Intrinsic Reasons for Support and Resistance changing roles

[walterw 10]

Hello dear fellow traders, I am working on other thread around the "flip" trade, its a neat idea for scalping that I am experimenting and it looks like it has some posible bright future...

 

My question here, and I would love to hear some bright minds here at TL thinking is : Why or wich is the reason (what happens inside the market) to make a previous resistance level now become a support...

 

It happens over and over again, on any time frame, its incredible when you start paying atention to this fenomena, how it works...

 

There has to be a clear reason in terms of market internal behaviour that I would love to hear your interpretations...

 

Take your time, maybe when you take an inmersion bath on your hot tub as Aristotle did you can meditate on this fenomena and we can all say Eureka ¡¡

 

Expect your disertations, cheers Walter.

[notouch 10]

The reason is that bad traders (i.e. most traders) like to get out of their bad trades at break even. So traders who sold at resistance only to see the price rise and go against them will buy as soon the price comes back to where they sold. As the bad traders buy to close their bad positions, this creates support where the resistance was. On top of this, good traders understand what's happening and know that the previous resistance will provide support so they buy at that level too.

[Soultrader 12]

Once a area of resistance is taken out, the shorts who sold are in pain. As prices come back to their entry point they will most likely cover to limit their losses. Also, the shorts who planned to sell at resistance but did not are no longer thinking of shorting. Instead, they are likely to switch from a short to long mindset. This throws in another group of buy orders at that price level. Combine that with traders who love to buy pullbacks and you have buy orders from different traders across the board. This will cause resistance to become support.

 

Once you got the late shorts covering at a loss and momentum traders joining in, price is going to rally until the late comers appear. My 2cents

[ckait 10]

I read somewhere that it takes effort in the way of $ to break through resistance or support, so maybe price gets shut down when the effort to pass through isnt worth the reward on the other side.

[weiwei 10]

It is just matter of $$$$, and the winner defending their investment.

 

Look at this pic, each arrows is 700+ ES cars on that time interval. With that many sellers to short at 11220 area, it takes a lot of buying powers to over come that area.

 

so what happen when buyers and sellers dual out again at that area. Only one side will win. Either seller able to cap it or buyer able to break out it. The winning side must out power the other side. Simple as that.

 

So if buyer is able to break out of that resistance. which means a lot of $$$$$. they sure will defend it when it gets challenged again, so they do not lose money on their position. Thus Resistance become Support or vise versa.

 

It is the big boys who can muscle the market that matter. They are the one who created S/R. So they are the one who will react to those S/R, if that is where they conduct their business at.

 

 

http://www.traderslaboratory.com/forums/attachment.php?attachmentid=1409&stc=1&d=1178597719

[Guest cooter]

  weiwei said:

 

It is the big boys who can muscle the market that matter. They are the one who created S/R. So they are the one who will react to those S/R, if that is where they conduct their business at.

 

Doesn't smart money (aka Professional Money) create faux S/R levels so as to trap unwittingly buyers and sellers?

[bakrob99 11]

WeiWei

 

I dont see that chart as an example of Resistance becoming support ... I see it as a zone of resistance ...

[weiwei 10]

Cooter, as for me, I have no way of telling if Smart money is the one who is capping, all I have is data from tape and I do my best dedution out of it. And I would guess that most people can not know who is capping in this case.

 

It is base on this logic that I made my analysis.

 

The pic dose not tell the whole story, as it leaves out any transaction below 700 cars. so during any 1m interval, there could be a flux of sub-700 cars, and the chart is not showing.

 

again, my logic is that any time there is a transaction that big, some one is serious. on top of that, if there are many of them at a price level, then that some one is dead serious about protecting that price level.

 

so carry this forward, to break out of that R level, a lot of money will have to be involved.

[weiwei 10]

Now this logic would not be completed without knowing how pro traders dose things.

 

I personally met a few traders working for big companies. they all made very good living earning their pay check and commissions from those companies.

 

Once they made that big $$$$, they live very comfortable life, which takes a lot $$$$ to maintain it.

 

what dose all these mean? that means they must perform, so at end of each month, they can collect that bonus to support their life style.

 

To perform simply means to make money for companies they work for, and they can do what they can to a limit, usually the risk control department come to tell them to stop.

 

And btw, they are not smarter or more displine then individual traders, one of edge they have is that some one else is force the displine for them.(risk control department). and the other is the amount of contract they can trade.

 

After I put all these together, then what I posted was my observation.

 

weiwei

[weiwei 10]

Now my conclusion on why support become Resistance and vise versa.

 

Using my pic as an example, to break that R level, it takes a lot of $$$$, commitment , and your job on the line. Once those pro traders able to push higher, they sure will defend their profit when it is challenged again, because they would want to get that bonus at end of each month.

 

weiwei

[walterw 10]

Bright Bright Minds ¡¡¡ thanks for the explanations, they all make sense..

cheers Walter.

[ItalianSharp 10]

When a breakout takes place, you got different types of traders participating in it:

 

1) Those who are stopped out

 

2) Those who enter at BO

 

3) Those who fade the BO

 

4) Those who wait for confirmation and/or retracement before getting in

 

Breakouts often generate spikes because of the many orders placed around those areas.

 

Soon after a BO markets usually lose momentum or volatility...this is due to profit taking and prices becoming less attractive because of overbought/sold conditions.

 

This is why markets often retrace to the BO level...that was the level where most of liquidity was, and the big players must place their bets in highly liquid areas to keep slippage to a minimum.

 

I also believe that since markets move within blocks or key areas, they re-test a prior area before moving to the next one...just to make sure that the BO was for real and not a fakeout.

[jperl 11]

The idea that support becomes resistance and vice versa is in my opinion not a good description to use. It gives the impression (often false) that when price moves down (up) to one of these points, it will bounce back up (down). So what are support/resistance points? They are points where the price action PAUSES, before either moving on in the same direction, or reversing. There is usually low volatility at these points and so they represent a good place to either exit a trade if you are in one, or initiate a new trade. The direction the market will go in from these pause points will of course depend on other factors.

 

Looked at in this way, s/r points then become decision points for you the trader.