Support & Resistance In Your Trading
From the desk of Norman Hallett. Enjoy:
I’d like to talk today about the one thing that I check before I put on any trade or apply any stop.
And that one thing is support and resistance.
It’s likely the single most important trading FACT. You see, price movement is really all we are concerned about when we trade and support and resistance areas are proven price areas where actual buyers and sellers agree that there’s price equilibrium.
When a price is heading higher, it has a tough time getting over that agreed-upon price and when a price is heading lower, it has a tough time going below that agreed upon price. So the market supports prices that are trying to head lower and and resists higher moving markets from going higher.
So when we trade, we need to take advantage of support/resistance prices that we see. In fact, they are so important to know, that many of the most successful trading systems that I’ve seen use support and resistance as the backbone of the system.
A couple of ‘use’ examples… Let’s say you’re looking to be a buyer in a particular market. The market has been in a corrective phase against an general uptrend, but, as always, you never know if you’re seeing a correction in the trend or your seeing a reversal of the trend.
OK. The market comes down to the 38% Fibonacci level that you like to buy against in a corrective phase, but your trading system needs more confirmation.
You inspect the situation and look back in time in the chart and see that there is a nice support/resistance coinciding with the 38% fib re-tracement level. That gives you further confirmation that if you see a nice reversal candlestick formation that returns to the trend direction… that gives you a GO to apply your long trade because the 3 conditions of your trading system have been met.
In this example, you have 3 non-correlated indicators that are telling you the same thing.
The Fibonacci re-tracement level is a universal expansion indicator whose equation is derived from universal physical law.
The Support/Resistance level is a historical price level derived by traders where equilibrium was agreed upon in the past.
And the Candlestick trigger is a RIGHT NOW indicator that is derived by real-time action in the present.
This is the kind of synchronicity I like to see in a trade. 3 different unrelated indicators telling me to get in, anchored by the grand-daddy of all indicators… the historically-based support/resistance level.
Now, I’ve just described on kind of support/resistance. Contract highs and lows can be support and resistance levels, etc., so you need to study the different types.
But once you know how to identify them, you’ll have a great tool to help you peel off profitable positions, knowing that there are natural resistances going up at these points; you’ll have a great tool to combine with other indicators to build responsible systems… it’s all good.
So don’t forget the importance of support and resistance to you trading success.
OK…that’s it for this addition of 4 minute drill for traders…
So, until next week…
The Disciplined Trader Institute