Beginner - Support / Resistance Question

[Tommygun66]

Dear all,

I've recently joined t2w in a bid to improve my spread-betting skills. I know the basics of the business, various strategies, technical skills and have placed about a hundred trades over four years, but I would still call myself a very amateur trader.

Aside from introducing myself I had a question that I would like opinions on. It's about support and resistance and how arbitrary most "support" and "resistance" points are. The reason I say this is that, despite the work I put into investigating a trade, entry points and placing stops, support and resistance lines have only very exceptionally ever actually held true. In all markets I have bet on, be it individual shares, indices, currencies and commodities, I find the price shoots through supposed "support" and "resistance" lines as if they weren't there.

This got me to thinking about them and I've come to the following conclusion (hence my question). I've used a real life example but it affects all markets. This question is based on the fundamental premise that 'traditional' support and resistance appears when the market decides, for example, that £2 is too low for a particular share, so they buy at £2, and support forms around £2: -

Question / Example - The EUR/USD was rallying earlier this year when Ireland said that it would take financial assistance from the EU. The EUR/USD subsequently rallied from about 1.3500.

For the sake of argument let's say that the Euro continued to rally and then for various reasons (Greece etc) it starts to fall.

Won't analysts and traders make the mistake of looking at the previous low of 1.3500 (which looks like a big bounce) as a support line, rather than the truth, in that it just happened to be the point at which news of Ireland accepting monetary assistance came out?

If Ireland hadn't come out and said yes to monetary assistance until a week later, who's to say that the rally wouldn't have occured from 1.3000 or lower?

In this respect, doesn't that mean that most 'support' and 'resistance' are simply illusory, in that they are simply a reflection of breaking news at the time, and in fact the only true supports/resistances are when there is NO specific news (or very little given, our 24hr media environment) and the markets decide to move a share/currency on their own, simply by buyers outweighing sellers or vice versa.

In addition to my overall question, in true quiz style, I have the following statements, which I believe to be true: -

(a) When a genuine (and random) news story causes a reversal in the market, the point at which the market turns is arbitrary and is not a genuine support/resistance line.

(b) The next time the EUR/USD approaches 1.3500 (for example), all will be forgotten about what caused the turn and Ireland accepting assistance, and a market-esque self-fulfilling prophecy will occur whereby 1.3500 becomes a support.

(c) The media and analysts will often 'create' reasons for why something happened (e.g. "weakness in the US employment numbers today caused gold to increase"), when in fact it is the market who is making the moves happen, such as traders buying gold simply because it's going up!

All this, if true, would prove to me why I've yet to see support or resistance lines hold up. I have tried tight stops and far away stops, it matters not.

Thanks for your opinions on this matter.

Cheers,

Tommygun66

 

[forker]

What time frame are you using

 

[Tommygun66]

I use different time frames depending on the trade in question, but for most trades and especially for those based on support or resistance I use daily time frame (or hourly zoomed out). I expect to see the support or resistance to have held at least twice before; I wouldn't use a "support" line from a 10 min chart for example, I know that's just noise.

 

[forker]

Post some charts so I can get an idea of how you are plotting levels

 

[Tommygun66]

Ok, please see attached (won't let me copy & paste into this box).

I have a hundred examples but this is one I did recently; chart shows Glaxo all the way back to 2007, it repeatedly tests the 1300-1350 area only to fall back every time (bar once in 2007). I sold at 1300 with an admittedly tight stop at 1380 - I figured that if it broke 1350 for the first time in 4 years then it would keep going.

On an aside note, I believe GSK has since fallen in line with the FTSE and all the other market turmoil recently, not because the stock itself is overbought necessarily. Hence my difficulty with picking real support etc.

Thanks

 

[forker]

While you are getting some screen shots, lets go over the gritty of support. What makes support important is the buildup of orders around them. In news announcements the volatility skews all technical analysis. Don't give weight to any technicals in these times. You are best served standing aside until volatility normalises.

The biggest mistake I see new traders make is trying to find the perfect fit. There is typically a range in these areas not a single defined level. Second mistake I see new traders make is blindly buying\selling at the level. There are several approaches to trading these levels with blind buying\selling being the Least profitable. Something you need to pay close attention to is how price is reacting to the level measured in context of the trend, if any. Price gives away many clues before proceeding. The only time this isn't true is during high volatility. Sometimes high volatility is a great thing and quick profit can be realised under optional conditions of trend and news. Look to build several strategies that take advantage of support under different conditions.

 

[forker]

i have outlined several areas where there are 2 separate strategies that could have been employed. if i could teach you anything it would be to look for the first pullback to a level. i find this the most consistently successful of my strategies.all the arrows pointing up are based on that strategy with slight variances depending on the trend. the arrow pointing down is a different strategy. its a clear failure of the level and when price pulls back below the level sell sell sell....

can you see where i am going with this

 

[Tommygun66]

I can see pull back from the 1300 level and the sentiment to sell once it fails to maintain its momentum above this price. I'm not so clear on the arrows pointing up.

 

[forker]

price always reacts when it pulls back to prev support it has broken after an initial run. The first pullback is typically a high reaction level for continuation. those upward arrows are those levels. you might not understand ti straight away because not all of them are obvious. Just put it in your "review in 6 months time bag" when you have a better grasp trading support.

 

[Windowsill]

Have you considered another approach. If say the price heads toward a prev low or high, then the most normal approach IMO is to assume it will carry on. If it does, stay with it if it does not then get out. Now that simple sentence brings with it a huge number of questions. To resolve trading, this is all that needs to be resolved. I have never spoken to another trader but once you understand the simplicity of this approach I would have thought it is the only way to trade.

 

[Tommygun66]

Ok, I think I see what you're saying. I'll have to keep my eyes open to that one as I continue to watch what happens.

I still think my initial point about market news = arbitrary support/resistance has some weight so I think I'll take your advice and sit the volatility out.

 

[forker]

Technicals are useless during news volatility the majority of the time. You only going to frustrate yourself and lose money trying. When you get more experience you will see when and how to trade news.

 

[trader_dante]

It's about support and resistance and how arbitrary most "support" and "resistance" points are.

Tommy,

There is nothing arbitrary about S/R at all.

Infact, it is so accurate its startling. You just need to know how to plot it and how to trade it.

First off, a single previous swing low or high is NOT to be considered as S/R.

Second, you are not going to have much success plotting a level that has held three times as resistance and then selling it on the fourth touch. The order flow that will build up beyond these areas is just one reason why.

Contrary to what you read in books or hear from people, do NOT sell established resistance and do NOT buy established support.

After more than two touches of a level wait for a breakthrough and pull back (a polarity flip) - this is very simple and very profitable. The more touches the higher probability of a trade at the inverse.

The golden rule is SELL rallies into previous SUPPORT.

BUY dips into former RESISTANCE.

 

[MajorDutch]

Tommy,

There is nothing arbitrary about S/R at all.

Infact, it is so accurate its startling. You just need to know how to plot it and how to trade it.

First off, a single previous swing low or high is NOT to be considered as S/R.

Second, you are not going to have much success plotting a level that has held three times as resistance and then selling it on the fourth touch. The order flow that will build up beyond these areas is just one reason why.

Contrary to what you read in books or hear from people, do NOT sell established resistance and do NOT buy established support.

After more than two touches of a level wait for a breakthrough and pull back (a polarity flip) - this is very simple and very profitable. The more touches the higher probability of a trade at the inverse.

The golden rule is SELL rallies into previous SUPPORT.

BUY dips into former RESISTANCE.

in my study of S/R so far I would agree that the set up you describe could be profitable although I havn't tried it. It certainly fits with what I have observed. I dont agree with your advice though to NOT sell established resistance (and vice versa) as long as it's done with a genuine edge and in the right manner. Price will often react at these levels AND THEN proceed to either reverse completely or breakout into one of the setups you talk about. You have to be careful trading these reactions which can turn out to be full blown reversals or breakouts but I have seen it done with my own eyes very effectively.

totally agree on your point about the accuracy being starling. I can literally draw up my 1 hour chart and levels, go to bed, check it in the morning and price has reacted at the levels I have drawn, not saying I have predicted its eventual path but price has just reacted at these levels and it these small reactions that are tradeable. there are many ways to skin a cat. just my 2c.

 

[p-lab]

After more than two touches of a level wait for a breakthrough and pull back (a polarity flip) - this is very simple and very profitable. The more touches the higher probability of a trade at the inverse.
.

I'm sorry to ask dante but I just don't get this. I must have a real brain fade at the moment. Could you expand a little. Thanks

 

[forker]

He is talking about trading a break of support. It's one of my favourites too.

 

[Tommygun66]

Some interesting thoughts.
Please could you clarify "The golden rule is SELL rallies into previous SUPPORT. BUY dips into former RESISTANCE."?
I don't understand this; surely when something is rallying (ie going up) you don't sell it and it is going to encounter resistance, not support anyway (unless there is a historic established support line). Same for "buying dips". Thanks.

 

[Tommygun66]

Just looked at Gold (graph attached). I think I now get what you are saying. You would buy the dip into former resistance?
Thanks,

 

[MajorDutch]

I think he is saying this. See attached FTSE 100 5min chart as of now.

 

[TheRealMrT]

Try plotting them on Daily and Weekly charts - much better respect.