Support & Resistance
This applies to any trading, of any market I simply put
it in the futures section as that is the instrument I trade daily.
The idea of support and resistance is not a secret in the trading
industry. There are so many different theories which try to explain
what support and resistance really is and, more importantly, how to
derive it. We will not get into a debate on how to derive support and
resistance, as that can start a religious argument among the various
camps. Some people use indicators to determine support and resistance.
Others use pivot points, whether proprietary or standard floor trader
calculations. Others, use auction market theory and Market
Profile. There are many options to choose from and choosing which
methodology is not the important aspect of this. What is important,
however, is making sure you are using some form of it in your every
day trading.
Why is this so important? More importantly, why are there so many
people who do not realize how important it is? I mean, the reason
to write this article is because so many people are just
chugging along trading the markets without using any concept of it at
all. The most obvious reason to use it is that, theoretically, making
a habit of taking positions with a level to support the trade as well
as using the levels as profit targets should help you maximize your
effectiveness in the market. The most important reason, however, is
the structure it adds to your trading methodology.
See, the mere fact that you are planning your entry and exit strategy
around support and resistance levels carries a most amazing side
effect: it keeps you disciplined. Think about it. When you wrap
support and resistance theory around your trading system, you are
adding a level of forced discipline into your trading. You are not
just taking random technical indicator signals any longer. You have
now added market structure to your system without even knowing it!
Essentially you are filtering your indicators and stacking the deck in
your favor, all while adding a level of discipline.
The more you use the concept in your trading the more you will come to
trust it. I think we have all gone long into resistance and short
into support before. It is the worst feeling is it not? Even worse
is not knowing it was support or resistance in the first place. After
you see it work time and again, the next time your indicators are
telling you to buy into support the little birdie in the back of your
mind will say "No sir! Not today! No Thank you!" OK maybe not but you
get my point I hope.
Now, I am making it all sound rather easy and I apologize for that
because it is not as cut and dry as it seems. I think the main point
of this article is to just get your attention and make you think more
about the idea of support and resistance if you currently are not
using it at all. Hopefully you will see the many benefits of using it
and look into some of the many methodologies involved in deriving
levels and start implementing them into your trading approach.
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