Hi, I’ve just started to read through the baby pips school and have a few questions about some of the statements made in the Elementary section: Can you explain what it means to make the market fit the line instead of the line fitting the market (when drawing support and resistance lines)?
“When a support or resistance level breaks, the strength of the break depends on how strongly the broken support or resistance had been holding.” So does that mean that when a stronger line is broken, the follow through will be stronger or will it be stronger when a weaker line is broken?
“The steeper the trendline you draw means the less reliable it is going to be and the more likely it will break.” Why?
I am going do my best to answer, I trade exclusively a type of support/resistance but I am also a noob.
Can you explain what it means to make the market fit the line instead of the line fitting the market (when drawing support and resistance lines)? This is about drawing your lines without having a personal stake in what they say. Some people want to see a certain thing and will try to draw lines that specifically back up their preconceived notion. For example you are looking at longer timeframe chart say daily, you see that the trend is generally going up. So you drill down to 1 hour. But the price action is ranging or starting to fall off, you will pick specific swing highs and lows to try to have the lines show long bias even though your current time frame shows no such correlation.
“When a support or resistance level breaks, the strength of the break depends on how strongly the broken support or resistance had been holding.” So does that mean that when a stronger line is broken, the follow through will be stronger or will it be stronger when a weaker line is broken?
The movement away or through from a trend line is directly related to it’s strength. Yes your statement is true, as I read it to mean that the buying or selling pressure will have to be much larger to break though a strong s/r level than a weak one. Maybe this analogy will be helpful you have a weak trend line(could be for many reasons not shown as a level where there was a previous price reaction or that it’s on a small time frame) is like dry wall. While a strong one is like a brick wall. To break through drywall you can run through it but if the next wall behind that is cinderblock the guy running through it will be stopped. The stronger wall will not be broken by one man and that will bounce and show resistance then more pressure will build until eventually you got a truck driving through it. It’s got more build up and buying pressure behind it so it’s going take more to stop it and smaller walls ahead of it won’t do much.
The steeper the trendline you draw means the less reliable it is going to be and the more likely it will break." Why?
Steep lines are caused by large amounts of selling or buying. There is a point of exhaustion, this is caused by either all the orders getting filled or the price has moved to far from their entry. The price action is likely to consolidate. Which will break your line. Now they could show a continuation pattern and continue the move in that direction or it could have met significant resistance at that point and do a retracement. there may even be some people taking profit and covering during the consolidation period and that may contribute toa retracement or continued sideways action
my take on the support and resistance question you asked is this:
look at your charts, minimize out so you can really see the levels if need be (i primarily use weekly and monthly)…don’t try to make an insignificant line where there shouldn’t really be one - just cause it would suit your purposes of validating a trade decision. the more times price is rejected at a given support or resistance level historically, the stronger it is, the more likely it will reject (cause a reversal). so, if a strong level is broken, the trend must be very strong to have busted through a level that had previously caused price reversal.
the other part of your question concerning trendlines…well, in a highly volatile market, you may have sharp (steep) trendlines, but that kind of buying/selling pressure isn’t likely to continue whereas the long steady trend is more stable.
i am a newbie, so take this into account…but that is my interpretation of things! good luck :41:
Thanks Ramah21…makes sense what you said! I haven’t done any practice trading yet. I’ve only started to do some reading, which is possibly why some things go straight over my head as I haven’t yet seen what I read in books, websites etc. happen in reality.
Yeah no worries the school of pipsology Is a great resource and I got started there as well. Keep on reading learning and asking questions. Also just open up some charts and just watch the price action. Stick to Euro/USD or GBP/USD they are quite volatile and have good trading volume during most times. It will make the things your reading about much clearer. Good luck on your journey.
for instance, if you look at the monthly chart for GBPUSD, 1.67377 is a pretty strong level of resistance…price has not been above this level since Oct. 2008
Any number of things, none of which I personally concern myself about, there may be ways of estimating a target, but the market is an ever evolving story, you can see when a move is at an end, but to estimate how much that move will be in the first place in my opinion is a waste of time.