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Simply Support and Resistance – Part 1

If you have never put the term “Technical Trading Strategies” into a Google search, then I suggest you do it now before reading any further in this article. The reason behind this suggestion is that I would like you to see exactly why I preach about keeping trading as simple as possible. If you have yet to do the Google search I suggested, then let me save you the time and trouble and tell you that you will find literally hundreds of websites and postings on the internet right now, all with their own tips, ideas and tools to help you make money in the financial markets consistently. Let me say outright that by no means am I disputing whether or not these various strategies work or don’t work, as that is not the purpose of this article. However, I would instead like to talk you about why it is so very important in any discipline to learn and fully understand the core basics before attempting anything else.

In my experience, one of the most damaging things about looking on the internet for trading techniques and strategies is that it becomes very easy to confuse yourself if you don’t know what you don’t know, which in the case of most inexperienced traders is a core understanding of price action. I like to think about it in terms of sports. Take soccer, for example. You can have one or two star players who have an impressive ability to do magical things with the football and their footwork skills; however, this alone is not enough to consistently win games. There needs to be some kind of a formation played by the whole team at any given time, knowing when the best time to attack is, when to defend and when to wait for an opening. What good would the skills of your best passing player be if every time they put the ball in a solid place, there was never another member of their team to receive it? Trading is much the same way.

By just using a detailed technical strategy alone which relies on various price indicators for execution and analysis, there will always be the danger of overcomplicating the trading process. I like to think of such technical tools as the “skills” the soccer player adds to the understanding of the game. If you just practice kick-ups alone on the sideline, you are only then developing one specific skill and what use is the ability to do a hundred kick-ups on the actual playing field if you don’t understand the rest of the game? Likewise, as traders we need to understand the “game” itself, before we start to rely on the “skills” to win the match. A good striker only needs to be in the right place at the right time, with a sound kicking leg to score goals. A solid defender only needs to mark their man and tackle cleanly to cut off the opposition’s attack. Learn these fundamentals and do them well and you are already on your way to winning games. In the trading world, we also have the fundamentals which need to be understood and applied before anything else. We call it Support and Resistance.

One of the most important skills to develop in trading consistently is the ability to be able to make a decision objectively and unemotionally. We should never be in the situation whereby we are saying to ourselves, “I am buying this because it looks like it’s going up;” rather, we should always have a clear and functional reason to enter a trade that has been part of a disciplined and well-written trade plan. The more reasons a trader looks for to enter a position, the less likely they are to come to a quick and simple decision. Take a look at the chart below with a handful of Technical Indicators applied, like Momentum, Fibs and Bollinger Bands®:

Keep you trading simple

I will admit that this does look pretty impressive to somebody looking for a deeper level of technical understanding in the markets, but we also need to ask ourselves what the purpose of each indicator is in this example. Yes, Bollinger Bands® are a great way to assess price volatility and extensions and Fibs are a clear cut way to measure pullbacks in trends, but we also need to know exactly what we are looking for when we enter a trade. Are we trading trends, or are we trading reversals? Are we looking for volatility breakouts, or are we trading a chart pattern? You see the danger of creating an overcomplex strategy with an abundance of indicators, is that we need to know and understand clearly that each tool measures a different aspect of price behavior. Mixing and matching a whole variety of them is only going confuse the trader and hinder their ability to pull the trigger. It’s like having too many individually skilled players on the team, but with no team mentality!

On the other hand, we can start with the basics and build from there. At Online Trading Academy, we recognize that a simple rule-based strategy is always going to provide the most objective and unemotional path to consistency in the market. This is where price support and resistance builds the foundation of everything we should be doing. Let’s look at the same chart without any other tools applied:

Price is the leading factor in any trade

For a start, this is cleaner and what many traders usually forget is that there is plenty we can learn about price action from just studying the candles alone, but that is something for another article. What I have done in this example is to have just drawn a few areas of price support and price resistance. By doing this, we have not only simplified our choices of when to take action in the market, but we can also reduce our risk and increase our potential reward massively if we pick the right areas for our buying and selling opportunities. When you think about it, support and resistance offer the disciplined trader a unique chance to time the market with a decent degree of accuracy and provide a very objective price target at the same time. If you have been looking for the very best leading indicator, then you really need look no further.

Before confusing yourself with a plethora of fancy indicators and patterns, please consider my analogy of the soccer team. When applied correctly, support and resistance become the foundational tactic or formation of the strategy and can get the whole “team” working in the same way. Develop your core, then apply your specific skills and you will be amazed by the results I’m sure. Join me in two weeks for the second part of our exploration of the dynamics of Support and Resistance where, I will define why this simple analytical approach will always carry the greatest edge in trading and how we can then use our understanding to look for the ultimate imbalances in the Supply and Demand equation. See you in two weeks.

Take care,

Sam Evans sevans@tradingacademy.com


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.