How Does Price React At Support and Resistance

Part of the problem with how people use support and resistance is that although most are aware of the

different basic ways a market can respond to a technical level, they often

are not taking it into account when executing around a level.

A market does not have to instantly bounce from a level and this is a

dangerous way of thinking that's easy to get sucked into. A market can

breach a level only to turn around and reverse back where it came from.

A technical level of support and resistance is merely a reference point for subsequent activity and this must be at the forefront of a trader's mind when looking for clues to take their

next trade. Before we get onto how a market can respond to a level, it's

absolutely crucial to cover rotations.

A rotation is simply a definable leg within the market movement. It

doesn't have to be a big directional swing - think of it in terms of

breathing. A market must, just as a living creature, breath in and out.

In a bigger directional move, there are still counter rotations to the move. You

can think of these in terms of breathing out - the expulsion of stale air or market energy in readying for the next intake of breath to fuel the next rotation in the direction of the

bigger move.

The key point is that it's always happening and by identifying the size of the last swing, you can get a better feel for whether enough energy has been

expended in order to encourage the other side to push the market in the opposite

direction - at least by enough for what you consider to be a small rotation.

Now of course, the size and distribution of rotations is highly

dependent on the product and the timeframe that you are looking at.

To extract this kind of information from the market you are looking to

trade is far easier if you have the kind of software to do most of the work for

you.

If not, you can select a period and do it manually. What you'll end up with is a

distribution and what has been the most common sized rotation over the

period of analysis.

By tailoring the timeframe you trade and the general scaleout size to take

the market's rotation profile into account, you can get to a point where

your trades have a much greater probability of becoming "safe" even if they don't end up being big winners.

Put another way, understanding rotations can help you get in sync with

the market flow.

Okay so now we have some basics about rotations as a foundation, let's look at the ways the market can react

to levels of support and resistance.

First of all, it can bounce from or a tick or two before the level itself.

Like in all cases, a market can bounce with a counter rotation of sufficient

size.

However, before the counter rotation is sufficient in size, it looks like this: -

At this point, the market can continue up and form a reasonable bounce or it can continue to move lower but at the same time be moving back and forth

by a handful of ticks each time it does.

At this point, it's a little bit premature to make assumptions based on the

information the market is giving you.

Once the market has moved a full rotation however, the chances of it pulling back to the level and then at least attempting a secondary push in the same direction, are much higher.

The second basic way a market can react to a support and resistance level

is by scything through it.

Again, for a greater chance of the break to at least have a secondary

push after pulling back to or somewhere towards the level, the

simple requirement is that the break is by a number of ticks that by studying the market, has been identified as a

common size for a rotation.

The last basic way and the one that often catches people out, is that the market can breach a level by a small

number of ticks and only then begin to reverse.

Now there are of course many different combinations that the

markets can conjure up to throw us off course. Indeed, the market does not have to do anything. But we're not

expecting certainty are we. All we're after is a decent probability to lean on.

A market can look like it has already reacted to a level in a certain way. It

might look like it's bounced for example, only to run through the level

on a retest.

It might look like it's broken the level but really it's trapping sellers (in the examples I've used). The key thing

here is to get your timing right and to do this you can leverage your understanding of rotations.

If a market bounces from or breaks through a level by a decent number of ticks, what it's telling you is that it had

enough energy on that side to gain that reaction and at least an additional

secondary test in that direction is therefore likely after any pullback.

It might continue to reverse or power on lower. In fact it might never give

you a decent pullback at all once you've spotted how it's initially

behaving.

But until you see how the market reacts, it's extremely difficult to judge the nature of other traders and what

they want to do at the level.

I will always believe in the importance of identifying key technical levels of

support and resistance.

However, without considering how a market can react once it gets there, you

are at risk of making an error in assuming it will do one thing or the other - either

bouncing after pulling back from the level by just a handful of ticks or making a big

move on a breakout just because the price is traded through by a tick or two.

Understanding rotations and market energy is another part of unlocking the

power of levels.

Get it right and you'll potentially improve your timing of trades

significantly.