Way of the turtle

Shaky Ground
The prices near the edges of support and resistance represent what I
call points of price instability. They represent places where prices are
unlikely to remain but are more likely to move higher or lower. In the
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Way of the Turtle

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case where support holds, the price moves higher. In the case where
resistance holds, the price moves lower, bouncing off the resistance.
In cases where support and resistance do not hold, the prices con-
tinue to move in the direction of the breakdown and often do so for
quite some distance. When a price level has been broken that the
market has not seen for some time, there is generally no obvious sub-
sequent point where one is likely to encounter further support or
resistance. There are no remaining obvious anchors that might serve
as potential turning points for change in trader psychology.
In both of the examples described above, the price is not likely
to remain at the unstable price point. That is why I use the word
unstable to describe those points. There is too much pressure at
those points. One side or the other will win the battle of psycho-
logical warfare, and as the exhausted side gives up, the price will
move up or down. It generally will not stay where it was. Points of
price instability represent good trading opportunities. This is the
case because at these points there is a relatively small price differ-
ence between a trade working and not working. This means that
the cost of being wrong is lower.
The battle analogy is apt for another reason. In classic battles,
the General of the attacking army waits until the best opportunity
for success presents itself. He may send small forays to test the
defenses of the enemy, but he does not put the full weight of his
army into the attack until the proper time. When prices are in
between support and resistance levels, each side is not really
engaged in the battle so it is difficult to see who will win or lose. As
the prices draw closer to those levels each side becomes more and
more committed. One of the sides will lose. The price cannot both
break out and fail to break out. It will do one or the other.
Falling Off the Edge
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It is easiest to tell who will win a battle when it is nearly over. It
is also easiest to tell whether the buyer or seller will win the psy-
chological battle of support and resistance after they’ve engaged
and you can see the price either continuing to break out through
that support or resistance or clearly bouncing off of it.
Using Figure 6-2 as an example, a countertrend trader who
bought at $2.10 in anticipation of an upward move could place a
stop 6¢ below that entry, as that price would represent a breakdown
of the support. Likewise, a trend-following trader who sold the
breakout at $2.10 could place a stop $0.05 or $0.06 above the entry
at $2.15 or $2.16. A price that reached those levels after hitting
$2.10 would be showing enough strength to indicate that the sup-
port was holding.
Edges come from places where there are systematic mispercep-
tions as a result of cognitive biases. Those places are the battle-
grounds between buyers and sellers. Good traders examine the
evidence and place bets on what they perceive to be the winning
side. They also learn to admit when they have made the wrong bet
and quickly fix the situation by exiting the trade. Subsequent chap-
ters will build on these concepts and look at complete systems.