I am reading the articles from the school and I cannot understand the following in the chapter
Support and Resistance Levels
Trading the Lines
The Conservative Way
"Imagine this hypothetical situation: you decided to go long EUR/USD hoping it would rise after bouncing from a support level. Soon after, support breaks and you are now holding on to a losing position, with your account balance slowly falling.
Do you…
1.Accept defeat, get the heck out, and liquidate your position?
OR
2.Hold on to your trade and hope price rises up again?
If your choice is the second one, then you will easily understand this type of trading method. Remember, whenever you close out a position, you take the opposite side of the trade. Closing your EUR/USD long trade at or near breakeven means you will have to short the EUR/USD by the same amount. Now, if enough selling and liquidiation of losing postions happen at the broken support level, price will reverse and start falling again. This phenomenon is the main reason why broken support levels become resistance whenever they break. "
–>>> I understand that many people are closing their long positions (because they were hoping that the price will bounce off the support, but it didn’t) so the price will continue to fall when their stop losses are triggerred.
But I cannot understand what will make the price first to go up to the support line?
same thing that causes the price to go ANYWHERE in the first place - thousands of people have different opinions of where the price SHOULD be. majority rules, so some are gonna be right and others wrong, and some people are tricky little buggers and they’ll “play along” for a few minutes and then shove back HARD.
besides, as the day goes on, new traders log in and other traders log out, so some bunch of yahoos is feeling greedy - or they’re panicking and having to cover shorts. and there’s bound to be one yahoo that’s just bored and itching for some action so (s)he starts to put on some big trades hoping to ‘jolt’ the market one way or another.
I agree that there are multiple reasons which may drive the price in all directions. However in the text is said "This phenomenon is the main reason why broken support levels become resistance whenever they break. "
But it seems to me that this phenomenon will cause the price to go down. I do not see why this phenomenon will cause the price first to go up so it can find a resistance level and then to go down, instead of going down straight.
one of the reasons that support turns into resistance is this scenario - a bunch of people went long expecting the price to go UP, but it doesn’t and it falls way down, so those folks start to sweat and worry. natural ebb-n-flow can cause the price to briefly flow UP again, and those yahoos who were sweating and worrying are realizing that a tiny loss is better than a big loss so in good ol’ panic mode then dump (sell) their positions. this causes extra selling pressure from the panickers, which is why the line is now a resistance. the folks aren’t sure if the price will climb back way up, so they’re dumping early just to try to break even (which they rarely do). price falls. they breathe a sigh of relief. THEN they realize “oh, huh, maybe i should have gone short too, instead of just going flat!”
cycle repeats, cuz they tend to do that just at the very end, and the price has fallen quite a bit and needs to bounce back up and rest. so, they again see their trade go against them, panic, dump when it’s at a certain point, etc.
and on and on it goes, where it stops nobody knows…
In my 2 cents view,when a support line is broken it means that sellers have taken control over the buyers.After all,nothing is sexier than a break out in trading.When it is broken the sellers wait for more bears to join the bearish camp but most of the people find it better to sell it at a higher price so they prefer to place pending orders at the broken support.Market moves back to that line(provided that if bearish momentum is not so strong)to look for more bears and there (pending order) bears join them and take the price lower.Of course,everyone prefers to sell at higher price and vice versa.
Thanks. I think is more clear now.
The desire of the people to go breakeven is the real reason why this line is becoming resistance. It is not because they are trying to liquidate their positions, but it is because they try to liquidate them at breakeven.