Support and resistance - total rot ?

[timsk]

When resistance works, the value traders have deemed the security over-valued. There is usually a liquidity imbalance at this point (shortage of sellers) and the value traders become liquidity suppliers. The herd then follows and then prices go down again.

When resistance fails, it's because no value traders have been active at that level and the trend continues because they don't think the security is over-valued. There is no liquidity imbalance at this point and trend carries on (no shortage of sellers).

Obviously, we can all make up our own minds and, in a sense, it doesn't matter which view is right or wrong. All that matters is that our individual view of the market - and the way it functions - makes sense to each of us and we can construct a successful trading strategy around it. For my part, as a trader, I don't care two hoots about value. If I was a long term buy 'n hold investor, I might take a different view and, certainly, I would not buy equities that were overvalued no matter how good the TA picture looked. Similarly, If I was already long, I might well consider taking some or all of my profits. However, as a trader, I look at S&R and I think about those traders already holding positions - the longs from below and the shorts from above. Which group is feeling the heat the most and is most likely to capitulate? What will then happen to price if and when they start to unwind their positions? If you're long and price has hit resistance and is pulling back and gaining momentum, are you really going to just sit there and think to yourself: 'This is fun. Fair value and getting fairer with every point the instrument falls'. Or, are you more like to think to yourself: 'Oh a-r-s-e! With every point this thing pulls back, I'm losing $$$$'s that I could have had and all the time price is getting closer and closer to my entry level'. I know which camp I'm in. IMO, it's all about fear and greed and not some academic notion of fair value.
Tim.

 

[scose-no-doubt]

I can't agree with you Timsk as I don't think that institutions are in the business of succumbing to neither fear nor greed. The nature of their business is quite the opposite. It's about accepting risk for a premium or exploitation on facilitation of a transfer using better info/equip/personnel than the opposition and clients. Funds are in for huge size and therefore any selloffs are immidiately apparentm plus they aren't usually in for the short term swing of a few points but for the yield. On an intraday basis you're only really playing the market makers who want to gobble your bid up using their clients' huge funds. You remeber GammaJammers post about a day in the life of a MM? Didn't seem to me that he was in the business of playing poker with doji's and hammers etc instead of cards as I was lead to believe in my early days of forum shadowing . If he needed a fill, he needed a fill. End of. Profit or loss. And there are hundreds of thousands of people like him all over the world doing exactly the same thing in every market. These are the players who move the market and we're just along for the ride. IMO fear and greed should only be considered introspectively as they only really effects "speculators" (what a resurgence that word has got lol). If you are trading and making money wtf does somebody else's emotion matter when you're considering your position? They could be in for any number of completely different reason to you.

 

[MrGecko]

The title is meant to be get people interested.

Why do the concepts of "support" and "resistance" seem to work - is this because they are self-fulfilling, i.e. most people see the level and react in a similar way? Or is there something else going on?

In my view, before you can determine of something "works" or not, you need a clear definition of what it is "supposed" to do in the first place. If Support and Resistance are supposed to be terms that you can throw around to jazz up your posts on T2W, then they work. If they are supposed to show you how you will die when you say them three times in a mirror, they don't.

 

[robster970]

Hardly a cogent argument dissing an economist is it?

Also value is not used exclusively for buy and hold is it? After all we're all in the game of buy low, sell high aren't we? So don't we therefore make a judgement on value?

I would say that what's been said on here so far demonstrates a limited view of what value really means in a market where the weight of opinion determines whether prices move up or down.

Ultimately at resistance the weight of trader opinion is that the security is too high. At support, the weight of trader opinion is that the security is too low.

S&R are where that weight of opinion changes when they work. When S&R 'fail' it's because the weight of opinion hasn't changed. To change the opinion, some buggers somewhere have decided that a security is over-valued and then the rest of the mob follow when they realise the smart money are getting out.

So how can you tell me that value doesn't come into it...................

 

[timsk]

Hi s-n-d,
I agree with your comments but they don't - as far as I can tell - negate anything I've said in previous posts.

I expect you're quite right that institutional traders don't experience fear and greed in quite the same way as minnow retail traders like me (or am I the only one that has such emotions? ), but they still have to get in and out of the market somewhere and, presumably, like us mere mortals they'd rather end up with a profit than a loss. Often as not, this means they're buying weakness and selling strength. They look to enter at optimum levels which, usually, means taking the other side of the 'weak hands' who are bailing out of losing trades or wanting to take profits on winning ones. Equally, they look to exit by working the resistance levels so they can sell when they're net long and and visa versa at support levels when they're net short.
Tim.

 

[timsk]

Hi robster,

Hardly a cogent argument dissing an economist is it?

That was pretty obviously a tongue-in-cheek comment looking for cheap laughs. I certainlty wasn't 'dissing' the esteemed academician. The 'cogent arguement' - as far as there is one - was made prior to and after this jokular comment. C'mom robster - lighten up!

So how can you tell me that value doesn't come into it...................

I'm not saying it doesn't come into it. Far from it. If you refer back to my first post in response to yours, I made it clear (or so I thought) that value doesn't account for momentum in an extended move. All I'm saying is that momentum is caused primarily (not always and not exclusively) by existing positions being closed out, rather than by new traders entering the market.
Sorry if I didn't express myself clearly enough in earlier posts.
Tim.

 

[robster970]

I'll resort to any cheap tricks to win an argument Tim - I don't take anything on this site seriously apart from when I ask for help and the good boys and girls on here provide it........................

For the avoidance of doubt, my use of the word 'Momentum' was not in the classic sense of momentum trading. I was trying to illustrate the momentum that gains when value traders get off the bus and we mere mortals follow.

 

[doobs]

Hi robster,
I don't quite agree with you. New traders 'joining the party' aren't, generally, the ones responsible for momentum in a price move, IMO. My view is that the momentum that's sometimes created either side of S&R is - usually - a consequence of traders with open positions closing them to book profits or to minimise loss, as opposed to new traders coming into the market. Take two scenarios:

A.In a rising market, price hits resistance and holds.
Anyone long will be looking to bail as resistance looks to be holding. Some new traders will - of course - enter with short positions. However, if price pulls back any distance and with momentum - this is mainly a consequence of the longs closing their positions, rather than traders opening new short positions. Why? Because long holders are the larger dominant group and it's their numbers that will create in imbalance in supply/demand sufficient to cause price to fall with momentum as they take what profits they can before price gets back down to their entry level.

B.In a rising market, price hits resistance and fails.
Unlike scenario A, the longs from lower levels will - for the most part - hold their positions and let their winners run. The speculative shorts who expected resistance to hold will - for the most part - have stops just above the resistance level. As these tend to be clustered within a tight zone, price will suddenly 'pop' as they are all taken out together. However, these - and any new longs buying the breakout (or existing holders adding to their positions) tend not to be sufficient to carry price a lot higher and certainly not with momentum. There's unlikely to be enough of them. For that to happen, traders who entered shorts at much higher levels (assuming there are some) will need to be threatened and start to unwind their positions. It's their actions that will create a huge imbalance in supply/demand sufficient to cause price to rise with momentum as they take what profits they can before price gets back up to their entry level.

In scenario B, having breached resistance, price could be in blue sky territory making fresh highs at levels where there are no existing short holders. In these circumstances, if price moves higher with momentum, then this can only be as a result of fresh longs desperately jumping on board the starship hoping to catch a ride to the heavens. I would stress these are generalisations and not absolutes. However, as generalisations go, IMO, momentum is usually a result of the actions of those who have the most to lose, rather than by those who have something to gain.
Tim.

brilliant post senario b is one of my favourite trades. I use the very big round numbers - every 500 pips - 1.00000, 1.05000,1.10000 etc. when price breaks these levels against the major trend and hits the next round number (50) holds and has divergence ,I fade the break back down to, or very near to the 00 level, - a good 40-50 pips with a nice tight stop Its a very simple strat but quite succesful. When you zoom out on the weekly and monthly charts you can see how good these levels work as s+r.

- doobs

 

[meanreversion]

In my view, before you can determine of something "works" or not, you need a clear definition of what it is "supposed" to do in the first place. If Support and Resistance are supposed to be terms that you can throw around to jazz up your posts on T2W, then they work. If they are supposed to show you how you will die when you say them three times in a mirror, they don't.

Yes, someone else made this point (Rossini?) early on. If it "works" in some way for someone who uses it, then it exists in that persons mind. There are sufficient people out there who use the concept of S&R that the terminology itself is commonly used, that's about all you can say!

 

[scose-no-doubt]

Hi s-n-d,
I agree with your comments but they don't - as far as I can tell - negate anything I've said in previous posts.

I expect you're quite right that institutional traders don't experience fear and greed in quite the same way as minnow retail traders like me (or am I the only one that has such emotions? ), but they still have to get in and out of the market somewhere and, presumably, like us mere mortals they'd rather end up with a profit than a loss. Often as not, this means they're buying weakness and selling strength. They look to enter at optimum levels which, usually, means taking the other side of the 'weak hands' who are bailing out of losing trades or wanting to take profits on winning ones. Equally, they look to exit by working the resistance levels so they can sell when they're net long and and visa versa at support levels when they're net short.
Tim.

I don't think this is always the case Timsk. I think that sometimes people are just doing the business that needs to be done. You think Ford US is gonna give Italian company X a bligh on agreed settlement date for a fleet of vehicles because the FX markets a bit heavy 30 days later? What about cash flow for international subsidiaries?vThere are literally millions of contracted transactions that must be pushed throught he markets every day. Physical deliveries, option exercising, risk adjustments and many more. take execution traders for example. They're don't even have an opinion for the most part do they?

 

[meanreversion]

Take the red pill if you believe in support and resistance, and the blue pill if you think it's a pile of crock.

 

[meanreversion]

I don't think this is always the case Timsk. I think that sometimes people are just doing the business that needs to be done. You think Ford US is gonna give Italian company X a bligh on agreed settlement date for a fleet of vehicles because the FX markets a bit heavy 30 days later? What about cash flow for international subsidiaries?vThere are literally millions of contracted transactions that must be pushed throught he markets every day. Physical deliveries, option exercising, risk adjustments and many more. take execution traders for example. They're don't even have an opinion for the most part do they?

Institutional traders are mainly just responding to client flows. Occasionally they might consult their charts for prop positions, but that's only a small part of their P/L.

However, they may give chart levels a little nudge from time to time to fish all the stops placed there.

 

[MrGecko]

Yes, someone else made this point (Rossini?) early on. If it "works" in some way for someone who uses it, then it exists in that persons mind. There are sufficient people out there who use the concept of S&R that the terminology itself is commonly used, that's about all you can say!

Support and Resistance (and importantly the reaction to these) are sources of qualitative market generated information. Other sources of "qualitative" information include

* the markets reaction to good/bad news
* the action at the open and close
* the reaction to daily/weekly highs
* the 200d MA
* inter market correlations

Put together, it is possible to build a picture of the overall context of the market. That is what support/resistance (et al) are "supposed" to do.

All IMVHO.

 

[scose-no-doubt]

Institutional traders are mainly just responding to client flows. Occasionally they might consult their charts for prop positions, but that's only a small part of their P/L.

However, they may give chart levels a little nudge from time to time to fish all the stops placed there.

Thats the point I was trying to make. Businesses need to trade the markets in order to operate as a going concern. It's not all just speculative casino gambling and poker play.

Also, what about Goldman Seezy prop?

 

[meanreversion]

I have zero information to back this up, but I bet if you added up all prop profits from bank prop desks over the years, it would be 1 pct or less of total profits.

 

[scose-no-doubt]

GS prop is circa 10% revenue, Citi 2%. All going soon anyway now that Obama has his fiery sword out.

 

[meanreversion]

Hmmmm are those figures reliable? Doesn't sound a million miles off though. However I wonder how much those units would make if completely cut off from the rest of the bank, i.e. if they didn't have the flow information.

 

[scose-no-doubt]

From bloomberg news stories. What you mean "if completely cut off from the rest of the bank"?. Don't they have like iron wall thingies? The ethics regs mean departments cannot share information no?

 

[meanreversion]

Hmm well I used to publish information about what trades clients were doing on the internal chat system. On one occasion we were paid by a customer for a large GBP put/USD and got f-cked, i.e. we couldn't buy it back as vols moved higher, spot moved etc. At the end of the day I was going through the trades and spotted that one of OUR prop traders had secretly paid another bank for the exact same option about a minute after the trade was done, in other words he used the information that we were f-cked to make money for his prop account. Sad but true.

 

[scose-no-doubt]

bet hes not short of a few though lol.