One of the main facets of trading support and resistance levels is the idea they increase in their strength the more times the market fails to break past them. The trading books and websites state the reason why they get stronger with each successive failure is because it shows traders have an interest in keeping the market from breaking the level. If the price fails to break the a support or resistance level multiple times it means the level must be important to traders in the market and its in their best interest to stop the price from moving past the level in the future.
The Multiple Touches Theory
Common price action books and websites say the more times the market touches a support or resistance level without breaking it the higher the chance the market has of not breaking it on the next touch.
The rational behind this theory is if a level has been touched several times and has not been broken then it must mean the people who keep buying or selling when the price comes up to the level must have some sort of vested interest in keeping the price from breaking past the level.
Another element to the theory of support and resistance levels increasing in their strength the more times they have been touched, is the premise that if a enough people see a support or resistance level which the market has failed to break a number of times in the past they’ll place a trade upon the price returning to the level because they think its unlikely to be broken. The books and websites state this increases the probability of the market not being able to break the level because so many people will start buying or selling when the price returns to the level, thus making it harder for the level itself to actually be broken.
Why It Doesn’t Make Sense
Here we have a support level on the daily chart of EUR/USD.
In total the market has touched this level 4 times with each touch failing to break below the level. To a trader who uses support and resistance in their trading the support level above would seem like it can provide a high probability buy trade, they think because the market has already failed to break the support 4 times its unlikely it will be broken on the 5th touch.
Look what happens when the price returns to the support for the 5th time……
It breaks straight through it, our supposedly high probability support level has been broken, how can this be ?
The answer lies in what happens in between the 4th touch and the 5th touch.
After the market touched the support level for the 4th time the price began climbing higher, the only way the price can move higher is if somebody has been placing buy trades, where will they have been placing buy trades ?
When the market has been moving down.
The four X’s on the image show the points where the banks were placing their buy trades, whether these buy trades were from them taking profits off sell positions placed before the drop or from them buying to make other traders lose, it doesn’t make any difference.
The point is they were placing buy trades all around the same point, which is why all the touches on the support level were at a similar price. Each touch didn’t manage to drop much further past the previous touch which shows that someone wants to keep the price from breaking below the support level.
Now after the market touched the support for the 4th time the price began rising. For 193 days the price continued to move higher and higher before a reversal occurred and the up-move turned into a downmove.
It took the market another 133 days for it to return to the support level, in total the price has been away from the support level for 334 days, almost an entire year !
Why this is important is because the concept of support and resistance becoming stronger with each touch is based around the idea that the people who have stopped the price from breaking the level in the past will want to stop it from breaking the level in the future.
The problem is the reason the traders had to stop the market from breaking the level in the past will change as new developments enter the market.
For the first 4 touches on the support the banks were placing buy trades, when the price moved up the bank traders who brought made a nice profit. When they closed their trades the up-move changed into a down-move and the price began to fall. When the market comes into contact with the support level for the 5th time there is no reason for the banks to buy again, their intention was to get buy trades placed before the move up-move took place, now the up-move is over and they have made a nice profit there isn’t any reason for them to come into the market and place more buy trades.
The only reason someone would keep buying at a support or resistance level is to stop the market from breaking above or below the level, why they would do this is if they have trading positions placed which need to be protected. The banks didn’t want the market to break the support for the first 4 touches because they had buy trades placed, if the market had broken through the support level their positions would have gone into a loss and they will have had to liquidate their trades which inevitably will cause them to lose money.
By the time the price returns to the level for the 5th touch, the bank traders buy trades have been closed because they have made a profit from the move up, there’s no reason for them to place more buy trades because they have no interest in keeping the market above the support level.
Therefore taking a trade upon the market returning to this support level for the 5th time is not high probability trade because the reason why the market couldn’t break the support for the first 4 touches i.e the banks placing buy trades, has gone, they don’t need to place any more trades because they have made a profit from the up-move which was want they wanted to do in the first place, so its pointless for them to buy again as they’ve achieved their original goal.
In addition to this is doesn’t matter if a large number of retail traders end up placing buy trades when the price hits the level which is one of the things the books state as increasing the probability of level not being broken. The banks are the ones who control the market, if they want the price to move down they’ll make it move down regardless of how many traders start buying or selling when the price hits the level at a level.
Support and resistance is a subjective technical analysis concept not only in its application i.e how do you draw correct levels, but in the assumptions it makes about why these levels work in the market. If the levels really did increase in their probability with each successive touch then the market would always be in a consolidation, the price will not be able to move anywhere because the levels would never be broken.
Thanks for reading, please leave any questions in the comment section below.