Support and Resistance- Flipping Roles

3 Ogo 2023

⚡In simple terms, support is a level where demand overcomes supply, while resistance is a level where supply overcomes demand. In the market, different types of traders participate, and I have broadly categorized them into four groups based on their behavior.


⚡You may have heard that once a support level is broken, it tends to act as a resistance level, and vice versa. This phenomenon occurs because the roles of support and resistance flip, influenced by the psychology of traders at these levels.


⚡Let's illustrate this with an example. Consider Group A, a set of buyers who bought a stock at 80. The stock price rises to 100 but faces some resistance. At this point, Group B, consisting of short sellers, enters the market and starts selling the stock near 100, with their stop-loss orders placed just above 100. Thus, there is supply present at this level.


⚡The price consolidates within a narrow range and eventually breaks out above 100. Group A is delighted as they bought at a good price, but Group B becomes unhappy. Some members of Group B exit the trade as their stop-loss orders get triggered, while others continue to hold in hope of a favorable outcome.


⚡Now, another group of traders, Group C, known as breakout traders, becomes active above 100. Their buy orders, combined with the buy-stop orders from Group B, add momentum to the upward movement, pushing the price up to 110.


⚡As the buying pressure eases, and short-term traders take profits, the market starts to pull back, eventually reaching the old resistance area around 100.


⚡Many pullback traders look for buying opportunities near this level. Additionally, members of Group B, who shorted at 100, realize their mistake and start buying to close their short positions at breakeven. Some of them also reverse their positions. Other buyers who were waiting on the sidelines also start entering the market. All these buy orders create a strong demand.


⚡Notice that once there was significant supply at 100 and now there is significant demand. If this demand is substantial enough, the price resumes its upward movement, illustrating how changes in market sentiment impact a participant's psychology and consequently affect the nature of support and resistance levels.


⚡The reverse is true for how a support level, once broken down, turns into a resistance level.


⚡I hope you found this tutorial helpful. Please stay tuned for more educational content in the future. Feel free to show your support by liking this post.

Disclaimer: Practical knowledge

4 Ogo 2023

Nota

In the dynamic world of trading, it's essential to recognize that there is no one-size-fits-all strategy that works best. However, some strategies outperform others, and one such effective approach is support and resistance trading.

Even with a time-tested strategy or pattern, people may encounter failure, which is where psychology comes into play. Surprisingly, even a 10-year-old can execute a strategy more successfully than 80% of losing market participants. This is because they are less entangled with the monetary aspect of the trade and hence can execute Buy and Sell decisions at the right time, without emotional interference.

Emotional engagement is a significant concern for most traders, but shifting focus to visualize market movements based on group behavior can help reduce emotional influences.

The key to success in trading, like any other field, lies in practice and consistency.

9 Ogo 2023

Nota

It needs to be kept in mind that support and resistance work in all time frames But they are relatively less reliable on lower timeframes than on higher timeframes.

Ex. If we have a strong support at 100 on daily timeframe but on intraday chart (5min) the candle closes below 100 then it would look like a decisive break of support. There are higher chances that this might end up as a false breakdown of support level 100 and may hold above 100 by the end of day.

The best way to confirm such a break down of support is to wait for a retest of the break level, to see if previous support is now flipping its role. If it does then a short trade might generate good results.

Another advantage of taking trades near the flip zones is the minimum risk (stoploss). Even if we get stopped out in these cases, we end up losing small but we surely be looking for big returns.