Best Thread Support & Resistance Explained

[Shakone]

re: Support & Resistance Explained

This is a fairly simple question. Try a backtest of any single piece of TA used in isolation. This could be buying MACD on oversold, MA crossover, reversal at a point of support & resistance.

Yes I've done this. The % win typically varies between 30% and 65%. You can alter stop and target sizes and it will change a bit again. Will those %'s hold in the future? God knows. Depending on what you're testing it may have for example a 58% win for longs and 40% wins for shorts. Maybe that is because of the trend mainly being up during the data tested. But trend can be determined. So again I still see no reason why it is 50%, and I see no evidence for that either. Many things are close to 50%, but many things are a bit worse, or a bit better.

It is often brought out that things are 50-50. Why on earth would they be? Of all the numbers it could be, why always 50. When the Dow was in the area of 6500, do you think the probability of it going either to 13000 or to 0 was 50-50? What about probability of it going to 2500 or 10500? 50-50 too? If like me, you don't think either are 50-50, then what does that tell you?

Someone can draw Support and Resistance where they like, at any level. So the implication from what you have said is then that
1) EVERY price point has a 50-50 chance if stops and targets are equal, no matter what those stops and target sizes are.
2) Trend is irrelevant (as a consequence of 1), as is any history of price.
Is this what you are saying? I don't agree with either.

There are things that will have an impact on price that are outside that single set of data.

Yes I agree. There are also things that will have an impact on price, that you won't see, either because you're looking at a different timeframe, looking at DOM, or distracted by bloomberg, lol. Nobody can have an eye or an ear on everything, you have to prioritise which data set you're looking at. Perhaps your prioritising is better than mine, and I should use more things from outside the chart.

I will give flyonthewall a try. Thanks for the suggestion

 

[Liquid validity]

re: Support & Resistance Explained

S&R for me are just sentiment barriers thats all. Its a mass of human traders that ultimately decide S&R and price. Strong ebbs and flows in sentiment can and will crash through S&R whilst at other times hold solid as sentiment is neutral (i.e no strong fear or greed prevalent).

Anyway back later 0930 news now...

 

[D70]

re: Support & Resistance Explained

S&R for me are just sentiment barriers thats all. Its a mass of human traders that ultimately decide S&R and price. Strong ebbs and flows in sentiment can and will crash through S&R whilst at other times hold solid as sentiment is neutral (i.e no strong fear or greed prevalent).

Anyway back later 0930 news now...

Liquid validity,
What's your story ?
ie. Introduce yourself.

 

[Scotty2Cues]

re: Support & Resistance Explained

Found a nice example of resisitance in the FaTSE.

FaTSE finds major resitance at 0.48. After a minor retrace, FaTSE finds a way through that level only to hit resistance at 1.00 (further down the corridor) or is that support ?

http://www.youtube.com/watch?v=QBJB-nunxgE

 

[Liquid validity]

re: Support & Resistance Explained

Liquid validity,
What's your story ?
ie. Introduce yourself.

:cheesy: Nothing interesting or unusual, just another retail trader like most here.
I've been a long time lurker, only registered now as i'm getting into day trading more (cable, indices etc.).

Primarily been a FTSE 350 swing trader in the past, with AIM more recently.
With global markets as they are, for me personally short term, low news risk trades (intra) are my personal way of trading uncertain times.

Not much else to say unless I lie and spout BS

 

[D70]

re: Support & Resistance Explained

:cheesy: Nothing interesting or unusual, just another retail trader like most here.
I've been a long time lurker, only registered now as i'm getting into day trading more (cable, indices etc.).

Primarily been a FTSE 350 swing trader in the past, with AIM more recently.
With global markets as they are, for me personally short term, low news risk trades (intra) are my personal way of trading uncertain times.

Not much else to say unless I lie and spout BS

Cool.
Welcome.
(Not that I am qualified to welcome, but welcome anyway).

 

[Liquid validity]

re: Support & Resistance Explained

S&R for me are just sentiment barriers thats all. Its a mass of human traders that ultimately decide S&R and price. Strong ebbs and flows in sentiment can and will crash through S&R whilst at other times hold solid as sentiment is neutral (i.e no strong fear or greed prevalent).

Anyway back later 0930 news now...

Cheers for the welcome D70

Going back to S&R - I said earlier that sentiment decides S&R. So why does it sometimes not work. In a nutshell, largely its down to unexpected news or events. May's flash crash was an unexpected event, cue massive S&R failure. Less extreme examples may be unexpected deviations from forecasts in economic reports.

Using an analogy, S&R is like police crowd control - under normal conditions it will do its job. That same line of police with interlinked arms won't stop a stampeding herd of elephants or a tidal wave though, An extreme event causing S&R failure can be anything from Soros on black weds to flash crash with degrees in between. NFP is a regular more low key example of events disregarding S&R depending on NFP figs.

I suppose what I'm trying to say is S&R are just chart boundaries, the event itself does not cause S&R failure (black weds sterling withdrawal from ERM), rather its the markets reaction to it, which under those kind of conditions tends to be lead by traders like Soros or whoever has the clout at the time to cause such a movement. Days like that, S&R goes in the bin.

 

[bbmac]

re: Support & Resistance Explained

Specifically Re post above, It's not just market reaction to 'unexpected' events and news/data that causes the break of potential support/resistance factors , ie obvious fundie based reasons, but in the run of normal events, just simply the imbalance of demand/supply or supply/demand causing a potential resistance / support break respectively..in a strong up/down trend that may hyve established itself, such a break indicating that market sentiment may have changed.

G/L

 

[trader_dante]

re: Support & Resistance Explained

Spy74 put up a good link. Have a look at this section - http://www.proptraders.net/free-prop-trader-training/ look at the diversity in the things they tell you to pay attention to.

I thought I recognised my writing!

 

[Liquid validity]

re: Support & Resistance Explained

Specifically Re post above, It's not just market reaction to 'unexpected' events and news/data that causes the break of potential support/resistance factors , ie obvious fundie based reasons, but in the run of normal events, just simply the imbalance of demand/supply or supply/demand causing a potential resistance / support break respectively..in a strong up/down trend that may hyve established itself, such a break indicating that market sentiment may have changed.

G/L

That is true and a very valid point.
Sometimes the market is just looking for an excuse for a selloff or rally, purely due to the cyclical nature of markets.

Other times, the effects of an "event" may be more lasting creating or breaking a trend, which actually breaches S&R later in an apparently non news releated way.

Using "events" to illustrate S&R is just simpler than throwing the whole basic supply demand issue into the mix as well. Although it has to be said you are right and I probably should have mentioned that as well, instead of inferring the market is totally news driven.

 

[DionysusToast]

re: Support & Resistance Explained

Yes I've done this. The % win typically varies between 30% and 65%. You can alter stop and target sizes and it will change a bit again. Will those %'s hold in the future? God knows. Depending on what you're testing it may have for example a 58% win for longs and 40% wins for shorts. Maybe that is because of the trend mainly being up during the data tested. But trend can be determined. So again I still see no reason why it is 50%, and I see no evidence for that either. Many things are close to 50%, but many things are a bit worse, or a bit better.

It is often brought out that things are 50-50. Why on earth would they be? Of all the numbers it could be, why always 50. When the Dow was in the area of 6500, do you think the probability of it going either to 13000 or to 0 was 50-50? What about probability of it going to 2500 or 10500? 50-50 too? If like me, you don't think either are 50-50, then what does that tell you?

Good points.

Let's first consider the 6,500 DOW and the 0/13000 targets. This is not within the domain of what we trade, unless you hold trades for that long. So, perhaps I should have qualified that for smart-arses like you (I mean that in a cuddly way). The point is that any single technical indicator will give you a 50/50 entry. Of course, if you take 1 trade and then wait for 0 or 13000 you have reduced your sample size to 1 trade and you time to test to many years. This proves nothing.

What we are discussing here is using a single analysis technique across all markets and timeframes, so perhaps our testing should allow us more than 1 set of results per decade.

Let's say we have a 10 to 100 tick target on the instrument of your choice. Suddenly we are in the domain of what people here can trade and in the domain where we can have a significant sample size.

Now pick a SINGLE indicator and run this over enough data for 1000 trades with an equal stop and target. What you will witness is 50/50 winners. You can pick daily, weekly, minute, tick, whatever timeframe and 1000 trades and what you will see is the more traded that occur, the closer to 50% you get.

Someone can draw Support and Resistance where they like, at any level. So the implication from what you have said is then that
1) EVERY price point has a 50-50 chance if stops and targets are equal, no matter what those stops and target sizes are.
2) Trend is irrelevant (as a consequence of 1), as is any history of price.
Is this what you are saying? I don't agree with either.

Correct - and now I have had to qualify that statement for the overly-anal.

So - the statement is - if you take any single TA indicator and apply it over a significant sample size, then you will see a 50/50 win rate with a co-equal stop and target.

Of course, if you look at MACD and that throws a long or short and you have a 6000 point stop and target, you may have to wait a while for the result.

Yes I agree. There are also things that will have an impact on price, that you won't see, either because you're looking at a different timeframe, looking at DOM, or distracted by bloomberg, lol. Nobody can have an eye or an ear on everything, you have to prioritise which data set you're looking at. Perhaps your prioritising is better than mine, and I should use more things from outside the chart.

I will give flyonthewall a try. Thanks for the suggestion

Well - if you are using anything outside of the chart, you are already diversfying in terms of information you trade off and are therefore already smarter than most.

 

[bbmac]

re: Support & Resistance Explained

Isn't the scenario below just a greeat example of confluence of potential support factors?...I have posted the 4hr chart but what exists is actually a previous 1hr and 4hr obvious near-term fractal swing lo x 2 zone (ie an obvious near-term imbalance of demand over supply that saw price rise sharply from the area on 2 recent occassions. Also in this potential support zone were 3 x fibs of the major swings up to the recent 6018 high on this gbpusd pairing, these all within a few pips of the actual low .....all in all a confluence of pre-identified potential support factors.

Add to this that when price reached the zone it had seen an intraday hi-lo of 107% of it's 20 day average pip range and it was late in the U.s session, London having closed.

Price action there and other technical readings suggested that the greater probability was that price would rise from this confluence of potential support factors creating the potential support zone (howseoever temporarily) this greater probability creating a hi-probability trading opportunity, ...and this is what resulted.

The point I am making is as I have made before in the thread, and this is that there are no absolutes - just price action and other technical factors at a potential supp/res zone that when like in this example are added to the confluence of potential support factors that the whole market can see, suggest a greater probability of one thing over another. Combine this edge with the proper money and risk management and net profitability can result.

G/L

 

[D70]

re: Support & Resistance Explained

Reading this thread. I am getting the impression that "traders" have become removed from the coal face. They talk of "MACD's" and price action like they are some kind of mystical tool. Do you even know how an MACD indicator is constructed? Do you actually know what causes a price to move? What is "price"!? And support / resistance.... WTF are you guys talking about. Doesnt anyone relate their trading / price action to everyday observations? I think you are all way off the mark.

 

[DionysusToast]

re: Support & Resistance Explained

I agree with you D70.

It seems that the chart is enough and nothing else matters to most people. It seems that nothing outside of the chart could possibly be worth looking at.

I was rather hoping that we'd see different perspective from people who trade different markets and hold for different people, that we'd see a wide array of factors that impact trading each market.

Nope - it's all in the chart apparently.

 

[DionysusToast]

re: Support & Resistance Explained

I thought I recognised my writing!

Whilst it is true that some of this stuff was in a thread you wrote, you yourself copied that from a course at the prop shop you worked for before leaving to spend more time with your family.

Similarly, your pin bar thread is based on the work of others such as James16.

Are you saying someone is copying the work you copied ?

 

[bbmac]

re: Support & Resistance Explained

I agree with you D70.

It seems that the chart is enough and nothing else matters to most people. It seems that nothing outside of the chart could possibly be worth looking at.

I was rather hoping that we'd see different perspective from people who trade different markets and hold for different people, that we'd see a wide array of factors that impact trading each market.

Nope - it's all in the chart apparently.

In the market I trade, it pretty much is all in the chart..ie in forex I have no reliable order flow/market depth or volume info...so all I have in respect of potential support/resistance is areas on the chart where there existed an obvious near-term imbalance of demand/supply or supply/demand and other factors known to have historically caused such like fibs and trend lines...It s the confluence of these factors where the highest probability trading opportunities lie....In the case of trading the major forex pairings I can't think of anything else that I could look at that is not on the chart that would enhance my trading edge so derived....but I am always open to suggestions. Your postings seem to suggest that those who think it is 'all on the charts' are somehow niaive.' Tell me what else you would consider re potential support/resistance in this market?

 

[D70]

re: Support & Resistance Explained

In the market I trade, it pretty much is all in the chart..ie in forex I have no reliable order flow/market depth or volume info...so all I have in respect of potential support/resistance is areas on the chart where there existed an obvious near-term imbalance of demand/supply or supply/demand and other factors known to have historically caused such like fibs and trend lines...It s the confluence of these factors where the highest probability trading opportunities lie....In the case of trading the major forex pairings I can't think of anything else that I could look at that is not on the chart that would enhance my trading edge so derived....but I am always open to suggestions. Your postings seem to suggest that those who think it is 'all on the charts' are somehow niaive.' Tell me what else you would consider re potential support/resistance in this market?

Hi BBMAC,
I wouldnt presume to be able to inform you of anything because I have read your posts over the years. I was trying to highlight the fact that we talk of price, support, resistance, indicators, etc as if they are defined. They are not. As per my post, I dont think 95% of people actually know why prices go up/down and hence create the market and plethora of derivatives, such as indicators that we interpret. Which is why I am disappointed by the title of this thread and the misleading content.

 

[bbmac]

re: Support & Resistance Explained

Just a follow up to that scenario shown in the post referred to below...price rose sharply from that potential support zone and in mid morning trading of the London session has found supply at the confluence of the underside of the breeched 4hr ascending channel with the 50% of the a-c and 61.8% of the b-c move, c being the low at that potential support zone....(these fibs are not shown on the 4hr chart below as are on my 1hr chart)...Just another example of a confluence of potential resistance factors...the 4hr chart is posted below and so far there has been a 40 pip drop down from the area.

Isn't the scenario below just a greeat example of confluence of potential support factors?...I have posted the 4hr chart but what exists is actually a previous 1hr and 4hr obvious near-term fractal swing lo x 2 zone (ie an obvious near-term imbalance of demand over supply that saw price rise sharply from the area on 2 recent occassions. Also in this potential support zone were 3 x fibs of the major swings up to the recent 6018 high on this gbpusd pairing, these all within a few pips of the actual low .....all in all a confluence of pre-identified potential support factors.

Add to this that when price reached the zone it had seen an intraday hi-lo of 107% of it's 20 day average pip range and it was late in the U.s session, London having closed.

Price action there and other technical readings suggested that the greater probability was that price would rise from this confluence of potential support factors creating the potential support zone (howseoever temporarily) this greater probability creating a hi-probability trading opportunity, ...and this is what resulted.

The point I am making is as I have made before in the thread, and this is that there are no absolutes - just price action and other technical factors at a potential supp/res zone that when like in this example are added to the confluence of potential support factors that the whole market can see, suggest a greater probability of one thing over another. Combine this edge with the proper money and risk management and net profitability can result.

G/L

 

[bbmac]

re: Support & Resistance Explained

In the OP's first post of this thread he says:

'...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....'

The answer is because

a. The analysis of potential support/resistance was wrong
b. The analysis was right but the market chose not to sell at such resistance or buy at such support

c. When it does work (ie hold re OP's uestion above) is beacuse the market decided too that they would act at the potential supp/res confluence because the analysis suggested a bounce from itwas greater in probability than a break on this occassion.

It really is that simple. Assuming b. above, ie that our analysis is right and we act at the highest confluence areas when our trading edge sets-up - lets say in this case such an edge suggesting that the potential supp/res factors may hold and price will likely see a bounce not a break of the potential supp/res factors [I personally would not act even at the highest areas of potential supp/res factor confluence unless my edge developed there,] and then the opposite happens, ie not a bounce-a break: Were we wrong ? No because we played our edge that suggested the greater probability was for a bounce not a break-the fact that the greater probability did not play out does not mean our analysis was wrong re potential supp/res factorsjust that it didn't..on this occassion our edge did not result in a winning trade...So what ? - move on...so long as the analysis and edge is sound this is just a statistical occurance in the sample, and overall a net gain should still result. We have no idea in advance what will actually play out, we can only play our edge and hope the greater probability that it suggests plays out.

G/L

 

[DionysusToast]

re: Support & Resistance Explained

BBMAC - It is not that simple at all in my opinion. Each market is different for a start and some markets can be pushed around by large speculators in the short term which means that short term trading is a different beast.

With index futures, you can clearly see a lot of the time whether support/resistance will hold or fail before price gets to that area. The decisions to buy/sell at that area have been made and are in process before the area is reached.

When S/R fails in the short term it is not because any chart analysis was wrong, nor is the success of S/R the result of any chart analysis being right. In the short term on index futures, EXACTLY the same chart set up with all of your confluence will work at times and not at others depending on the whim of the big money that likes to sucker traders in at those points. The edge is not in the charts in this scenario.

With stocks, when a takeover is announced, price will move to the takeover price and stay there. If the offer is rescinded, then the price will move back to where it was before. Anyone purely looking at the chart will see support & resistance but when taken in context, we can see that this was not a case of sellers overwhelming buyers at that point.

Perhaps I have identfied 2 markets and 2 scenarios that are totally unique and that in all other cases, context is not important and the only thing that matters is what is in the chart.

I find it most bizarre that no-one can address real-life scenarios like this or even want to discuss them. It has to be charts or nothing.