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Why does previous support become resistance and vice versa ?

  • Post #1
  • Quote
  • First Post: Mar 11, 2010 5:21am Mar 11, 2010 5:21am
Why does when a resistance get broken it becomes a new support? I see people open trades below and above these levels ,which is quite common. But what is the reason?
A simple story of emotions, fear & greed.

After a resistance level is broken, there are very few Sellers left, and they have lost money (in pain), and now there are more buyers present to push prices higher. (The sellers may also jump ship & join the buyers).

Psychologically this area now becomes an area of pain for Sellers & an area of gain for buyers, so with memory of this area, both previous buyers & sellers step up and buy again and this level now becomes support. The reverse is true when a support zone is taken out.
Follow the Money
Quoting Shabs19
A simple story of emotions, fear & greed.

After a resistance level is broken, there are very few Sellers left, and they have lost money (in pain), and now there are more buyers present to push prices higher. (The sellers may also jump ship & join the buyers).

Psychologically this area now becomes an area of pain for Sellers & an area of gain for buyers, so with memory of this area, both previous buyers & sellers step up and buy again and this level now becomes support. The reverse is true when a support zone is taken out.
I also think, like so much in trading, it just becomes self-fulfilling prophecy. Support become resistance and visa-versa. We're told this in every book, every webinar and on almost every thread of every forum. The whole trading community works on this principle so orders are placed at significant areas as per "the rules".

Watch how many times it doesn't work though. Go back through years of data and see the countless times it fails - especially in ranging times.

If all you needed to know is this "rule", we could all mop up and start planning the villa build. You need to pick your levels well and look for more than just this one principle if you want to start turning a profit.
Quoting Trotty
I also think, like so much in trading, it just becomes self-fulfilling prophecy. Support become resistance and visa-versa. We're told this in every book, every webinar and on almost every thread of every forum. The whole trading community works on this principle so orders are placed at significant areas as per "the rules".
I have never seen proof that there is such thing as a self fulfulling prophecy.
You'd imagine that you could find evidence of Fibo Numbers ( one of the biggest trading hypes) rather easy. But that isn't the case.

http://citeseerx.ist.psu.edu/viewdoc...=rep1&type=pdf
Quoting TJPLD
I have never seen proof that there is such thing as a self fulfulling prophecy.
You'd imagine that you could find evidence of Fibo Numbers ( one of the biggest trading hypes) rather easy. But that isn't the case.

http://citeseerx.ist.psu.edu/viewdoc...=rep1&type=pdf
stop being an inconsiderate hater... at least give us a heads up next time so we can get the popcorn before the fight starts
Forex Trading for the Savvy Beginner
Quoting TJPLD
I have never seen proof that there is such thing as a self fulfulling prophecy.
You'd imagine that you could find evidence of Fibo Numbers ( one of the biggest trading hypes) rather easy. But that isn't the case.

http://citeseerx.ist.psu.edu/viewdoc...=rep1&type=pdf
Thanks for the document. That confirms what I was already thinking for a while.
true,
i dont know why people think the market is made of retail traders....

the muscles are flexed by the interabanks, and central banks, i dont think they go to those weminars
AVT INVENIAM VIAM AVT FACIAM
i just skipped to the end of the pdf where it states that fibo-traders are deluded wankers. did i miss anything in the middle?
Forex Trading for the Savvy Beginner
I think it is because this ideology has been passed from one generation to the other.

If you are travelling and you suddenly see a road sign with the caption

SLOW DOWN, DANGER AHEAD

There is this naturally tendency for you to apply your brakes not because you have seen any danger but because you have been warned about a probable danger.

If every Pro passes the concept to the next set of newbies that when support is breached it becomes resistance and when resistance is breached it be comes support. These newbies which would be pro someday will also pass this principle to the next generation so that at such points. We all tend to react to resistance and support.

That is the psychological part of the market i guess, where we all think this is what is going to happen and react to such points they way we do.

JUST TO DRIVE HOME MY POINT

The use of pivots, fibs, psychological prices like 1.000 etc have been known to act as resistance/support points because of the large number of traders that use it in the market.
I think the reason is that people are trading off support and resistance. Probably the most obvious trade to take.

There will be traders selling at (or around) the resistance believing that it will hold, then when it is breached, some will get out quickly and some will hold on to see what happens (mainly praying that the price will retrace so they can break even or there abouts). More often than not you see price retrace (people are taking out profits) to the resistance that was broken, and when it does people who's been holding on to it will get out making the price bounce at the previous resistance.

Also, at the same time there are traders buying at the retracement of break of resistance, which also adds to the bounce.

Similar applies to Support.
  • Post #11
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  • Last Post: May 27, 2011 6:41pm May 27, 2011 6:41pm
Quoting Brb-Fraudin
Why does when a resistance get broken it becomes a new support? I see people open trades below and above these levels ,which is quite common. But what is the reason?
It's nature's way of showing righ path to Technical Traders / Chartists in placing their trades.
The Thief of Wall Street
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