Price, (Volume), Support, Resistance, Demand, Supply . . . (Abridged)

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dbphoenix

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Originally Posted by GirlPower
How about a really simple statement of what the relationships are between these aspects?

Support and Resistance are points where respectively, Demand overshadows Supply and Supply overwhelms Demand. That would assume no other direct or indirect manipulation of the price - just straightforward buyers & sellers.

High, lows and particularly round number points are likely SR points (especially decade points).

Recent High/Low points also act as SR points. Current day, previous day, weekly, monthly, 52wk Highs & Lows.

Where the bunny hits the mincer is when we look at the relationship between Price & Volume.

DBP, you're an expert on this, why don't you give us your take on it?
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

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Originally Posted by barjon
dpb

If the price reverses at a resistance level it can be either that new supply has come in or that demand has been withdrawn - presumably you look to volume to tell you which?
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

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Originally Posted by ChartMan
I agree about accumulation occuring at a price due to "institutes" wanting to buy big vol at price x, with the help of MM's.... however, on idecies, I think accumulation occurs in a band where the market in general ( the big boys) prepare for a move.
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

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Originally Posted by blackcab
The problem with pure price/volume analysis is not being able to split buy volume from sell volume systematically, you can only do it by studying the day's trades and it's prone to error. If I'm wrong there, someone let me know. In looking at price/volume alone, how can you know or at least get a feel for buy/sell volumes within the single volume figure reported?

I looked at 10 years EOD of one UK big cap and found no relationship between t-1 price movement and volume movement and t0 price movement (perhaps a very slight tendency for price to continue downwards if previous day's price was down and volume was up, but probably insignificant). It was a crude analysis however, in preparation for something finer which I'm working on).

In practice do you end up concluding that the high volume candle/bar at the bottom of a dip meant buys kicked in and added to the existing sells giving high volume overall, AFTER the event? During the event you could as easily assume it was sells increasing to accelerate the down move. Early thoughts on this and quite basic.
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

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Originally Posted by blackcab
But within any single volume bar the ratio of buys to sells isn't 50:50 is it, the MMs don't keep perfectly flat books within short timeframes. On say an EOD chart, I don't see how you can say that the high volume at the bottom of a decline is due to exhausted sellers and aggressive buyers IF every buy & sell are matched - if they were matched and vol is high, there's still a ton of selling. They get matched of course but over time is what I'm getting at. Maybe this is getting OT and I should get my thoughts clearer.
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

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Originally Posted by Porks

These and other tape reading studies are useful, but I'd love to hear how you go about creating specific criteria for entering and managing a trade.
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

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Originally Posted by Porks
Dbp,

Here's my take on S and R

- Floating supply must be removed to penetrate resistance.A move up through resistance mainly occurs not because of increasing buying but because of an absence of selling
- It takes professional money to penetrate Resistance, and higher volume with movement in the price action to confirm a valid penetration

- A market will only fall through a support area when there's an absence professional buying
- Again increasing volume with price movement within the bar confirms a break through support

When prices are approaching both support and resistance on decreasing volume this shows a lack of interest from professional money to participate at these levels and prices are more likely to reverse.

Porks.
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

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Originally Posted by Porks
dbp,

Would it be more correct to say :

A move up through former resistance mainly occurs not because of increasing buying but because of an absence of selling pressure.

A move down through a former support area occurs when there's an absence of professional buying pressure.


Given your point on volume is correct, how would you judge whether a move towards former S and R areas is likely to continue through, by price action alone ?

Porks.
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.
 

dbphoenix

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Identifying Support and Resistance is fairly straight forward enough to do on all chart timeframes IMHO. The key is the price reaction at those areas. At it's simplest anytime there's a rally the base of the rally can be called Support on the chart, Buyers supported that area by buying. Vice versa for selling. The more times the support/resistance area is retested the more valid your support/resistance is. Please note that I see Support/Resistance as areas and not one price.

I find the harder part to my trading is to know how to trade that support/resistance. There's always the old chestnut of "Buy at Support and Sell at Resistance" but you never really know if it's support until after you've bought and there's also the chance that support won't be fully tested so you're not in a position to buy. Maybe It should read "Buy at or near Old Support and Sell at or near Old Resistance" but I do believe that it's the best place to buy or sell as it gives me natural areas in which to place stops i.e. under said support if buying.

To help get a feel for market direction I look at the price reaction at those support/resistance areas that I've identified. If I see the market go up 70 points in 2 days from the support area and at resistance only goes down 20 points in 3 days. I'd say that demand was present at support but didn't see supply present itself in such a fashion at resistance. Therefore my outlook for that timeframe would be more bullish than bearish. I would feel more comfortable buying at/near support than selling at/near resistance. I also find that timeframes are very important to my trading as what often appears to be a major support area on a daily chart might be nothing more than a correction on a weekly/yearly chart. The longer term support/resistance areas are most important to my trading. e.g. Support on a 5 minute chart is nowhere near as important as on a yearly chart. If support/resistance areas tie up on more than one timeframe then you have a tradable market IMHO. For each timeframe I decide whether I'm Bullish, Neutral or Bearish and it's often the case that I'm Bullish on the weekly chart and Bearish on the daily chart for the same equity.

I personally find that once the resistance area is broken a very profitable area to enter long is at the retest of that old area, hence the adage "Old resistance becomes new support" and vice versa for Resistance.

There's a number of questions that need to be answered when I trade off support/resistance and as with anything the more I trade the better/more confident I get at answering them. I'd also say that my approach is very subjective and I have to make many "Judgement Calls" on what I see around the support/resistance areas. I would love to find a non-subjective system but have yet come across anything which does not require the trader to use his/her judgment when deciding to buy/sell.

I hope this helps,
Dan
For a practical example, I've attached a chart which may help illustrate this S/R business.

There are dozens of swing points in this chart, thousands with a shorter bar interval, but these are enough for the illustration.

Note at 1 that price reverses. You don't know why. Doesn't matter. But it reverses, making a swing point. It's not support. Not yet. Just a reversal due to changes in the balance between buying pressure and selling pressure. At 2, however, this level now becomes support. Ditto for 3 and 4 re resistance.

When this R is penetrated, a new swing point is created at 5, though it's not yet R; it's just a swing point. At 6, that old R level is tested and now becomes S. When price balks at 7, that level now becomes R.

More later.

Edit: Note that S is "broken" at 8. However, price quickly rebounds above this level, confirming its importance. When price is unable to reach R, suggesting less buying pressure, breaking this line again generates more of a selloff. The line is broken again to the upside, re-confirming the importance of this level, and when selling pressure gains the upper hand for the third time, a substantial selloff ensues, down to 10. Buyers love this level, tho, and push price all the way back to 11. The next day, this carries implications for the move to 16.

Another edit:

There are maxims that we come to believe as though they were principles, or even laws, though they barely qualify as guidelines.

For example,

S once breached becomes R, and vice-versa.

Buy S, sell R.

The more a given level is tested, the stronger it is.

Big volume on breakouts or breakdowns is good (assuming you're on the correct side of the trade).

And so on.

However, in order to determine whether or not any of this is true, one has to go back to the point where these old reliables gained currency.

That could take a great deal of time, however, and probably wouldn't be of much interest, much less practical use.

So for now, perhaps we could settle on the concept that S and R represent those levels at which one can expect to find profitable trades. Unfortunately, it's next to impossible to determine in real time whether those profits are to be found on the short side or the long side. The idea that S, for example, becomes stronger the more it's tested does not bear close scrutiny. In fact, if S has been tested twice and price returns there yet again, sellers assume that there's a reason and they prepare to short that return. Some have created yet another maxim -- Third Time's The Charm -- but this doesn't stand up under close scrutiny either. As with everything else, it just depends.

So what does one do at these so-called S/R levels? As Mark Douglas counsels, "be available". Don't assume one side of the trade or the other, but be prepared to take either.



Great post DB,

I like the chart. I think it shows nicely that S/R appear on all timeframes. I'm guessing that it's a 5min intraday chart you posted? I also like the fact that you've replaced a maxim with another maxim -- "if S has been tested twice and price returns there yet again, sellers assume that there's a reason and they prepare to short that return" -- but you have a valid point that all trading rules/assumptions/maxims are broken. It's impossible for a trader to be profitable 100% of the time and therefore that means that sometimes our assumptions as traders are incorrect. But as a trader you have to deal with that and the key is to have a strategy in place for when we are incorrect, i.e. stops. S/R areas need to be monitored to gauge the reaction of the market, you're able to form opinions of the market dependant on those reactions. Once you've formed opinions of the market you're in a position to trade the market.

This is a great thread which brings a great deal of information to the table and reminds me of a snip from the classic book Reminiscences of a Stock Operator where a brokerage firm runner goes to his boss and says that he's got the low down on a certain stock and that the big players are buying. The boss then calls the floor and sells 1000 of said stock. "What?" the runner says. "Did you not hear me right? They're buying." So the boss picks up the phone and says "Sell 1000 more". At this point the runner is getting quite irate. "Boss, they are buying and all you are doing is selling. Do you not trust me?" The Boss then studies the tape and sees that his orders have not budged the market. He then picks up the phone and buys 10000 of the same stock. "You see, boy, if your information was incorrect, my selling 2000 would have made an impact on the tape. It didn't move it one bit so therefore that confirmed to me that someone was absorbing my selling, so your information was correct. Thank you very much." Please forgive me that it's not word for word but I think it demonstrates nicely that the boss identified the market support by selling 2000 lots of the stock in order to gauge the market reaction. He saw that the market absorbed his order easily therefore he knew the big players were buying (supporting) and was in a position to go long.

It's the soaking up of that supply which causes those in the know to get long. The big players will defend their position by absorbing the supply and adding to their position along the way. The market shows a lot of effort (volume) for little result (small price range), which is a tip-off to those looking.

These players are happy for the market to flow between Support and Resistance, but they control the range by buying at/near support and selling at/near resistance. Adding to their position near support and taking a little off near resistance, but they will still remain net long. It's hard for the big players to mark-up the market quickly with the number of contracts/lots they require and getting a good price throughout. It's the controlling of these price ranges (S/R) which allows them to satisfy their objectives (getting long/short at a decent average price).

Cheers, Dan
 

dbphoenix

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Originally Posted by djnsfc
I also like the fact that you've replaced a maxim with another maxim "if S has been tested twice and price returns there yet again, sellers assume that there's a reason and they prepare to short that return" but you have a valid point that all trading rules/assumptions/maxims are broken.

It's impossible for a trader to be profitable 100% of the time and therefore that means that sometimes our assumptions as traders are incorrect. But as a trader you have to deal with that and the key is to have a strategy in place for when we are incorrect i.e. stops.
As to the "maxim", I was only explaining the Third Time's The Charm, since the reasons for these things tend to get lost over time. Price can bounce along S five or eight times if it likes. What matters is what happens at the time and as a result.

As for having a strategy in place for when we are incorrect, there's more to choose from than stops. At the very least, one has to "be available" and consider taking the other side. This idea has been corrupted to a large extent by the Parabolic SAR indicator, but in it's original form, the idea is sound. Whether one is successful with a self-reversing tactic or not depends on how well he defines the setup, but it's there for consideration.
 

dbphoenix

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Originally Posted by djnsfc
I'm not confident enough to reverse if incorrect on a trade. If I'm in doubt I get out and then re-evaluate the position. If a reverse is required then I'll do so.
I include two elements beyond the usual in the definitions of my setups: (1) what will invalidate the trade before the entry is triggered and (2) under what conditions will I fade my own setup (i.e., take the reverse). These apply only to entry, of course, and I make as few entries as possible (preferably, one). If I don't do this, it's difficult to tell when the trend has reversed, and it's much easier to find oneself trading counter-trend than most gurus are willing to admit (day before yesterday, for example).

Edit: Incidentally, going through this process is also a handy means of determining the stop for at least a portion of what's held.

Further edit: I should point out that it is absolutely critically essential (or essentially critical) that one decide just what he wants to do about trading coils (or symmetrical triangles or hinges or whatever). To bypass this is a recipe for disaster.
 

dbphoenix

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Originally Posted by robq
http://www.crbindex.com/techtip/tipv2n06.htm

In case anyone else shares my ignorance of coils and symmetrical triangles!

Still not sure about hinges.
My apologies for being unclear. And thanks for providing the link.

Unfortunately, the "explanations" of triangles is mostly wishful thinking.

What I meant with regard to coils, etc (having meant to equate them, not suggest that they were distinct from each other) had to do with making decisions in real time as to objectives.

An uptrend consists of higher highs, higher lows. A downtrend consists of lower highs and lower lows. When the highs begin to even out and the lows begin to even out, you've got a range. Whether that range is tradeable is up to you.

However, when price starts making lower highs and higher lows at the same time, the "triangle" pattern begins to develop, and if one doesn't notice what's happening with highs and lows, he can find himself trading shorter and shorter movements until he is more or less making random entries and exits.

Not that trading within these coils is a bad thing. However, it is important to make a conscious choice to do so since they require different tactics. If one gets caught up in a coil without being aware of it until it's too late, he can end up having made a lot of unnecessary and probably pointless trades.

For this reason, a lot of people avoid trading them at all, waiting for price to break out of them one way or the other. However, these "breakouts" are a messy subject in themselves, and the tactics require advance planning and testing.

Example of a hinge (actually, two):



Edit: Two things I neglected to mention about coils et al. One is that they should be "filled with price", as Schabacker said. Otherwise, you're looking at a different dynamic. The other is that the business of the breakout being faulty if it doesn't take place by 2/3 of the way through the triangle is not supportable. This scenario may apply in a highly-charged, volatile, trending market, but otherwise, the longer the base around the midpoint, the more likely there will be a strong, sustained move, assuming that traders are interested in the instrument in the first place.
 

dbphoenix

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This chart was posted elsewhere, but it may be of help in making certain concepts clearer.

The example used is the NQ, but the concepts apply to all trading vehicles regardless of timeframe or bar interval.

SC = Selling Climax
BC = Buying Climax

 

dbphoenix

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Originally Posted by bracke

I have anumber of question, most, if not all are very basic, please bear with me.

Working from left to right along your chart.

1 r=resistance ?

2 note tails, what is to be noted ?

3 s=support ?

4 poor quality vol,unable to make new high, but volume was rising.

5 up vol gets worse. what is significance ?

6 pot'l SC off, what does this mean ?

7 pot'l exh, what does this mean ?

8 weak mammer accom by good vol, what is significance ?

9 slng exh, what does this mean ?

Regards

bracke
1. yes
2. price is unable to hold at the highs
3. yes
4. vol was rising to the downside
5. vol declines as price rises
6. potential selling climax off minor support from previous day; note hammer
7. potential exhaustion, what some call "oversold"
8. weak hammer accompanied by good volume. The volume suggests a large number of shares being traded, but the weakness of the hammer suggests that buyers are not particularly strong
9. selling exhaustion
 
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