Support and resistance levels

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Support and resistance levels

Postby ivanlim » Mon Oct 04, 2010 9:41 am

Hi guys. I was wondering,why does a previous low act as a support level? What's the reason behind it?
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Re: Support and resistance levels

Postby ivanlim » Mon Oct 04, 2010 11:04 pm

I guess you can wait for a more powerful move up before going long.
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Re: Support and resistance levels

Postby whipcrack » Tue Oct 05, 2010 1:51 am

ivanlim wrote:Hi guys. I was wondering,why does a previous low act as a support level? What's the reason behind it?

It doesn't always act as a support level though.

If that was the case then every time price arrived at a previous low everyone would make easy bucks by simply entering long at support & tracking the upside by trailing their profit stops until it exhausted & flattened out.

Demand (support) tends to exhibit repetitive behavior patterns around key levels, as does supply (resistance).
If an imbalance exists at a particular level or zone then you'll witness prices moving away from the level quite aggressively. These are the areas on a technical chart you want to be paying more attention to the next time price revisits.

If you match these occurrences up with an appropriate continuation or reversal set up/trigger & ensure there's sufficient upside or downside potential in the move there's a higher likelihood that the probability angle will be tipped more in your favor.

As a recent example, take a look at a 60min chart of AUDUSD & look at how aggressively price shifted away from .9450-70 on 21 Sept.
It shifted 150 pips over 1.5 days before pulling back to test demand in a confirmed bullish bias. There were one or two confirmatory elements assisting this potential continuation long opportunity on a revisit to support (demand):-
You got a dominant directional bias.
A powerful supply/demand imbalance.
A decent continuation set up/trigger (in the form of a 1-2-3) to re-engage long as price re-tested a prior level of imbalance.

Spotfx also presented a very recent typical opportunity in this thread when he highlighted the possibility of price reacting to the upper supply zones ahead of time on the EURCAD.
usdcad-long-term-bias-t392-10.html

If you want to see how this type of analysis plays out on a regular basis then check out the information & examples on the Combination Strategies thread:-
combination-strategies-t140.html

Rom wrote:I also have a S/R question. When prices stall at a support level, what to look for before going long?

That would depend on the type of model or strategy framework you use & accompanying confirmatory information observed.

Buying pullbacks in a strong directional bias is one typical opportunity providing you're obtaining evidence that it represents good value.
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Re: Support and resistance levels

Postby Carll » Tue Oct 05, 2010 1:10 pm

That's true rom, there's no conclusive or guaranteed outcome as far as support & resistance is concerned.
S&R should form part of an overall analysis consideration, not a stand alone trade decision.

When used in sync with the likes of cycle awareness (trend or range), momentum strength/weakness, average days range availability, prior reaction to the support (or resistance) level etc, it helps to stack the odds a little firmer in your favour.

You often find traders load stop orders above & below the more obvious & visible support & resistance levels, especially when trading a strong directional bias. As prices fall victim to profit taking or strong offers (in an uptrend), prices naturally pullback to assess the potential for further bid activity.

If the support level is heavy with continuation buy orders (bids) & overwhelms the sell orders, then prices will stabalise, consolidate & eventually absorb the dominant order flow, thus rising off support & continuing to trade into fresh highs.

Here's a possible example of this scenario playing out today on the eur/usd.
Price has probed this local resistance zone underneath 1.3800 since the beginning of the month.
3 attempts were made to penetrate the level before successfully pushing through today.

This level also represents last weeks high, so it adds a little extra interest to the action. If this latest mini leg of the bull move attracts more longs, then traders will be eyeballing this previous resistance zone with intense interest to see if it acts as solid support & attracts further longs.

If it doesn't then the next visible support zone rests back at todays lows around 1.3650.
Quite often these flip zones (resistance becomes support) are important fulcrum levels for gauging the each-way strength of a move & these areas provide likely opportunities to re-engage longs if you're flat or looking to add more bets to your core position.
Image
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Re: Support and resistance levels

Postby ivanlim » Wed Oct 06, 2010 8:19 am

Thanks
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Re: Support and resistance levels

Postby Carll » Fri Oct 08, 2010 1:59 am

Carll wrote:Price has probed this local resistance zone underneath 1.3800 since the beginning of the month.
3 attempts were made to penetrate the level before successfully pushing through today.

This level also represents last weeks high, so it adds a little extra interest to the action. If this latest mini leg of the bull move attracts more longs, then traders will be eyeballing this previous resistance zone with intense interest to see if it acts as solid support & attracts further longs.

Quite often these flip zones (resistance becomes support) are important fulcrum levels for gauging the each-way strength of a move & these areas provide likely opportunities to re-engage longs if you're flat or looking to add more bets to your core position.

And re-test it they did.
Price pulled back nearly 100 pips after breaking through the 1.3800 resistance level to check for continued demand.
You can see how traders loaded up more longs by the reaction & closing behavior of the price bars as it probed for fresh orders before moving away to test for next level support & resistance.
Image

The daily chart shows the next upper support & resistance points that traders will have located & plotted, & just like clockwork price has reacted strongly on arrival at the 1.4025 area.
These next 2 upper s&r zones will now hold the interest of traders should the positive momentum continue to support the EURUSD on this next leg up.

If not, then they'll look to drive price back to test for orders at the swing support levels which can be clearly seen on the 60 or 240 min charts.
Image
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