Monday, 20 April 2015

Why Does a Support or Resistance Break?

Most traders look at some form of support and resistance. Lets ignore the fact that some so-called support and resistance is neither support nor resistance and talk about why a real support or resistance does not hold.

With the evolution of electronic trading, more information is available. In earlier times, the retail trader was at a great disadvantage to the institutions and the so-called smart money. Now, we can all be smart money albeit that we may trade smaller size than the banks and hedge funds, not to mention the HFTs. Technology has become cheaper and accessible to us all.

So the answer to the question that I posted in the heading to this post and which was asked by a blog reader in an email:
I had a challenge figuring out these longs today in ES, because market was trading right into resistance, and the risk / reward that i was measuring didn't favor the longs at those points.

I'm wondering how I misread the situation.  (Please see attached)

The answer is very clear both to the topic post and to the email: Its what is happening with the order flow that breaks support and resistance and also what tells me when the support or resistance is likely to hold. One of the tools I use is the volume imbalance between the BID and ASK deltas. I use a number of other order flow tools.


3 comments:

  1. Respectfully, I would avoid saying things like "Things are very clear to me". While Order flow tools are helpful, most folks don't know how a read a price chart and are myopic in view by looking at something as inconsequential as 5-Range chart when people trading 100+ cars are looking at 60M charts or more.

    I am attaching a 240M chart with intra-bar volume nodes along with weekly and monthly volume profile.

    The area in question is not 2088 (at all). Instead look at 2081 and 2096 and reaction of price to these volume control points. One does not need something as short term as bid-ask (however helpful) to generate very high expectancy trades.

    http://content.screencast.com/users/Deucalions/folders/Snagit/media/949471ac-3781-4006-a9e6-eea5110119f1/04.20.2015-16.15.png

    Good work though,
    Best regards, Sandy

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    Replies
    1. Hi Sandy. As Thomas Leonard wrote:"Clarity affords focus". I agree. A single price is just a trigger point. It is the sequence that makes up the order flow that makes that trigger point a trigger point. The periodicity of a chart is proportional to the amplitude of moves a trader wants to take or the granularity of the entyry he requires if he is using a longer term chart. Most retail trades in the ES are looking at 2 to 4 handle targets. maybe 5. A 60m or 240m chart would hide all those profitable trades available to them. A 100 lot trader may well also be looking to make only 2 handles. Depends on the style and trading plan.

      Thanks for the contribution. Its great to show another style of trading.

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  2. In response to the question you received from the reader, I think most value is in using MP for preparation/envisioning the context. Then once you are at a critical point w.r.t. MP just look at order flow and think about what "they" are doing (also consider context what happened earlier /day(s) before). Blindly trading a MP S/R level gives just an average win rate. The analogy in poker would be evolving from playing your hand to playing the other players.

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