Support and Resistance The Greatest Trading Tool

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span good old-fashioned work.

class="cap">Despite

And where better to start than
all the hype from the           the first item on the above list
internet marketers who try to         - a setup which provides the
sell you the latest trading           potential for a lower risk and/or
‘secrets’, the fact is there are      higher probability trade.

NO secrets.

Every technical analysis book
* Identify setups which provide       on the market shows a number of
the potential for lower risk          charts with horizontal lines, and
and/or higher probability trades.     labels them support or
* Enter and manage those trades       resistance. Why is that? Because
in a consistent and disciplined       they look cool, and you can show
manner.                               your friends how clever you are
* Minimize risk.                      at analyzing the market? Well,
* Manage your money.                  yeah, perhaps that’s part of it.
* Manage your emotions.               But have you ever really stopped
* Journal your results, and           and asked why you should care if
review them to identify what’s        the price action can be bounded
working and what’s not working.       by a line? What does it really
* Keep doing what is working, and     mean if price has been unable to
* Improve what is not                 break through a particular level
working.

in the past? Why should you care

If you’re not trading              if price consistently rallies
successfully, it’s because you’re     every time it falls to a certain
not doing one (or perhaps all) of     level?

these things.

The reason we care is because

There are no secrets!

support and resistance are

So, it’s time to stop              providing you with setup areas
searching for this holy-grail         with the potential for lower risk
solution and get down to some         and/or higher probability trades.

While there are numerous ways to      supply. If the supply/demand
define an area of low risk and/or     ratio can be tipped in favor of
higher probability trading, I         supply, price will fall.

have not personally found one

Resistance is simply an area
that works for me as well as the      which has shown past evidence of
concept of support and                halting a price rise. Price hits
resistance.

the resistance zone, and turns

So, how do support and around to fall again. If it
resistance work?

helps, think of resistance as a

We discussed in a recent ceiling that resists any further
article how price moves, due to price rise.

an imbalance between supply and

Support works much the same.
demand. When there is more demand     Price falls while supply is
than supply, price rises until        greater than demand. As price
they are once again balanced.         falls though, it will become less
When there is more supply than        attractive to sellers, leading to
demand, price falls until once        reduced supply. And it will
again the supply/demand balance       become more attractive to buyers,
is restored. We can also use this     leading to increased demand. If
concept to explain support or         the supply/demand ratio can be
resistance areas.

tipped in favor of demand, price

Let’s first consider will rally.

resistance.

Support, then, is simply an

Price rises while demand is        area which has shown past
greater than supply. As price         evidence of stopping a price
rises though, it will become less     fall, and leading to a price
attractive to the buyers, leading     rally. If it helps, think of
to reduced demand. And it will        support as a floor that supports
become more attractive to             price.

sellers, leading to increased

At this point you might have

two questions.

this area, which once again

(1) Just because we can creates the support or resistance
identify support and resistance zone.

in the past, how does that help

The simple fact that we can
us with our trading right now?        now expect these areas to provide
After all, we don’t trade             support or resistance again, and
history; we trade the hard right      therefore stall and possibly turn
edge of the charts; and

price, provides us with a higher

(2) How does this provide us probability trade.

with the opportunity for a higher

And the closer we can get our
probability and lower risk entry to the point of support or
trades?

resistance, the lower our risk on

Previous support and               that particular trade, because
resistance can be found in a          our stop can typically be placed
number of areas – previous swing      just beyond that support or
highs or lows, areas of               resistance zone.

congestion, round numbers and

In the follow-up articles,
gaps. When price returns to these     we’ll look at a number of charts
areas, there is a good chance         to provide examples for each of
that they will once again act as      the types of support or
support or resistance. This           resistance (swing highs and lows,
occurs for one of the following       congestion areas, round numbers
two reasons:

and gaps). We’ll discuss the

(a) Traders expect it to act       reason they occurred (whether due
as support or resistance, and so      to expectation or a psychological
trade accordingly, thereby            need to trade), and give examples
creating support or resistance;       of how these areas can be used to
or

provide a great trade setup.

(b) Traders have a

Till then, review your setups,
psychological need to trade in and ask yourself whether you’re

planning your trades in an area Reserved.

which provides a low risk and/or nd>About the
high probability trade.
Author

And please remember, although      id="authorbio"
support and resistance allow a        class="membersnoticewhite">For a
trader to identify areas in which     continuation of this series of
price is likely to stall and          articles, including chart
possibly reverse, there are no        examples of support and
guarantees. You need to always        resistance at swing highs and
ensure proper application of risk     lows, and areas of congestion,
and money management.

see my article directory at

Happy trading,

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