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Yes and no. It depends what type of technical analysis you are doing... If your technical analysis has no other inputs except the price(over any period(s) of time), then you may as well go buy a lottery ticket.

If you are wondering which category you are in, if at any point during your "analysis" you find yourself looking for things with names like "evening star", "bullish engulfing", "head and shoulders", etc.... save yourself some time and money, and go buy that lottery ticket. Day trading is not for you.

If your technical analysis is looking at volume/price/depth-changes, then congratulations, you are on the right track. Next you have to overcome the largest and most devastating hurdle, which is your own psychology.

Could you suggest books that go deeper in the second type of technical analysis? Most of what I find online fits well in the first type you described.

The best resource I know is John Grady's "No BS Day Trading" book. It's part of his basic course at http://www.nobsdaytrading.com/courses/basic-course/

Reading that and applying it was a huge turning point for me in my trading.

Couldn't this strategy be easily automated, and therefore, probably has been competed away by now?

The more this strategy is automated, the more effective it becomes. This is a simple explanation for "trends", as people see liquidity consumption and enter on the side to further consume it - more people repeat the pattern. The net result is a "trend", which is a blunt way of saying "demand exceeded supply in <x> direction".

There is no sane way to automate this, since everyone's description of "enough" volume delta is different. Perhaps I open positions at a CD imbalance of 15%, bank of america waits on 19%, and chase at 25%. My actions at 15% further the delta, causing bank of america's 19% threshold to fire, which in turn increases the delta to 25% causing chase's threshold to fire. Until every day trader "gets on the same page" so to speak, this will not be automated. And...if they ever do get on the same page, then it only takes 1 person with decent equity to take the other automated strategies to the cleaners.

tldr; This will be automated away when greed no longer exists, i.e. never.

This is most adaptive algorithms work, though. As your scenario gets played out over and over, the high threshold people will notice the decline in profitability and look for ways of improving the algorithm. They'll look at the various parameters and notice that the lower the volume delta the higher the return, so the volume delta parameter will come down. As everyone's volume delta comes down, the strategy will work less and less until it roughly equals the discount rate.

Anything that can be completely automated will lead to an elimination of excess returns. Having a single parameter that differs between market participants is not enough to stabilize a long-term imbalance.

I appreciate the comment, but it just doesn't work out that way. In theory yes, what you are saying holds up. In practice(I'm running these 24/7 and generating my income solely from them) this has not happened yet, and is showing zero progress towards happening.

Can anybody explain the fundamental reason behind "resistance/support lines" in technical analysis?

I'm guessing it is a self-fulfilling prophecy (everybody believes in it, so it becomes true), but perhaps there is a logical explanation that I'm totally missing.

Quoting from Bruce Kamich's How Technical Analysis Works:

Support and resistance areas form because market participants remember price levels, and they tend to react as a group when a stock returns to those prices. A simple example will make the concept easy to understand. Let's imagine that you and other investors bought a stock at its initial public offering price of $20. People who did not buy the stock at the offering price are interested in buying it at that level, and they buy the stock at $20 or perhaps above $20 as interest in the stock builds. Other buyers come in and the stock trades up to $22.

The stock may trade back and forth between $20 and $22, but let's imagine that at some point the stock slips down to $16. Some traders will hold on to the stock, hoping that its fortunes will reverse and it will trade back above $22. But if the stock remains depressed, owners of the stock who bought it in the $20 to $22 area will begin to think it would be nice just to break even. If the stock does trade back up, the desire to get out at break-even will become even stronger as the stock approaches the $20 to $22 area.

To put this price zone into perspective, the more sideways trading that occurs, the greater the supply of stock will be. There will be more people who want to "get even," and therefore there will be more resistance to the stock's advance.

Support and resistance are not precise concepts. When support develops during a decline at a price short of the exact level, it is usually because traders are anxious. They remember the prior resistance level at $22, but they start buying on the way down at $22.75 and $22.50 because they are anxious or even fearful they will not have the opportunity to buy again at $22.

On a few occasions, eager traders might push a market too quickly through a support level, and support might not develop until just beyond the support area. Whether support is found short of the expected level or just beyond the level will tell you how eager or fearful traders are.

We have seen that when support is broken on the downside, it then becomes resistance. The opposite is also true; resistance, once broken, becomes support. This reversal of roles is due to the memory of traders and investors who want to get out of their losing trades at break-even, and traders who want to increase winning positions by buying more stock at or near support.

The role reversal of support and resistance leads to the formation of trends, because in an uptrend, market pullbacks or reactions will tend to find support at the last resistance level. In a downtrend, reactions or rallies will tend to find resistance at the last support level.

All support and resistance levels are not equal. The strength of a support or resistance level depends on several factors, such as the number of times the level or area was tested, the volume of trades transacted there, how long ago the formation appeared, and whether it was a round number of a "big figure." Even knowing the type of security will help in determining the validity of the support or resistance area.

The more times a level or zone of prices is tested, the more important that level becomes. A level that is tested six times and holds tends to be more important that one that was tested only twice. The more times a support or resistance level is tested, the more traders will remember it and the more traders will be likely to be committed near it.

When a large volume of trading occurs in a support or resistance area, that adds to its validity because a greater number of traders and investors will remember the level, so their commitment to the level will likely be greater.

The further back in time the support or resistance area was formed, the dimmer the memory, and the more likely that people have already acted on new information and may not respond in the same way again. They moved on by liquidating their positions. An area of support or resistance that was formed recently tends to attract a greater number of people who are still committed to the level. Thus, these nearby levels have more validity or potency.

When a support or resistance level forms at a round number or a big figure, such as $100 or $1,000 or DJIA 10,000, many more people will remember the level because it is easy to remember and obvious. In turn, the more people who remember and act at that level, the stronger the support or resistance will be.

This is a good explanation of the psychology when trading these "imaginary lines", but for example it does not explain why distances between horizontal resistance lines have the ratios of the Fibonacci sequence. Horizontal lines are not that interesting, even though they are powerful. What's much more astounding are the angled lines and things like the Gann fan, or the Fibonacci speed resistance arcs.

Thanks. I think this only explains resistance/support lines which are horizontal, but in technical analysis these lines may also have a slope.

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