A different way of playing support and resistance?

[ChocolateDigestive]

Hi

I thought i would start a new thread on this popular topic and hopefully spark some useful debate.

Forget the instrument and the time frame lets discuss support and resistance.

You can see below a H1 chart of spot EURUSD, time frame doesn't matter, instrument doesn't matter it's just an example. On the chart I have marked a blue area where I believe in the future IF price reaches the blue area price may find support. The chart has candlesticks, this doesnt matter could equally be a line graph.

My understanding from many hours of screentime, is that price is likely to find support at the blue zone, price will then either then break through the support before continuing or rebound before moving away from the zone. Of course price could run all over the blue zone as well and do a combination of both.

I try to think of support and resistance in terms of market psychology. So we know that market participants are likely watching this blue zone. As we approach the blue zone from above there will be people who are already short, those people may look to take profits at the support (those that do think price will come back). Then there are those that are long already and are taking some heat, they might be thinking I am going to hold this and see if we get a bounce, if we don't them I am out. Then we have the third group, perhaps the largest (???) who are flat and they are thinking I am going to wait and see what happens at the blue zone before making a decision on whether to enter.

So it is quite a complex set of human emotions, fear and greed etc that each market participant is experiencing whether they are long, short or flat.

I have been thinking recently about a phenomenon I have noted that price tends to always reach a major previous support and resistance area when close by. It is a little difficult to observe correctly as clearly if something is moving towards something else then the momentum is likely to take price further. Biases are in play.

This is just something I have noted in addition to other strategies I play (which are not the topic of this thread).

My thoughts on the matter were say price is fast approaching a major previous support area. Lets take the situation of the participants again.

(i) the person who is flat - they may well think to themselves, I am just going to wait here and see what happens. i.e. they continue to do nothing.

(ii) the person who is short - they are probably thinking I will take partial or full profits at the support zone.

(iii) the person who is long - they are feeling the heat but maybe they think, I am going to hold this and see if I get a bounce. or they sell and remove liquidity from the bid thus fueling the move down further.

The above 3 participants could have the effect of a status quo in the market a kind of vacuum, this would have the effect of the momentum in the market moving towards the support just being allowed to flow on to the zone. With the majority of the traders who are flat not seeking to enter until the zone is reached this potential activity is not present to turn price around early increasing the likelihood that price will continue on its current path.

Check it out for yourself, pull up any chart, any instrument, any timeframe say H1+ to ensure the most participants are thinking about a future level. Then watch price as it moves towards that level, what I have noticed is that when it gets close it nearly always gets there. - if you get what I am saying

I am wondering if this can be formalised into a strategy, whether it could be made to work.

On the other hand I am probably just talking a load of cobblers.

All thoughts / comments welcome.

Good trading.

PS - This is not a strategy I use I am just musing some ideas.

 

[scose-no-doubt]

Personally, I think there's something in this kind of approach, especially so in FX. I believe that say for instance a corporate needs transact or whatever large player need € as would be the case in this instance, they might put in an order for $X better than X price giving the MM a bit of wiggle in terms execution which would allow them to look at whatever else is on offer on the desk e.g. triangulation arb through other orders or whatever else from a whole array and multitude of opportunities (GammerJammer once said something very interesting about FX desks pushing price to set off touch options). Point is, whatever they're up to, they're gonna be bid or offered at around a certain level until their cup is full or empty as may be the case innit? Could be that they're in and out with the size of the cup being the only issue in terms of how long a level holds

Lookin' at this you can see that it's (FX) mostly (44% in 2010) interest rate driven anyway which opens that whole sh8 storm and so can only be gamed or driven by emotion to a certain extent innit? I'd have thunk anyway.

Kind of missed the point with my ramblings but can this be formed into a strategy? Probably. I have an idea of why and how but it's all very hypothetical,theoretical and possibly massively incorrect. Also, I don't really have the time, energy or even the inclination to go into it. Why have I made this post then? Who knows? I should be in bed.

Can I ask you though, Choccy... why do you say a "different" way of playing S&R? This all seems pretty bog standard to me.

 

[rathcoole_exile]

price is likely to find support at the blue zone, price will then either then break through the support before continuing or rebound before moving away from the zone. Of course price could run all over the blue zone as well and do a combination of both.

exactly the basis for all my trading

 

[rsh01]

I try to think of support and resistance in terms of market psychology.

So it is quite a complex set of human emotions, fear and greed etc that each market participant is experiencing whether they are long, short or flat.

who are the biggest participants in the fx market?

who is likely to move price, us (retail prop trader) or them (financial institutions)?

who is likely to trade with a tendency to skew towards emotions of fear and greed? us or institutions?

you are describing 'all' market psychology as a sum of fear and greed. and by doing so you are discounting the main participants - the fin institutions (uk banks do >75% fx transactions) who are trading largely on behalf of CBs, HFs, other Inv Banks, Corporates etc etc.

Fear and greed doesnt come into their psyches when trading, targeting areas of liquidity does. Fair enough, they will play on our emotions to increase liquidity or direct price towards liquid areas, but they are not being filled mainly by us. so fear & greed really do not come into why price becomes support or resistance, getting orders filled does.

I will be able to answer more lucidly tmrw. at least i tried, thats all my mum asked for.

 

[wackypete2]

I like waiting until price reaches the blue zone(s) and then look for a failure bounce especially a pullback to the trend. The chart you show is clearly in a downtrend so my preferred play would be to wait for a clear upward bounce and a move back to the blue zone, then I'd look to short.
IMO S/R is one of the simplest ways to trade. Nothing guaranteed of course but very little stress if you keep proper stops and stay with the trend.

Peter

 

[rsh01]

I have been thinking recently about a phenomenon I have noted that price tends to always reach a major previous support and resistance area when close by.

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Check it out for yourself, pull up any chart, any instrument, any timeframe say H1+ to ensure the most participants are thinking about a future level. Then watch price as it moves towards that level, what I have noticed is that when it gets close it nearly always gets there. - if you get what I am saying

soz i missed this part. yes there is all sorts of reason for this - main reason imo is to search for liquidity (to get orders filled) - and orders do stack up behind/in front of previous levels - one reason for this is cos maybe they didnt get all the orders filled first time around; another reason may be to trigger options due to expire, and resistance to this is to protect option levels - a key reason why round numbers do actually mean smthg in the markets - most options priced simply for simple ppl.

if anyone can help out why price tends to gravitate towards levels please add.

 

[wackypete2]

soz i missed this part. yes there is all sorts of reason for this - main reason imo is to search for liquidity (to get orders filled) - and orders do stack up behind/in front of previous levels - one reason for this is cos maybe they didnt get all the orders filled first time around; another reason may be to trigger options due to expire, and resistance to this is to protect option levels - a key reason why round numbers do actually mean smthg in the markets - most options priced simply for simple ppl.

if anyone can help out why price tends to gravitate towards levels please add.

If the levels are big enough (plenty of sitting orders) the large players will attempt to move price in that direction to get those orders filled. In CD's example suppose price is currently above the blue zone and the brokers/dealers/banks know that there is a large imbalance of buy orders at the blue zone. They will short the market to drive price down then use the sitting orders from retail players to exit with a profit. Happens with stocks even better all day long. That causes a small bounce up. IMO that's the time to look at trying to get in a trade.

Peter

 

[Lord Flasheart]

Have you compared this to a round number or indeed any number. The dip towards the resistance you are talking about could just be explained by other PA means

 

[Enzzo]

Hi all,
I do think that approaching any market strategy considering what traders, and especially "general retail traders" are willing to do next is a very clever and effective way to do it...
For example, I see over and over trading S/R, that the universal "trading book law" that the more a S/R level is hit, the more it is likely to hold result in the complete opposite, and more often than not, market (big players that really paint our charts for us) will break that levels to screw that general S/R traders, and sometimes too, you will see the breakout is a fake, screwing up too the breakout traders.....
That for me means picking up liquidity, to trigger big orders with not a lot of squeezing for big fishes, and getting the most of traders trapped and in a hard position that will result in triggering their stops to get out of their positions favoring the opposite move momentum...
I think you can see these kind of things over and over in any chart or instrument, and that is the reason why price always gravitates to S/R and key points in the charts imho...
So by trying to read what most of the traders are gonna do next and timing a little your entry on those events, is a very effective way to deal with with S/R as per my own experience...

 

[ChocolateDigestive]

Can I ask you though, Choccy... why do you say a "different" way of playing S&R? This all seems pretty bog standard to me.

I was making reference to my observation that most retail traders look to play S/R by entering after the S/R has been hit, then looking to play a bounce or a break.

 

[ChocolateDigestive]

exactly the basis for all my trading

are you going to let a cat out of a bag?

 

[ChocolateDigestive]

if anyone can help out why price tends to gravitate towards levels please add.

interesting point that. I have been musing over a theory that the larger players who can move the market via trading size or playing with liquidity have a vested interest to make price reach these levels. They know a lot of the smaller traders will have set orders here or will enter here, therefore my thinking is that these larger players want the price to reach there just to give them the opportunity to get some of the retail $$$. I could be talking BS though, this is just me musing.

i think this is what WackyPete is alluding to in his post.

 

[ChocolateDigestive]

Have you compared this to a round number or indeed any number. The dip towards the resistance you are talking about could just be explained by other PA means

no I haven't I did get a guy to program a back test on trading into a round number the first time price approaches. The results came out like 56% win 44% lose, I could be ar$ed to optomise it, maybe I should. For me though far bigger edges in the market existed so I just ditched it.

 

[Enzzo]

interesting point that. I have been musing over a theory that the larger players who can move the market via trading size or playing with liquidity have a vested interest to make price reach these levels. They know a lot of the smaller traders will have set orders here or will enter here, therefore my thinking is that these larger players want the price to reach there just to give them the opportunity to get some of the retail $$$. I could be talking BS though, this is just me musing.

Exactly what I meant, that's my thinking too

.........That for me means picking up liquidity, to trigger big orders with not a lot of squeezing for big fishes, and getting the most of traders trapped and in a hard position that will result in triggering their stops to get out of their positions favoring the opposite move momentum...

 

[ChocolateDigestive]

Exactly what I meant, that's my thinking too

sorry Enzzo, didnt read your post properly.

 

[Enzzo]

sorry Enzzo, didnt read your post properly.

nothing to be sorry about....mine was only a agree/support post

 

[ChocolateDigestive]

some very interesting price action at the moment on the euro. The blue zone is the previous hourly resistance.

 

[BeginnerJoe]

I think it's dangerous to rationalise every ebb and flow of the price. Then you start seeing things that's not really there.

Anyway I am shorting that beech for a down swing with a tight stop.

 

[ChocolateDigestive]

I think it's dangerous to rationalise every ebb and flow of the price. Then you start seeing things that's not really there.

Anyway I am shorting that beech for a down swing with a tight stop.

pure lulz

 

[The Leopard]

You mentioned a kind of 'vacuum effect' in your first post. In my opinion this is very, very common and very important. It could to a large extent be the basis of an entire method, albeit one that requires balls as big as a bag full slapoopies to execute. It would principally be a reversal strategy which most people should avoid, but it can be a very good way of getting in very early with very tight stops.

If you really want to see it in action or explore it further, look at futures under a microscope - such as a five minute or fast tick chart - it becomes very obvious what is going on. Combine this with a bit of thought about actual market mechanics and away you go.

Like I say, it's not one for beginners or the faint of heart, because essentially it looks like stepping out in front of an express, and quite often you will be. But the winners will often be vast.

As an aside, it can also be quite a useful concept when determining exit points.