Help Center Blog Open An Account

Support and resistance when volatility increases

Hello Guys, I am new to this community and need your help. It’s related to the topic here: How do you adjust your targets and stops when volatility changes? How do you think you should?

Do you also think that resistance changes when volatility increases? For example, do you find that during calm periods the support and resistance hold better?

Thanks,
Mo

2 Likes

I will quickly share my thoughts on support, resistance and volatility to give you some context to my answer.

I view S/R as a possible area or level of inflection. I am using area to describe a range of prices, not one specific price. When thinking about the reason these levels exist, support could be a price level where buyers view it as cheap and take positions. That is just one example of which I am sure there are many.
(Historical) Volatility, as I see it, is simply the high and low range, of price, measured over a specified time frame.
I have observed price move through these levels in both high and low volatility environments. I have also seen price reverse under the same conditions. I don’t think the volatility of price changes the reason the support or resistance is there to begin with.

Good question. I hope you find my answer helpful.

John

3 Likes

I agree with @JDFtrader’s point about S/R being a possible area where certain interactions may take place. I’ll add that it’s typically a good idea to watch the interaction at the area before placing a trade since it is the cumulative effect of buying and selling that creates S/R, not lines that are drawn onto a chart.

Something to consider along the lines of this question is the relationship between volatility, liquidity, and S/R by understanding market microstructure i.e. the available liquidity in the market depth, interaction between participants, and how it impacts price movement. Limit order buyers and sellers are liquidity providers. Market order buyers and sellers are liquidity users. What makes the market tick up? All of the available limit orders to sell are consumed and so the market must tick up in order for there to be more sellers to take the other side of the market buy orders. If those are also consumed, the market will move up again. This will continue until the buyers are no longer willing to keep stepping up and buying, the sellers offer more than the buyers are able to consume, or both. If the sellers overwhelm the buyers, then the market will tick down, and the process repeats in the other direction. This is the two-way auction process that takes place in the markets. In essence, the market is effective at determining how far is too far by testing whether prices shut off or bring in more activity. It is this activity that results in the S/R that we see on charts.

As a general rule, the thicker a market, the less volatile it will be and vice versa. This is why relatively thin instruments like Dax and NQ tend to be volatile and relatively thick instruments like ZB tend to be less volatile. It is worth noting that not all liquidity will be advertised and this is related to ideas like reloading, icebergs, pulling orders, but that’s going into a bit of a tangent for this topic.

If the liquidity of a market decreases, then it does tend to move through prices more easily simply because there are fewer contracts that need to be consumed in order to tick up or down. So in a sense, there is less resistance to movement. It’s likely that you’re asking more so about S/R levels that you’re defining using a chart rather than ease of movement, order flow levels, and such. Like most things in trading, there isn’t a straightforward answer to that since it is something that depends on the overall context. For example, right before a holiday the market may be thin, but the volatility may remain very low simply because there’s no real directional commitment. On the other hand, there can be days like last Friday (2/26/2021), where the market (talking about the ES and MES) was thinner than usual and moved through prices quickly and easily. On such days, support and resistance can appear to form on a chart as a result of offers quickly lifting from lower prices and bids dropping away from higher prices rather than the market actually being supported by large volumes of transaction. This is qualitatively different than seeing a large amount of volume being absorbed, unable to trade through, and then pushing the market in the other direction. The type of participant is different and the level of directional commitment will tend to be different.

3 Likes

I think certain markets do hold structure better (structure = support / resistance)
like ES and GOLD both hold beautiful structure.

3 Likes

Thank you. I have been struggling with this a bit, so I am happy to get feedback experienced traders.
Maybe I am drawing my S/R lines in a very narrow way thinking that volatility changes them. Do you think I need to revisit the horizontal lines I am drawing, and the fact that they are too close made my jump to conclusions(?)

This is golden. How do you tie all these things together? Is this part of volume analysis and order flow?

Glad I found this community!

2 Likes

Yes. I agree with you, and encourage you, to revisit and experiment with the method you use to identify these particular patterns in price movement.
It can be difficult to find a ‘framework’, our own interpretation of market information, from which we base our decision making from.

I am glad to be here also. Best of luck to you.

2 Likes