Price reaction to support and resistance | Forex Factory

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Price reaction to support and resistance

  • #1
  • First Post: Mar 6, 2010 5:39pm Mar 6, 2010 5:39pm
I am starting a thread about price and how it reacts around support and resistance.

To start here is a chart.

A lot of people talk about support and resistance but what is it really?
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  • #2
  • Mar 6, 2010 6:26pm Mar 6, 2010 6:26pm
Quoting chatzi
A lot of people talk about support and resistance but what is it really?
My personal definition of S/R includes significant prior candle highs/lows, key Fibo retracements and extensions, pivot levels, round numbers, 'obvious' trendlines, and possibly a couple of key MAs. However, most traders' definition is significant prior candle highs/lows only.

The 'significance' of a prior high/low is determined by factors like: recentness; salience (number of higher lows or lower highs either side of the candle); number of intervening candles that have 'busted' a level; number of times a level has already been respected; time lapse between such times; visibility across multiple timeframes; whether the levels are homogeneous or 'flipover'; trend and/or overbought/oversold considerations; confluence with other factors; and doubtless others. The S/R indy that I developed allows filtering by some of these factors.

S/R levels are ultimately created by orderflow. I posted in detail about this here.

If I understand correctly, what you're talking about (number of times price has passed through a certain level) is more like 'market profile' than S/R. But again, it depends on one's personal definition.
  • #3
  • Mar 6, 2010 7:10pm Mar 6, 2010 7:10pm
Quoting hanover

S/R levels are ultimately created by orderflow. I posted in detail about this here.
Recently Ive been thinking about writing a worthwhile addition to the forums content; an overview to the various approaches to take toward trading the forex market. Examples of individual headings would be: Technical Analysis, Fundamental analysis, Charting, News trading, order-flow etc, With further subtopics.

I'm not sure that I'm the man for the job, or that it would even be a job for any one man, but I'm sure if such a thing was put together by a poster as articulate as yourself then it would be a worthwhile addition to the forum, and a sure candidate for a sticky.

It wouldn't be a systems thread, but instead about general approaches that a new trader could consider. I'm sure the research and writing of such a thing would be a beneficial exercise for the writer too.

Just a thought.

Leon
Living the adventure in my head.
  • #4
  • Mar 6, 2010 10:33pm Mar 6, 2010 10:33pm
Quoting hanover
.....S/R levels are ultimately created by orderflow. I posted in detail about this here.....
That's why I prefer S/R levels that represent areas (rather than single lines) where this change in order flow has ALREADY happened. As oppossed to things like Fibs where the change is only presumed to might happen.

One of the truest things I have ever read about S/R levels is: "When drawing support and resistance levels, use a crayon unstead of a pencil."

You're better off thinking in terms of areas or zones and not an absolute number.
Without VSA, you're playing checkers while the Smart Money plays chess.
  • #5
  • Mar 7, 2010 12:17am Mar 7, 2010 12:17am
I am a long time lurker here but I am glad to see this point being discussed. This is the basis for most traders opening and closing their trades yet it gets very little attention. I hope it will be a good thread
  • #6
  • Mar 7, 2010 1:58am Mar 7, 2010 1:58am
Imo, Sam Seiden does one of the best jobs describing S/R.
  • #7
  • Mar 7, 2010 2:16am Mar 7, 2010 2:16am
I agree with s/r isn't at one price but a few levels (not 100s as some people draw) and must be looked at recent levels, unless it is a new low or high, which you then need to go to when price last visited the are. S/R is simply large pockets of liquidity that prove difficult for price to pass through. This can be seen most clearly when a news event comes out and price moves sharply but rebounds off S/R sometimes to the pip.
  • #8
  • Mar 7, 2010 4:02am Mar 7, 2010 4:02am
Quoting chatzi
S/R is simply large pockets of liquidity that prove difficult for price to pass through. This can be seen most clearly when a news event comes out and price moves sharply but rebounds off S/R sometimes to the pip.
Actually, the reality of S/R points or even zones is that traded volume at those prices is actually very low. If you looked at how many contracts traded at the extreme prices in various swing highs/lows you'd see that often times it is below 10. This is a striking differance when you look at volume traded more towards the middle of the swing or in places of consolodation where, depending on the timescale, there will be tens of thousands of contracts traded per price.

Said another way, most liquidity is found and consumed in consolodation areas(volume per price will be high), but not nesissarily in swing points. However, volume per time will increase on swing bars due to the competition for the cheap liquidity offered at over/under valued prices.

What about news times? Because you have relatively high concentrations of traders looking to speculate at the same time, naturally, a portion of these traders will be wrong for whatever reason and be forced to execute stop orders. When you have lots of traders issuing stops at the same time you get a long bar. What they end up doing is pushing price past it's true value while other uninformed traders chase price and quickly fill the price ladder with new bids (support). Value traders watch the losers lose, and watch more losers line up for the slaughter (those high bids). So, price ussually overextends at news times due to losers, and then more losers lose. Pretty ironic really.
  • #9
  • Mar 7, 2010 4:06am Mar 7, 2010 4:06am
I don't like to think in terms of Support/Resistance lines, but rather in terms of a Supply/Demand Delta Zone. What is a Supply/Demand Delta Zone? It's a zone or area where selling swamps buying causing prices to fall or buying swamps selling causing prices to rise. In other words, as price moves down into an area, buyers become more enthusiastic and become more and more willing to enter the market. Demand increases and overwhelms the supply in the market and price therefore rises. The opposite would be true if price was rising into this area-sellers enter en mass saturating the market with supply and causing price to fall as there is now more supply than there is demand. That's how I would define a Supply/Demand Delta Zone and ultimately I think that's how one defines support and resistance.

I have attached three pictures of a Supply/Demand Delta Zone created by an effort to rise candle that is a WRB. This represents a change in the supply/demand dynamics in the market. So what we want to ask ourselves is, "what does the market do the next time it comes back into this area where a change in the supply/demand dynamic already took place?". What we want to ultimately see are entry signal opportunities in this area. The market bouncing off this zone (or within it) is nice, but if you can't get into the market to take advantage of the bounce, what's the point?

The fourth attachment is another picture to give a broad view. This one is not related to the previous three. BTW I just happen to have those three pics so they were not specifically taken for this post. Hope the idea still comes accross.

While I have labeled the highs as 1 and 2, note that a nice 123 top is made when you consider the low in between.
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Without VSA, you're playing checkers while the Smart Money plays chess.
  • #10
  • Mar 7, 2010 4:53am Mar 7, 2010 4:53am
Quoting hanover
My personal definition of S/R includes significant prior candle highs/lows, key Fibo retracements and extensions, pivot levels, round numbers, 'obvious' trendlines, and possibly a couple of key MAs. However, most traders' definition is significant prior candle highs/lows only.

The 'significance' of a prior high/low is determined by factors like: recentness; salience (number of higher lows or lower highs either side of the candle); number of intervening candles that have 'busted' a level; number of times a level has already been respected; time...
Nice post, very helpful.
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  • #11
  • Mar 7, 2010 5:14am Mar 7, 2010 5:14am
This is where the method I use differs. I concentrate on the consolidation or pivot areas (not pivot points) as this is where price broke out, the flash point of the move down that created the supply/demand zone in the first place. What troubles me about hidden gap's zones are that they are too far from the original source for an entry point when price returns. However, on the flip side when price doesn't quite make my previous consolidation areas on return (although I have a 10 pip entry from the zone) hidden gaps zones make a lot more sense. HG, do you aim for an entry near to the previous consolidation as much as possible (although I see you use VSA so base your entry on that within your zones)?
Attached Image
  • #12
  • Mar 7, 2010 9:52pm Mar 7, 2010 9:52pm
Quoting Porkpie
This is where the method I use differs. I concentrate on the consolidation or pivot areas (not pivot points) as this is where price broke out, the flash point of the move down that created the supply/demand zone in the first place. What troubles me about hidden gap's zones are that they are too far from the original source for an entry point when price returns. However, on the flip side when price doesn't quite make my previous consolidation areas on return (although I have a 10 pip entry from the zone) hidden gaps zones make a lot more sense. HG,...
Interesting Porkpie. I would love to know more. Please post some more examples and the underlying logic if you would.

I should have stated this previously because I believe it to me so fundamentally important:

SUPPORT/RESISTANCE is NOT a trade signal. One needs a method to determine where support/resistance are and then another method to take advantage of this knowledge.

So one should not enter long just because price is falling and nearing a support number. But rather as the price falls towards the support number, one should begin looking for entry signals that are independently created of support and resistance. This is the only way to test the validity of support and resistance levels. If your entry methods yields good results when trades are taken in "air", but yields better results when taken at support/resistance than clearly the best situation is to only take those trades that occur at support and resistance.

Quoting Porkpie
..HG, do you aim for an entry near to the previous consolidation as much as possible (although I see you use VSA so base your entry on that within your zones)?
The ideal situation is a trade within the zone itself. Secondarily a trade just above or below the outside of the zone would also be considered. Trades within the zone would be trades within the body of the significant WRB. Which, as you know, is akin to the VSA idea of looking for trades within the range of the previous high volume candle/bar.
Without VSA, you're playing checkers while the Smart Money plays chess.
  • #13
  • Mar 8, 2010 1:04am Mar 8, 2010 1:04am
An interesting question. Resistance is where buyers who took control of the market do not want to buy any more because they are smart.
  • #14
  • Mar 8, 2010 5:35am Mar 8, 2010 5:35am
Quoting Leonlorenzo
Recently Ive been thinking about writing a worthwhile addition to the forums content; an overview to the various approaches to take toward trading the forex market. Examples of individual headings would be: Technical Analysis, Fundamental analysis, Charting, News trading, order-flow etc, With further subtopics.

I'm not sure that I'm the man for the job, or that it would even be a job for any one man, but I'm sure if such a thing was put together by a poster as articulate as yourself then it would be a worthwhile addition to the forum, and a...
Leon, thanks for the kind words, but I don't believe that I'm the man for the job, either. There are much more knowledgeable and experienced traders than me around here.

David
  • #15
  • Mar 8, 2010 7:52am Mar 8, 2010 7:52am
The two 'tips' that I find the most valuable on support and resistance are -

1. Like trends and everything else, the larger the time frame the support and resistance appears on, the more significant the support/resistance is.

2. The flatter the support and resistance line, the stronger the support and resistance. The strongest support and resistance tends to occur around double tops and bottoms, whilst steep trend lines tend to break a lot easier.
  • #16
  • Edited Mar 10, 2010 9:18am Mar 9, 2010 1:26pm | Edited Mar 10, 2010 9:18am
Excel helps us to get data from a platform like Meta trader.Almost everyone knows something about excel. So we can use Excel as a platform of forex trading.
  • #17
  • Mar 10, 2010 9:27am Mar 10, 2010 9:27am
We can use excel to implement complex forex trading strategies with a high degree of complexity.So no need to implement complex programming technique.
  • #18
  • Mar 18, 2010 6:24am Mar 18, 2010 6:24am
i agree, for newbies like myself, it helps that u can use excel in meta trader..
  • #19
  • Mar 18, 2010 11:04am Mar 18, 2010 11:04am
Quoting Scotty B
Actually, the reality of S/R points or even zones is that traded volume at those prices is actually very low. .
Well said.
  • #20
  • Sep 12, 2010 10:57am Sep 12, 2010 10:57am
Quoting Scotty B
Actually, the reality of S/R points or even zones is that traded volume at those prices is actually very low.
As Sam Seiden puts it; the demand/supply imbalance at these levels is so large that either the buy or sell orders (depending on if P is at resistance or support) get filled so quickly and exhausted, that price has to move from that level very fast and therefore very few get to trade at those extreme levels, especially if they are waiting for any kind of confirmation.

This order flow is quite clearly visible in the charts and is characterised by spike top/bottom reversal bars or pin bars or insert your favourite "nom de guerre," but you get the point (no pun).

I believe the key to having the confidence to trade at these levels and by so doing, "step in front of the herd," is having a solid understanding of the dynamics of order flow and how it affects price.
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