All of you probably heard on Support and Resistance levels. This is a basis for Technical Analysis and used by majority of Traders. I bet that you also heard about rule – “more often level is retested/touched by price, then stronger it becomes”. This is too far going simplification of those, who don’t fully understand Market Mechanics. And I will show you in a moment why. Of couse this “simplification” that I mentioned few words earlier makes drawing of such levels more straightforward, but still it’s very subjective topic. One trader will draw level on this particular price level, other won’t agree and will draw such level lower/higher. That’s another disadvantage of the whole concept that makes Technical Analysis so criticised.
Just to remind textbook stuff, the whole concept of playing out on market breakouts of support/resistance levels looks roughly as below:
Resistance level is finally broken by price and we try to enter on retest after breakout – the more amateur traders will try to enter Longs right after price climbs above top level (so our resistance). The problem is in nature of markets – very often price would break S/R Level, but moment later reverse and come back to Trading Range. And somehow this line of Resistance had to appear first on chart – sure, we see market in general respects resistance level multiple times so we can think “It’s strong level, it was tested so many times”.
The main misconception is that with more touches, S/R level “firm up” and are more robust. Horizontal levels are also too simple concept in trading and have not much in common when clashed with market mechanics and behaviour of institutional players. The truth is that those “multiple touches” are nothing more than resting orders being consumed by Institutionals. Aggresive traders are likely to break such level as their market orders won’t meet passive/resting orders on their way. Therefore rarely you will get move when market after breaking level, will in exactly the same place end correction (from the other side).
So ok, we can trade those levels either from the same side (bounce back from the level) or from flip side (support becomes resistance and vice versa). I never trade those levels from the same side – why? Because of Liquidity Pools. Therefore when price moves to the other side of horizontal level, we await retest of this level from the flip side. We know from market mechanics, that break of support/resistance was driven by Market Imbalance. Aggresive orders are not meeting on their way big amounts of Passive Orders (because they were filled in already earlier). Still please remember about some margin as market is rarely coming back strictly to the point 😉
I am using though as much of objectiveness as possible when setting up Support/Resistance levels on chart. Or rather more proper name to use would be “Zones”. I am fan of having places for observation been created directly by market. Therefore I am using described earlier concept of Virgin VPOCs, Gamma Levels and other standard intraday levels set by Market like High/Low and Close of last session etc. Also very effective are Supply and Demand Zones. If you still want to play though levels bounce from the same side, please wait for candles to be closed and see if any wicks appear in the direction of your expected trade. If we see a wick, it means that level is swept by Passive Orders (especially when new low/high is made due to wick).
You can see on chart above the example of Orders Sweep – price made new low, breaking level of Support. But very clearly are visible wicks at the bottom, giving us advice about sweep of orders.
On the contrary, we can see below example of breaking Resistance level and entry marked on the flip side of this broken level: