Why does resistance become support in a trade?

Discussion in 'Technical Analysis' started by LetItRide, Mar 7, 2011.

  1. Why does resistance become support in a trade?
    I've read this a bunch of times but always been curious why. None of the explanations I've read have made satisfactory sense. Anybody care to post a hypothesis?
  2. All the underwater shorts from the orginal resis. can now cover @ b/e .... so they buy buy buy !!!
  3. BSAM


    Because people have memories and TA works.
  4. wrbtrader


    There's hundreds of different types of price actions involving what you've described (resistance becoming support or support becoming resistance).

    Please post some charts to get answers that's specific to the type of price action on those charts involving this generic situation you've described.

  5. I guess resistance becoming support or support becoming resistance is a generic stuation not a specific one, it can be seen in forex, stocks, futures etc.
    my question is why?
  6. As both tomahawk and BSAM indicate above, this question can be answered either in terms of market microstructure, or TA, and probably in other terms as well ...

    market microstructure
    What is resistance? It’s a price (or range of prices) which the auction seems unable to rise through.

    Why would the auction have trouble rising through resistance? Because whenever price gets to that level, there are sellers; and there are enough sellers at that price (or below it) to satisfy all demand for the instrument at that time. If/when the auction subsequently breaks through the resistance it is because demand succeeded in becoming greater than supply.

    At all price levels, among sellers there will be traders shorting the instrument. If price continues to rise through the resistance, short sellers will be squeezed. If price then comes back near to the level of their shorts, many will try to cover their positions near break even. To cover their positions, they become buyers, adding to the demand for the instrument.

    At a prior resistance level, there will a higher number of exiting squeezed shorts than elsewhere. Therefore, as per above, demand for the instrument will typically pick up as price drops back to these levels. The increased demand may act to support the price.

    A prior resistance level will often be a point of interest on many TA charts (e.g. a prior swing high, or a prior channel top, a break out level, etc). Once resistance is broken through, many traders will place entry or exit buy limit orders just in front of/ at / just below the same levels in expectation of the same prices again being significant in some way going forward. These buy limit orders will provide support to a falling price.

    I am sure there are also other ways to understand what is happening (or better ways to describe what I have attempted above!)...
  7. Think in terms of two opposing ARMIES: Blue & Red.

    Each army owns citadels at key levels; when a citadel is breached and captured by the opposing team, they then use that level to rally their troops.

    Understanding this mkt behavior is a master skill of trading; the other important element, in my view, would be risk management & position sizing.

    When I was a broker I wrote a marketing piece on S&R. IF you're interested I may still have it. YOu can PM me.

  8. In for this!
  9. It "works" when it works, it doesn't when it doesn't. :cool:
  10. What is support & resistance ? :confused:

    I only see price dance in my screen .
    #10     Mar 7, 2011