Best Thread Support & Resistance Explained

Prawnsandwich

Well-known member
339 30
re: Support & Resistance Explained

PS - if you want to turn this into a thread about me, do not expect me to help you in that endeavour.

You say this has been explained before and if so, feel free to cut & paste. Just pick a market and a timeframe if you can and explain the dynamics in play.

If you don't wish to contribute, that's fine. If you want to start a thread specifically to attack me, then please do that.

For now, I would like to keep this thread to discuss the specifics of support & resistance market by market.

So - one last time, I respectfully request that you contribute to the subject at hand.

Thank you.
As requested - from your Thread Wall St = Minus Sum Game Post 229 (just insert S/R for TA):

TA works because of the following reasons -
Charts are visual representations of traders / crowds / human psychology acting in the markets. Traders have memories, and so remember previous price levels where price stalled or where there was plenty of overhead supply or demand ie support / resistance etc.

TA reflects human and crowd behaviour

Self-fulfilling prophesy - if everyone is looking at the same thing on their charts eg a resistance level...and the chart indicates that price tend to stall or reverse at this level , then it is more likely that different traders will look to exit longs at this level, and / or there will be a lack of buyers at this level.....and this is where confluence also comes in - the more factors which indicate the same thing, the more traders will act on it, increasing the self-fulfilling aspect
 

SanMiguel

Experienced member
1,135 25
re: Support & Resistance Explained

I agree entirely about your stop running comments and you can see this every day in the ES. I can't see how a similar thing could happen in Forex long term.
I do tend to see the same stop running in FX markets. Especially intraday, you can see cable burst through SR by about 10-20pips before reversing. Perhaps this is stop running, perhaps it is just stops being hit unintentionally at those levels causing the spike.

As an example, one of the theories is that all the trades that went short at a support zone, wait for price to return to that short zone and then close causing the support, eg
(a) Level 100, I go short at 100 but price moves to 110 then comes back to 100. When it reaches 100 I thank my lucky stars and close out the trade (closing a short = BUYing) voting never to go short at that level again. (b) More buyers come in at that level also because that's where they think the buyers are going to be waiting.
With (a) I find it hard to believe everyone would hold onto their short trade for that long.
In FX, there is the supply or demand issue. I would suspect companies are far more likely to pick round number levels for their trades or Daily SR levels but I have no evidence of that.
 

trader_dante

Veteren member
4,535 1,476
re: Support & Resistance Explained

The specific thing I would like to discuss about support & resistance is WHY it works when it works. I guess we could also discuss WHY it doesn't work when it fails.
I thought I would post a few things I've personally noticed about trading s/r across multiple markets.

Bear in mind that this applies to the D1 and H1 timeframe only. I'm not saying that s/r doesn't work on other timeframes I am saying that I do not usually watch any other timeframe so I can't comment on it with any accuracy.

As an intro I would say that if you think price reactions to s/r resembles a "random walk" then, with all due respect, you are drawing your s/r wrong.

Having said that, making money off of your s/r levels is not easy. That is because it takes a lot of time and experience to tell if it's going to be a very short term reaction or a longer term one and then of course if you can't differentiate between the two then all the problems of when to exit start to occur.

However, I would say that if you draw s/r levels on an D1 and H1 chart and you don't get a reaction (i.e. a counter trend reversal or a rapid decrease in momentum) to within a few pips, the vast majority of the time, you are definetly drawing your s/r wrong.

Here are some things that I have noticed to increase the probability of a tradable reaction. Note that what links almost all of these is the concept of time.

Time is of the utmost importance in the relationship of price and s/r.

1) Price is most likely to hold a level on the first touch. The second is usually pretty good too. When price is back for the third time I'm usually starting to get wary. After price has hit for three times relatively recently, it's probably best to forget about it. The probability of a level holding cleanly seems to diminish the more price has hit in a short span of time. If there is too much action around a level you will see it start to get abused and the sign of this will be price not reacting cleanly to it.

2) If the price has just bounced ahead of a the level the chance of it bouncing again if it comes straight back to it a short while later is dimished.

3) Price is more likely to reverse at a level if there has been some time and space beween the breakout point and the point at which is returns to it. I personally prefer to see what I call a rounded approach by price on the H1 or D1 timeframe to fulfil this criteria. What is rounded? Think of the letter U.

4) Price is more likely to bounce if it hits your level when price movement has well exceeded its 20 day ATR. This was a very popular technique with the scalpers in prop. You can also factor in time of day with this to increase probability. The nearer an active session close, the better for at least a short term reaction.

5) The majority of the time, if you hit a level before news, the news will go the way of the level if you have hit it right (with the above considerations in mind). This is why you can largely ignore the news and yes, this was one of the things that always amazed me the most when I was learning how to trade.

I'm not going to bother with examples of any of these points because hindsight is irrelevant. Just consider them and see for yourself.

Just my 2 cents.

Thanks Dion for a nice thread.
 
Last edited:

SanMiguel

Experienced member
1,135 25
re: Support & Resistance Explained

4) Price is more likely to bounce if it hits your level when price movement has well exceeded its 20 day ATR. This was a very popular technique with the scalpers in prop. You can also factor in time of day with this to increase probability. The nearer an active session close, the better for at least a short term reaction.

5) The majority of the time, if you hit a level before news, the news will go the way of the level if you have hit it right (with the above considerations in mind). This is why you can largely ignore the news and yes, this was one of the things that always amazed me the most when I was learning how to trade.

I'm not going to bother with examples of any of these points because hindsight is irrelevant. Just consider them and see for yourself.

Just my 2 cents.

Thanks Dion for a nice thread.
4/ Definitely something to consider more for high probability trades.
5/ Do you mean that if the resistance level is 100, price reaches near 100 and pauses just before the news that you reckon price will push up through it and continue? I've seen just as many times big reversals at major news like NFP, GDP, unemployment, RPI, etc.
 

trader_dante

Veteren member
4,535 1,476
re: Support & Resistance Explained

5/ Do you mean that if the resistance level is 100, price reaches near 100 and pauses just before the news that you reckon price will push up through it and continue? I've seen just as many times big reversals at major news like NFP, GDP, unemployment, RPI, etc.
No, I mean that if the resistance level is 100, you sell it at 100 before the news and the majority of the time, it will reverse. I should add that if is a straight forward resistance level and not one that has alternated between support and resistance I would be less keen to use this. Levels that have been both s and r are way more reliable.
 

Splitlink

Legendary member
10,850 1,232
re: Support & Resistance Explained

However, I would say that if you draw s/r levels on an D1 and H1 chart and you don't get a reaction (i.e. a counter trend reversal or a rapid decrease in momentum) to within a few pips, the vast majority of the time, you are definetly drawing your s/r wrong.
Would you not say that it is better to wait for the reaction before you draw the s/r? Who is to say whether a line is correct or not? An s/r level is a zone, after all, not a definite spot on the chart and it can go through a lot of points before it reverses.
 

bbmac

Veteren member
3,584 787
re: Support & Resistance Explained

I broadly concur with Td's points 1-5 in his post No.18 above. The probability of whether a previous price pivot (ie a previous near-term obvious fractal swing hi (s) / lo (s) zone that implies a previous near-term obvious imbalance of supply/demand or demand/supply respectively,) will see break or see price bounce can be further guauged by the candles leading up to the zone and whether on the 2nd or 3rd attempt there are LH's leading down to a previous swing lo (s) or HL's leading up to a previous swing hi (s) zone, as well of course as price beahavious around it There are no absolutes, just circumstances/technical clues suggesting a greater probability exists over one outcome than another.

I would add;

a. Previous near-term fractal swing hi/lo's as suggested above are indeed zones and there is in my experience a definate relationship between such potential resistance/support strength in respect of where in the zone price is testing.

b. A previous swing hi (s) zone that has been tested and held as resistance 2+ times and then breaks to the upside, becomes a potentially styronger potential RBS zone (resistance becomes support) on any trend pullback re-test from the topside. The same is true of a previous swing lo (s) zone.

c. On a 15min or sub 15min trigger 1hr+ previous price pivots represent the potentially strongest relevant potential support/resistance zones...If using say a 1hr trigger I would be looking at 4hr and Daily.

d. Where an previous obvious near-term fractal swing hi/lo exists as such on the next higher t/f so much the better in respect of it's potential as resistance/support.

e. Fibs of 1hr + swings and trend lines on 1hr + are the 2 factors that can add confluence to support/resistance analysis.

By way of example the 1hr screenshot below is gbpusd...the red zones are previous near-term obvious fractal swing hi's on this 1hr t/f that exist as such on 4hr...the blue zones similarly for previous obvious near-term, fractal swing lo zones. The orange and purple zones are just such on this 1hr t/f...the fibs are relevant to 1hr swings as are the trend lines.



G/L
 

trader_dante

Veteren member
4,535 1,476
re: Support & Resistance Explained

Would you not say that it is better to wait for the reaction before you draw the s/r? Who is to say whether a line is correct or not? An s/r level is a zone, after all, not a definite spot on the chart and it can go through a lot of points before it reverses.
I'm not sure if I've understood correctly but what's the point of waiting for the reaction before you draw the s/r? The whole point is to be able to tell where price is going to turn ahead of time. I draw all my levels ahead of time. The market will tell you if your line is correct or not and when you get good at identifying them, the market will either stall or outright reverse right around it the large majority of the time.

I agree that levels are often zones but from time to time they are definite spots. I don't subscribe to the whole viewpoint, that when price shoots 100 ticks through your level before reversing you say, "well, it's a zone". That's no use to anyone that is trying to cut losers quickly. Most levels that you pick you should not see price go through them more than about 20 ticks absolute max.
 

jefftheripper

Junior member
44 1
re: Support & Resistance Explained

I do tend to see the same stop running in FX markets. Especially intraday, you can see cable burst through SR by about 10-20pips before reversing. Perhaps this is stop running, perhaps it is just stops being hit unintentionally at those levels causing the spike.

As an example, one of the theories is that all the trades that went short at a support zone, wait for price to return to that short zone and then close causing the support, eg
(a) Level 100, I go short at 100 but price moves to 110 then comes back to 100. When it reaches 100 I thank my lucky stars and close out the trade (closing a short = BUYing) voting never to go short at that level again. (b) More buyers come in at that level also because that's where they think the buyers are going to be waiting.
With (a) I find it hard to believe everyone would hold onto their short trade for that long.
In FX, there is the supply or demand issue. I would suspect companies are far more likely to pick round number levels for their trades or Daily SR levels but I have no evidence of that.
If the round number is where orders are piling up then it'll show up as an s/r level when looking back on the charts. You will see price has reacted there before. Otherwise it might be 25 pips higher where the price reacts over and over and that is where you draw the s/r line.

As far as stop running, if I'm playing an hourly s/r level for example. Many times I'll look at a lower time frame chart (15 min) and place my stop beyond the next s/r level. That way it put's a barrier between price and my stop. If it hits that stop, then my trade was probably wrong, the s/r didn't hold well enough and I'm out. This also gives room for spikes since s/r isn't necessarily a line in the sand, but a zone.
 

Shakone

Senior member
2,458 665
re: Support & Resistance Explained

I agree that levels are often zones but from time to time they are definite spots.
I consider it to be one level, not a zone. But people will enter ahead of the level, on the level, below the level, look how it is reacting around the level and then enter, creating a zone effect. But to me it is a line. Where price closes relative to that line, has a direct effect on what people then do. I realise this is contrary to what everyone says support and resistance are.

2) If the price has just bounced ahead of a the level the chance of it bouncing again if it comes straight back to it a short while later is dimished.
I've seen this many times too, and thinking about it, there are good reasons why it is weaker.
 

bbmac

Veteren member
3,584 787
re: Support & Resistance Explained

I consider it to be one level, not a zone. But people will enter ahead of the level, on the level, below the level, look how it is reacting around the level and then enter, creating a zone effect. But to me it is a line. Where price closes relative to that line, has a direct effect on what people then do. I realise this is contrary to what everyone says support and resistance are.



I've seen this many times too, and thinking about it, there are good reasons why it is weaker.
The zones in respect of previous price pivots (ie previous obvious near-term fractal swing hi/lo's) are for me, taking a fractal swing hi as an example the area between the top of highest candle wick and the highest candle body that makes up that fracatal swing hi...the example below are 2 fractal swing hi's that occurred on the daily gbpusd recently.
...
Now these aren't the most obvious fractal swing hi's as price did not sell down very much from them (ie is better to see that price went at least as far as the swing up0 to it in respect of distance travelled, but ther are fractal nonetheless...so price breaks through them to the upside and then retests them on a pullback from that topside and in both cases resistance becomes support....but look in both cases where resistance became suupport, ie in the area of the zone where most previous price action was found...I will draw them again to illustrate this example which I allude to in my post # 22, point a.:


Now it may be that in such zones there is confluence of other potential support/resistance factors elsewhere...ie fib (s) and/or trend lines in which case this may be the most likely area where another imbalancce of in this case demand/supply may have been realised. In any event it is othertech factors that will give us clues as to the likely probability of that, not least price action...That top potential RBS zone on the Daily saw price find fresh demand after the 5921-5668 precipitous fall on Thursday'...and what resullted (dare I say it) a 4hr pinbar...


So for me the potential supp/res zones are definate, although I agree sometimes price can go a few pips under/over them respectively, which I make the working assumption may have been a stop run If I get a set-up.

G/L
 
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Splitlink

Legendary member
10,850 1,232
re: Support & Resistance Explained

I'm not sure if I've understood correctly but what's the point of waiting for the reaction before you draw the s/r? The whole point is to be able to tell where price is going to turn ahead of time. I draw all my levels ahead of time. The market will tell you if your line is correct or not and when you get good at identifying them, the market will either stall or outright reverse right around it the large majority of the time.

I agree that levels are often zones but from time to time they are definite spots. I don't subscribe to the whole viewpoint, that when price shoots 100 ticks through your level before reversing you say, "well, it's a zone". That's no use to anyone that is trying to cut losers quickly. Most levels that you pick you should not see price go through them more than about 20 ticks absolute max.
TD, the point is that there is no point. My opinion and no offence meant. I agree, as you say, that practice makes perfect, and there is no doubt that these lines do mark changes very often, but not often enough to convince me.

There are a lot of distinguished posters taking part in this thread and I don't want to go against you. Suffice to say that I don't think these lines are any better than a lot of other signals.

They are just a point on the chart and, getting it wrong produces the debate, "Why did you do that?"

What did Martin Luther King say?

Free at last! :D
 

oildaytrader

Senior member
2,806 125
re: Support & Resistance Explained

Another factor in determining support and resistance is the stochastic on the 4 hourly and trend direction.If trend is up and stochastic is up,future support and resistance areas will be higher .A trader should also gauge the market sentiment and apply it to s/r.
 
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bbmac

Veteren member
3,584 787
re: Support & Resistance Explained

Another factor in determining support and resistance is the stochastic on the 4 hourly and trend direction.If trend is up and stochastic is up,future support and resistance areas will be higher .A trader should also gauge the market sentiment and apply it to s/r.
I'm not sure that an oscillator reading on any t/f has any bearing as to where future support/resistance may lie in any market on any t/f. Potential supp/res factors either exist or they do not...however the slope/direction/reading of the indicator and the way price approaches the potential supp/res factors (ie in a strong trend or otherwise) can give us an indication as to the greater probability of a bounce or break at such pres-identified potential support/resistance factors.
 

bbmac

Veteren member
3,584 787
re: Support & Resistance Explained

Re: Splitlink's reply to TD in his post above.

Support/Resistance analysis like all other tech analysis is no holy grail but just another widely used tool, and we may as well use those that are most widely used in the market of choice purely because this gives us the greatest chance of being correct in our analysis, should there be a self fulfillinng element to the analysis we undertake.

Support/Resistance or should I say more accurately Potential future support/resistance can be represented by one or both of the following

a. A previous near-term obvious fractal price swing that shows us that there existed an imbalance of supply/demand or demand/supply at that area and such imbalance or even residual imbalance may exist again if price tests it in the near-term...ie whilst the imbalance is still visible on the respective chart.

b. Other factors widely used by the market that have historically resulted in price swings, ie fibs and trend lines.

Our analysis and plotting of such factors gives us areas in the market where other market participants may act and it is the behaviour of price around these 'zones' in which may or not be clearly represented the intentions of such market participants that can inform us of the greater probability - bounce or break, - but not always...a trading edge can be successfully derived from this.

G/L
 

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