Why exactly does previous support tend to become resistance?
I know this is probably a stupid question, but just wondering why support becomes resistance. I realize that supports was where traders were more aggressive than sellers, but I don't quite understand why when price falls, sellers become more aggressive in that area? Thank you in advance.
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Probably because such a level has been recognised as a significant meeting point by many. Levels that are easy to spot are subject to such a change of polarity. Those who missed the move when price broke the level will want to get their slice of the cake when price returns there. That's human nature and price patterns are a result of fear and greed.
1. Well, If nothing else these areas support and resistance are areas traders can visually distinguish in relation to price itself. Price is very ambiguous and these horizontal meeting places often cause bouncing and they are regarded as the make or break area for if the trade is going their way or not because of previous rejection. It's a common belief among traders that if someone stopped price at this level that they might come back to step in when price comes back.
2. Also if support became resistance and then broke the resistance and went higher, it's then safe to say the market is no longer in the dominion of the sellers. Most sellers aren't willing to hold their position in a questionable trade that has gone back into the buying territory.
3. also take note that resistance can become support.
4. Many novice traders will often buy on a break out of resistance or sell on support just to hold onto a trade without a stoploss and exit the trade as it comes back to break even due to fear and simple inexperience.
All of these stated observations work together in tandem to produce what most will see as support and resistance.
Last edited by Itchymoku; October 29th, 2013 at 08:28 PM.
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You might want to check out a book called Technical Analysis of the Financial Markets by John Murphy. This isn't a book about strategies, the book is about concepts. This goes over areas like the questions you've just asked. This is similar to the equivalent of the King James Bible to Independent Baptists . It's the technical analysis bible. If you're not super passionate about trading yet, you might find it dry. When I first started studying and trading it was a hard read for me, but as time went on I had some ah ha moments and the booked proved to be useful. I've read this book about 10 times front to back, only 529 pages not including the index and it looks cool on your book shelf or trading desk. This book will answer many of your questions.
Also, understand that people move the market. Yes there are external factors, but everything is reflected in the price action. Study those charts!