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Why does Support and Resistance doesn't work
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Why does Support and Resistance doesn't work

  #1 (permalink)
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Why does Support and Resistance doesn't work

A thought and need some guidance and wanting to provoke some in-depth thought

We all use some form of Support and Resistance or Pivots

So why does it not work for us and for some it certainly works.

Are we putting the cart before the horse ....Most of us are trading electronic market and which is open nearly 23 hours over 5 days.

The exchange is open for approx 7 hours a day over 5 days

Are we trying to fit in our template with our pivots to match the exchange/institutional levels.

If we all used the same opening times of the market and daily pivot then why doesn't our levels get respected.

Anyone willing to share the in depth knowledge

Additional input

Maybe a better question
When does the Electronic Market open and close as this may hold the key to the Pivots and maybe we all are putting our pivots on the exchange opening period and hence it doesn't work.



Sharmas


Last edited by sharmas; August 14th, 2016 at 02:59 AM.
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  #2 (permalink)
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  #4 (permalink)
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Support and Resistance is a very ambiguous term because it says nothing about the trade put on, where the stop or target is.

There's literally infinite variations of how you could trade the concept support and resistance.

You could put your stop 1000 ticks away and enter on support and exit a tick away and say you're trading support and resistance.

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Why does support work? Because a large trader or group of larger traders have shown interesting in buying at that support level because they perceive that level to be a good price. Imagine you are in a real estate condo market where "fair value" is 100,000 for each condo unit. And let's say that a big real estate investor believes 90,000 is a sufficient discount price to buy additional units for investment. So as long as that specific investor believes 90,000 is a good price, any time a unit is discounted to 90,000, it gets bought up. Price will never fall below 90,000 as long as that investor still has capital AND believes that 90,000 represents good value.

If the developer then comes along and decides the previously listed units which were previously listed for $100,000 sells all of his inventory with a new list price of 80,000, and lets say the investor in this case only has enough money to buy 20 more units but the developer is willing to sell 200 units, then suddenly your "support" disappears because the person buying that provided the support is no longer providing that demand. And now supply exceeds demand.

So it is harmful to think about "support" as simply a line on the chart, and more useful to think about it in terms of a price that a fund will have automatic orders waiting and ready to buy. And when that decision changes to cancel those orders, then that "line" will also then disappear.

As a more direct answer then, while the open/close/pivots may all be the same for everyone, VOLUME is not the same, and more importantly your size quota for a target price range is not the same even for the same firm as each day goes by because as you accumulate, your free cash reserve diminishes as does your demand for the asset. You may have say $500M to start on Monday to buy the SPX at 2170, and then by Wednesday you've already spent $450M.

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@sharmas

Look at globex high/low and higher time frames for better areas. Also, levels are more complex on CL, and the ES generally operates on multi-day S/R areas.

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I think for most things, whether they are support, resistance or other techniques, the value is their ability for a trader to establish clear rules and follow them.

There's no simple magic about these things, it's how we use them and how they shape our risk management that creates the value

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It might work. Perhaps if we define it. Then learn to recognize it on graphs. Perhaps then it will work. At least work to some degree.

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In my opinion it doesn't work because it is what most of the traders do. Remember that 90% of traders lose money while trading, which means that if you follow what most of the people do, you will probably also lose your money.

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Necroghost View Post
In my opinion it doesn't work because it is what most of the traders do. Remember that 90% of traders lose money while trading, which means that if you follow what most of the people do, you will probably also lose your money.

supposedly it is statistically correct 90% of traders loose money trading. All traders loose money. I think the 90% totally fail, give up and wash out of the game.

I do not think this is why support and resistance does not work though.

Its more probable that support and resistance not working and most other methods of trading actually not working is actually why 90% of traders fail.

There are volumes and shelves and entire sections of libraries teaching things, specifically to the traders question, teaching things like support and resistance and how it made them wealthy and how to do it and the like. Some of these books upwards of $60 and better ( its no wonder how the author got rich ). Most if not all the information, sometimes all of the information in these books is totally wrong and misleading. This is most likely why 90% of screen based, retail traders fail. But this is not why Support and Resistance fail.

The reason support and resistance fail is 100% mathematical. Simple arithmetic.

https://www.tradingview.com/x/h3zMtzLQ/

The drawing above illustrates and defines support and resistance. Perhaps not as is done so in so many books. But still this is a real picture of support and resistance.

once the unfilled orders are actually fill then the level is no longer valid. Its simple math.

I have read traders saying the more times a level is tested the stronger it is...totally false and mathematically illogical. What is logical is that the stronger a level, meaning the deeper the market ( the more unfilled orders at that level), the more "tests" it will withstand before failing. However there is no real way to know how deep a market really is at any given level. No, volume does not help either because volume is a tally of transactions already made and in no way gives any clue as to market depth. No, order book doesn't help either because while it does show some orders on the books its the orders that are on the books and not shown that make it useless as well.

If we, as traders, define and understand Support and Resistance as simply a level where unfilled orders are likely to be found, then figure out how to recognize these levels on a price chart and then, then perhaps we will see that quite often Support and Resistance actually can work for us rather frequently.

https://www.tradingview.com/x/yM2Y95Vw/

I scaled down from the original time frame pictured higher up, down to a 15 minute scale so we could better understand.
An X-Ray if you will. The green level was what the "Supply/Demand" gurus commonly call a "Drop-Base-Rally demand zone. We can see it was quickly returned to and worked beautifully. However at the same level about 24 hours later when price returned to this same level notice that it actually took quite the beating and gave another bounce even.

However it bounced into what those same "Supply/Demand" gurus call a "Drop-Base-Drop" supply zone and from there price pushed farther down easily penetrating what was previously "Support" and by some definitions a strong one too.

https://www.tradingview.com/x/L9oW0M3Z/

and one final picture pointing out that on the same graph some similar price structures that actually seem to not have worked out so well. My point with this last picture is that charting is not trading by any means. So if we as traders subscribe to support/resistance or supply/demand or fibs or VWAP or anything else none of these structures or methods will ever work 100% of the time. Good trading is what keeps us alive in this business where the institutions have all the money and all the answers and can see all the orders, ours and theirs while we, screen based retail traders, can not ever really see any of the orders.

good luck my friends.

99% of us fail because we simply are not allowed to have the information we actually need in order to succeed. Fact is, that privileged information is forbidden by laws, rules and regulations for us retailers to have.

(not sure if this is acceptable but if anyone interested in the charting service I can send a link. New traders can get them free and subscribe to them later on, or not)

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