Why does resistance become support in a trade?

Abattia,


You have the general overview..., but you’re overlooking the most important, and influential piece


The buyers

Market has a built in bias

Buyers always have the upper hand over the sellers (shorts)



Resistance is created when price is thought to be too high, by the buyers, and buying is removed (then the weak buyers become sellers, while the shorts also step in)


================================================
Resistance and support areas are created – where inventory is being transferred – either from…, or to…, the weak hands…

Or accumulated by the buyers (strong hands) in preperation for the next move up.

It is also why - when price falls, it falls ~2 1/2 times faster than it rises - no support (buying)


That’s the readers digest version, but if you think through it a bit the dots will start connecting.

RN

Quote from abattia:

As both tomahawk and BSAM indicate above, this question can be answered either in terms of market microstructure, or TA, and probably in other terms as well ...

market microstructure
What is resistance? It’s a price (or range of prices) which the auction seems unable to rise through.

Why would the auction have trouble rising through resistance? Because whenever price gets to that level, there are sellers; and there are enough sellers at that price (or below it) to satisfy all demand for the instrument at that time. If/when the auction subsequently breaks through the resistance it is because demand succeeded in becoming greater than supply.

At all price levels, among sellers there will be traders shorting the instrument. If price continues to rise through the resistance, short sellers will be squeezed. If price then comes back near to the level of their shorts, many will try to cover their positions near break even. To cover their positions, they become buyers, adding to the demand for the instrument.

At a prior resistance level, there will a higher number of exiting squeezed shorts than elsewhere. Therefore, as per above, demand for the instrument will typically pick up as price drops back to these levels. The increased demand may act to support the price.

TA
A prior resistance level will often be a point of interest on many TA charts (e.g. a prior swing high, or a prior channel top, a break out level, etc). Once resistance is broken through, many traders will place entry or exit buy limit orders just in front of/ at / just below the same levels in expectation of the same prices again being significant in some way going forward. These buy limit orders will provide support to a falling price.

Other
I am sure there are also other ways to understand what is happening (or better ways to describe what I have attempted above!)...
More...
 
You must log in or register to reply here.
Back
Top