Support Buying

Mr J · 5 October 2009

The majority get in at the second box.

I guess some would argue one would be sacrificing probability for R:R?

I do, because I believe the R:R gained outweight the probability lost. On the flipside, waiting for 'confirmation' sacrifices R:R in favour of probability - or so many think. By waiting, the trader may actually be making a lower probability trade. The longer we wait to get into a trade, the more likely we are to experience an uncomfortable retracement. Getting in early gives us room and options. If the move works out a little as planned, the early entry will do okay no matter what happens. Those who entered late need a far more significant move. So, I would argue that while the early entry is initially a lower probability trade, it becomes a higher probability trade as it plays out.

So even buying at point 1 you could very well have captured less of the trend then buying at point 2 - depending on your exit plans and re-entry plans etc, etc

Anyone who got stopped out at 1 was treating S&R as a thin line, not as an area. There were other entries, such at the end of #1, and the later higher low. We may very well have missed it, but I imagine good traders are prepared to miss trades. I do know that the best traders were in before the break.

Something else to consider is the entries that a faster timeframe would have allowed. That final move up to the break was a trend on a faster chart, on those riding it could have held on to see if it broke.

nomore4s · 5 October 2009

Mr J said:
Anyone who got stopped out at 1 was treating S&R as a thin line, not as an area. There were other entries, such at the end of #1, and the later higher low. We may very well have missed it, but I imagine good traders are prepared to miss trades. I do know that the best traders were in before the break

My point was purely not to get sucked into curve fitting an entry on a chart in hindsight.

The best traders were probably in at under $13

Now let's try to get this thread back on the topic of Luke's original questions

lukeaye said:
Hi guys,

I'm a big fan of support buying and i have a number of rules associated with this sort of trade.

I am no whiz at creating amibroker codes or anything like that so i havent backtested this theory to the best of my ability.

What i would like to know, as i think it would be of great benifit, is;

What sort of expectancy would a sp have of rallying off support into a breakout, relative to the amount of times that support line is honoured.

From my way of thinking, a sp should be honoured off a particular price with high volume, meaning there are a lot of buyers or somebody with a lot of money buying at this point. But at some stage, surely if the price keeps getting sent back down from resistance, there will be an exhaustion on one side. Either, we will run out of buyers, or run out of sellers, hence a breakout.

How many times can a price be supported to give us the greatest expectancy of an upside break? Is it when the price is supported 3 times? or 10 times?

Because of my newbiness with amibroker, i havent been able to examine these sort of results over as many stocks and time periods as i would of liked.

Has anybody else done this? or does anyone know how to write a script for it?

tech/a · 5 October 2009

Look also at breaks of Resistance by a gap even on low volume.
Low volume breaks are often longer lasting than high volume.

Low volume tells more than high volume in certain circumstances.
Everyone gets caught in the high volume hype, when in fact its often saying something,quite contrary to expectation.

lukeaye · 5 October 2009

Can we please get back to my question? im not debating the best place to enter? do that in another thread.

Kryzz · 5 October 2009

Were you looking to create an automated system (in amibroker) for support buying or just scans to bring up stocks of interest? Seems like there are plenty of turtle style breakout systems (short inc) coded in amibroker, suppose one could reverse engineer it to simply go long when a short signal came up, as there would be a perceived support level reached/breached? Coupled with other volume filters etc.

I thought the thread title was support buying? How would discussing entries at support levels be deemed off topic?

lukeaye · 5 October 2009

Kryzz said:
Were you looking to create an automated system (in amibroker) for support buying or just scans to bring up stocks of interest? Seems like there are plenty of turtle style breakout systems (short inc) coded in amibroker, suppose one could reverse engineer it to simply go long when a short signal came up, as there would be a perceived support level reached/breached? Coupled with other volume filters etc.

Well i would like to be able to test the expectancy of buying off a support point that is supported from as little as once up to whatever the largest time a point has been supported, to see if there is a correlation between how many times a point is supported and a likely break in that direction.

So i guess it would have to be backtested, which means it would have to be a buy script, not explore

lukeaye · 5 October 2009

Perhaps i should explain my thinking a little.

Here is what i am thinking.

A stock finds support why? There is a mutually agreed purchase(valued) point amongst buyers for the stock. Now one of two things are happening at this point.

(1) there is only a limited amount of buyers who will want to own the stock, so by hitting support more frequently, more buyers are taken out of the equation, therefore less likelyhood of a break to the upside, or less movement in that direction.

(2) there are many buyers, and limited sellers, so when support is hit, the sellers are washed out of the market, and much higher prices are now achievable.

So from this obviously we can deduct, that probably the most important indicator in these situations is volume on price levels? We would like to see more volume at support and less volume at resistance, and less momentum down to support.

lukeaye · 5 October 2009

Therefore, there has to be a correlation between the amount of times a support or resistance point is hit, relative to volume at these levels, and with this an expectancy of prive movement, in that direction, and an expectancy of a breakout occuring.

tech/a · 5 October 2009

No tested stats from me.
But dont agree with your logic.
Well not entirely.

lukeaye · 5 October 2009

Im just thinking out loud, i dont know if im right or wrong.

please share your thoughts tech

nunthewiser · 5 October 2009

is a great believer in the K.I.S.S system

it applies well with support/resistance trading

tech/a · 5 October 2009

lukeaye said:
Im just thinking out loud, i dont know if im right or wrong.

please share your thoughts tech

Support will either stay or go depending on Buyers OR sellers.
Rather than being seen as desirable constantly finding support at a level may well dry buyers up and sellers will need to sell lower to find buyers.

And sure sellers may well be absorbed by buyers after repeatedly hitting a support level and price moves up.

The trick is reading whats happening in volume and range.
This may not be apparent in the time frame your trading and maybe better seen in a lower or higher time frame.It may not become clear in a single bar or in a bar at all.
I'm sure Motorway would suggest that P&F charting would give a better representation of S&R.

Mr J · 5 October 2009

lukeaye said:
Can we please get back to my question? im not debating the best place to enter? do that in another thread.

I'm sorry you're interested in preventing good discussion. Your original question cannot be answered in the way that you intended, and the discussion was certainly related to what you are looking to do - trade support and resistance. Asking how often support is held is like asking whether the Pope will live to next year.

A stock finds support why? There is a mutually agreed purchase(valued) point amongst buyers for the stock

It finds support because buying pressure equals or exceeds selling pressure. In no way does it mean that buyers agree on value.

there is only a limited amount of buyers who will want to own the stock, so by hitting support more frequently, more buyers are taken out of the equation, therefore less likelyhood of a break to the upside, or less movement in that direction.

On the flipside there is a limit amount of sellers, so hitting support more frequently will take sellers out of the equation, leading to less probability of a break to the downside. Both of these views are wrong.

tech/a said:
Support will either stay or go depending on Buyers OR sellers.

And of course many buyers are sellers, and sellers are buyers.

Wysiwyg · 5 October 2009

Mr J said:
It finds support because buying pressure equals or exceeds selling pressure. In no way does it mean that buyers agree on value.

Good point, though everyday there are multiple trading instument charts with a support zone established and adhered to by buyers agreeing that it is a support zone. I will buy in the support zone and sell in the resistance zone.

If there was no agreement to a buy and sell within a certain range OR at a certain place then the price action would be sporadic and ill-defined. Like a splash of paint on the wall.

Mr J · 5 October 2009

Enough sellers have to agree it's a support zone, and since all trades have entries and exits, we're both buyers and sellers.

If there was no agreement

There doesn't need to be an agreement. It may be a tug of war that isn't going anywhere.

Wysiwyg · 6 October 2009

I suppose identifying `support` is the first step before buying. Maybe support is a figment of imagination or simply another name for a reversal of trend.

tech/a · 6 October 2009

lukeaye said:
Perhaps i should explain my thinking a little.

Here is what i am thinking.

A stock finds support why? There is a mutually agreed purchase(valued) point amongst buyers for the stock. Now one of two things are happening at this point.

(1) there is only a limited amount of buyers who will want to own the stock, so by hitting support more frequently, more buyers are taken out of the equation, therefore less likely hood of a break to the upside, or less movement in that direction.

(2) there are many buyers, and limited sellers, so when support is hit, the sellers are washed out of the market, and much higher prices are now achievable.

So from this obviously we can deduct, that probably the most important indicator in these situations is volume on price levels? We would like to see more volume at support and less volume at resistance, and less momentum down to support.

(3) Sellers with draw from the market at this level.
(4) Buyers with draw from the market at this level.

Point is movement can occur due to lack of interest from either party as opposed to increased interest from either party.

lukeaye · 6 October 2009

tech/a said:
(3) Sellers with draw from the market at this level.
(4) Buyers with draw from the market at this level.

Point is movement can occur due to lack of interest from either party as opposed to increased interest from either party.

Agreed.

It finds support because buying pressure equals or exceeds selling pressure. In no way does it mean that buyers agree on value.

yes but the reason buying outweighs selling at that point, is because of that mutual agreeance between buyers/sellers, or an institution average its buying in the stock at a particular price.

Mr J · 6 October 2009

s because of that mutual agreeance between buyers/sellers

Agreeing on a fair price? Many of market participants don't care about fair price; many only care about movement. Let's say buyers and sellers are battling it out and neither is gaining ground. This creates our point of interest (S&R), but where's the agreement? There is no agreement.

lukeaye · 6 October 2009

There has to be, if there is no mutual point of interest, then you wouldnt even be able to draw a straight line between the low points to create a support point, instead you would have volatile swings with no real organization, and no support

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