why Price Support and resistance is hardly random?

Discussion in 'Trading' started by traderzhangSan, Jul 8, 2010.

  1. at a given time, it is very hard to predict where next move is heading. However
    the support/resistance level is not that hard to predict. Once price level breaks out, the move is very strong, at least for a short period of time.

    what are the reasons behind that?
  2. Partly because the definition is circular... if price breaks the S/R and doesn't run, we don't call it a breakout, but rather chop or a failed breakout (if it reverses).

    Otherwise, a breakout of S/R implies that the supply/demand balance has shifted for some reason and price needs to run some distance to find a new balance. Add that, on any breakout, some traders are getting stopped or exiting positions for a loss while others are jumping on to ride the big move, adding fuel to the fire.
  3. speres


    supp and res areas also known as value areas which means you have lots of traders coming together thinking they have a good price to buy or sell..
    so,1 reason of a rally from resistance (which now becomes supp) after a breakout is , once price reaches res the sellers come in selling res, then price break res which means theres still plenty of demand and they over power the sellers , so basically that means sellers have been removed so theres little oppostion to higher prices and you get your rally...
  4. First of all, there are dozens of different ways of deriving support/resistance areas. Thus, you can literally have +30 traders with each having different s/r areas for the same trading instrument on the same time frame.

    That's one reason why some say it works and others say it doesn't work. There are other reasons mention below.

    With that said, s/r areas doesn't predict anything. However, you can calculate or determine the next s/r area but that doesn't imply the market will respect it. Simply, s/r areas are not trade signals. Your trade signal is independent of the s/r area.

    A good way to look at is that when price approaches a s/r area via whatever method you've used to determine it to be an s/r area...you sit back, wait to see if your trade signal gives you a signal at the s/r area. For example, if price reaches a s/r area and you don't get a trade signal...there's no trade. Just the same, if you get a trade signal and price is not at a s/r area...no trade.

    Statistically on many futures and exchange traded funds I've backtested the past +10 years...breakouts do not result in a "strong move" as you call it. The main reason is that s/r areas are very dynamic mainly because when testing the merits of s/r areas...you also need to test the merits of the trade signal in combo with the s/r areas.

    That's another reason why some traders say s/r works and others say it doesn't work if they are using the same s/r area. The difference in results is because the traders are using different trade signals although using the same s/r areas. Yet, on the flip side, traders using the same trade signals while using different s/r areas will also produce different statistics for the results of their trade signals.

    In the past here at ET there were a few different journals where guys trading the Emini ES were using the exact same s/r areas but had completely different trading results...one was profitable and the other two were not. The difference in results was the trade signals.

    Getting back to the dynamics of s/r areas. If price reach a support area...I have two types of trade signals...a reversal signal (Long @ support) and a continuation signal (Short @ support). Which ever signal appears first...I go with it. The opposite is true for price at resistance...a reversal signal (Short @ resistance) and a continuation signal (Long @ resistance)...which ever appears first...I go with it.

    As for breakouts of s/r areas...statistically most breakouts will fail or pullback enough to hit the initial stop in futures or exchange traded funds. However, the good thing is that when breakouts fail (most of them do fail)...they have one thing in common. Do your homework to find an old thread here at ET about such to find the answer and it's a big reason why there's sudden changes in supply/demand.

  5. Great and clear statement.

    Stop and think from this statement how one could create a chart with stable and natural support and resistance.

    Eliminate the variable aspect of the chart. It is this variable aspect that creates the many different support and resistance areas for the same trading instrument on the same time frame.
  6. Good thread. Intelligent comments so far. Will enjoy following this one...
  7. Supports & Resistances are the CITADELS of the Bulls & Bears. The Bulls field an army near support and the Bears station their troops near Resistance. These armies are always trying to breach each others' defenses.

    These levels may often be found with straight lines.

    When S breaks it may become R; when R breaks it may become S.

    Let's say you're a big dog and buying big lots near a support of your favorite stock or future. You buy big...support gets tested...then breaks badly.

    You're losing money...more and more.

    Eventually you may think "If I could just get out at break even, I would love to, and forget about this awful trade."

    So if given your chance, i.e. to then sell your instrument near the place you formerly bought it, you take it! Your support is now a resistance. Your covering coupled with new spec shorts (like me, perhaps) sends prices lower and the Resistance is reinforced.

  8. jprad


    What a crock!

    You didn't eliminate any variability by going from constant time to constant volume bars, you exchanged it. Instead of having a variable volume per bar component you now have a variable number of bars per unit of time.

    IMHO, the real laugh is that both types of bar are sub optimal for pure support/resistance use.

    If support and resistance are thought of as zones instead of precise values the best way see these areas is with constant range bars since they compress both time and volume along the X axis. More importantly, volume bars become a gauge of the relative strength of a given zone.
  9. Markets are traded in volume not time. Markets are traded in shares or contracts, whether one share or contract or 10 or 100 or 1000, etc. The markets are not traded based on time, they are traded "inside" time, either during RTH or in the overnight session. This bring up another point, the overnight session is a natural extention of the markets trading through RTH not the bastard child some traders treat it. There is no consistency in the number of contracts or shares traded on any given matched minute of any given day . . . ever.

    Having a variable number of bars per unit of time is the natural way the markets move. During and immediately after major news releases volume increases artificially skewing time charts with spikes. This doesn't happen with constant volume charts, only more bars are created depicting the natural flow of price. During slow times in volatility and liquidity, time chart users are stuck inside aggravating tight ranges and I simply speed the chart up to take advantage of the larger natural ranges the faster constant volume charts give me. Speeding time charts up only increases the artificial aspect of the chart and further shows how choppy markets are during low volume times. One single great example of this is watching the eMini S&P in the overnight session.

    Constant range bar charts are great if you are a break out trader not looking for recognizing buying or selling retracement areas in chart trending markets but for capturing a move as it breaks out of an existing range. Does this work, absolutely but not consistently. We have all seen breakouts immediately reverse.

    I completely agree that volume bars show the strength of a given area or zone. This is just another absolute consistency they they have over time charts.

    There are many ways to skin profit from the markets. What you have seems to work for you and more importantly you are comfortably with it, have confidence in it and I assume make money with it.

    I don't presume to know the specifics on how you use constant range bar charts but I studied them for a couple years and found many more inconsistencies with them over constant volume bar charts based on the continued natural flow of price both in the overnight session and during RTH.
  10. jprad


    #10     Jul 8, 2010