that it provides resistance and price reverses there, it could be doing so for either of the reasons you suggest. Volume provides a clue, but since volume is only trading activity, one has to look at the relationship between volume and price. If, for example, there's a lot of activity and price is difficult to budge, then one can assume that demand is insufficient to outdo supply. That may not be the case if buyers can trigger short-covering, but you play the hand you have. OTOH, if there's not much activity but price rises anyway, one can assume that there is at least some demand, but not enough selling interest -- yet -- to curb it.

dbphoenix

Where it occurs isn't as important as how it occurs and how long it takes. Generally, "accumulation" that takes place quickly won't take enough supply out of the picture to enable a move that is significant enough to generate more than a paltry profit, if any.

dbphoenix

Volume in and of itself is reflective only of trading activity, such as the number of shares traded. In order to know whether it is indicative of demand or supply, you have to look at the results of all this activity, i.e., the effect on price. In other words, there is no such thing as "buy" volume or "sell" volume; there is only volume, since a buy cannot take place without a sell (or vice-versa). What makes price move up is not the buys in and of themselves, but the demand.

As to high volume at the bottom of a dip or W or rounded bottom or whatever, again, it depends on the effect on price. If there's a lot of volume and price doesn't fall, then you can assume that the selling is exhausted and that aggressive buyers can buy the bounce, or that more conservative buyers can begin the accumulation process, depending on the context. If volume is high and price continues to fall, then selling is not yet done and buyers are not willing to do more than take shares off the hands of panicky sellers; they are not, in other words, anywhere near ready to pay a premium to stop the decline. The fact that the volume is high, however, suggests that selling is near an end.

Of course, "high" is relative and has little meaning unless it is placed within the context of a chart. One man's selling climax is another man's continuation unless one looks at the forest.

dbphoenix

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.

dbphoenix

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.

dbphoenix

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.

dbphoenix

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.