5 Reasons Why Support And Resistance Work So Well

For this post, I’m gonna be going through 5 reasons why support and resistance work so well. It is without a doubt that they are one of the most commonly used methods by traders and investors all around the world. But before we begin, remember to subscribe and give my videos a thumbs up if you like them. Also visit my main website for more cool stuff like free workshop, trading community, signals and alerts, mentorship, coaching and that kinda stuff.

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Alright so lets get right into it. The one over arching mother of all reason why support and resistance work is because it is based on mass psychology. And you will later see that the 5 reasons I am going to explain all link back to this. In fact most of trading work based on mass psychology because the more people believe that the price is going to reverse at the support, the more number of people are going to buy at that price and it becomes a self fulfilling prophecy.

That is what it really is about and it is the crux of support and resistance. In fact support and resistance form because they are a visual representation of the general belief of the trading population. They can only happen when majority of people believe that a certain price will hold solid which will turn that price into support or resistance.

1)
Ok so now that we know the main rationale behind why they work. Lets get into the first reason which is that they are easy to use. We all know there are thousands of indicators and patterns and all sorts of information out there in the trading world and to some extent, they all work given the right circumstances.

The keyword here is given the right circumstances. And sometimes it can be difficult to spot that right circumstance which is why some of those indicators are not so easy to use. Support and resistance on the other hand are very very easy to use and are used by pretty much everyone. From a beginner who just started trading all the way to the hedge fund managers or investment bank analyst. And because everyone is using them, the chances of it working is higher which is why they work so well. 

2)
Reason number 2 is that they are easy to spot. Support and resistances can be found all over the charts easily without having to add in indicators or use complex tools. This makes it much easier to use unlike other strategies which relies on more than 1 setup. Take for instance price divergence where you have to compare the price on the chart itself with another indicator and look for divergence between the 2.

It can be difficult to use for those that are not skilled enough. But support and resistance? Anyone can pretty much use it all day any day. Quick pro tip here is that when you are drawing support or resistance lines, remember to always draw candle wick to candle wick and candle body to candle body. Sometimes you won’t get it to line up perfectly but it is a good practice to do so don’t sweat it if it doesn’t fit 100%

3)
Reason number 3 is because they represent key areas of supply and demand. Imagine if the price reversed sharply twice in a row at say 1000. The next time the price gets closed to 1000 again, most people are going to look back in time to see how price behaved and they will see that prices bounced off the 1000 mark.

Now in their mind they will know that 1000 is a solid support because price reversed strongly twice at that level so it has become a significant level to watch out for. Traders that are looking to enter into a long position are going to want to enter at the price. Short sellers who already have a position will want to exit at that price as well because they know the chances of price going below 1000 is low as it has become a solid support. 

4)
Reason number 4 is that they are the bread and butter of price action. Price action is a strategy that believes price is the ultimate indicator which is why traders using this strategy will rely on price to base their trades on. This is because according to the efficient market hypothesis, prices already reflect all information available in the market.

So every price action traders out there are going to be using the same support and resistance levels to base their trades on. And because more people are using it, it plays out how they expect it to.

5)
Last reason number 5 is that they are used in many different strategies and patterns. It is like you got some inception going on here. You will start to see support within a support. And the reason why these patterns work is because people believe and expect the support and resistance levels to hold.

Take for example the double top pattern. The 2nd top takes place because likely there was a strong reversal at the first top so more people are expecting history to repeat itself. And if it takes place again then u got a triple top.

You can also see this happening in ascending triangle.

This is usually seen in a bullish market where price is going up but hits a resistance level so it starts to back down and consolidate before breaking out. And you can see that usually each time price goes back down, it goes down lesser and lesser and theres an upward slope.

What happens here is that initially price hits the resistance and people expect it to go back down but it goes back up and hit the resistance again and again. But each time it goes back up to hit the resistance, people are losing faith in the resistance which is why eventually the price gets narrower and narrower until it breaks out.

The breakout happens because people who initially thought the resistance would hold are not switching sides to thinking that price will break through it after seeing multiple failed attempts for price to go down. 

So those are my 5 reasons on why support and resistance work. Let me know what are your thoughts on this. Leave a comment below if you have other reason on why they work. Also subscribe to my YouTube channel and visit my website for more cool stuff.

Traders’ Problem: How to Deal With Performance Anxiety

Imagine having to present in a crowd of people as part of your personal job interview. You really want this job and you prepare yourself to get this presentation run flawless.

But then you start to have this panic attack, you know you know your stuff and you keep telling yourself you’ll get this right. But as you were presenting you notice some of the audiences weren’t paying attention to you at all.

You start to think if you are being sufficient in engaging them. As they seem to be losing some interesting and that fear gauged you that you’ll lose this job. As you try to improvise something attention grabbing and original, but your panic attack gets in a way.  Thus, performance anxiety steps in the game as your presentation suffers a lot out of it. 

So what is performance Anxiety?

A performance anxiety occurs anytime when our thinking when performing interferes with the way you act. It’s like you get mentally blocked if we worry too much. Thus results in forgetting the material we studied. 

This is highly the common problem among traders. The most common are proprietary trading firms and hedge funds. Performance anxiety strikes when a trader is doing really well and tries to take an even greater risk by trading larger positions.

Anxiety takes a lot of toll among traders, that they fell into slumps and become to worrisome about losing that at the end they fail to take in good trades. A trader may feel a lot of pressure in making profit that they prefer to cut winning trades short and block ideas to reach its potential.

Anxiety and panic attacks just don’t come from situation. They also manifest from our perceptions of those situation. If you convince yourself you are a hot candidate for this job and that you have a lot of job options. Thus, your way of thinking will reverse from less pressurize situation.

Traders engage themselves with their own anxiety. Instead they view a loss as a normal thing. They see it as something as a huge threat to their livelihood and self-perception. Whenever a trader makes a huge amount of money, they feel absolutely good about themselves. But when losing days falls upon them they become so consume with this lost. Instead they’d trade for profit; they trade so they won’t lose any more money.

Some traders try to see the negative into positive, not realizing that this is also one common mistake. They get so highly motivated with their positive expectations and reaffirmation on making money that they fail to realize that this impacts their performance as well- not able to fully identify negative to positive performance. We have to determine as well reality.

How to overcome Performance Anxiety?

One of the most helpful tool we can use to overcome performance anxiety is to carefully track all your worst trading days and make conscious effort in learning from those experience. This will help in turning your losing to an opportunity for self-coaching and not just by expecting failure. Alternately, you can use your lost to trigger any market review. Like are your other stocks in that sector selling off? Or is the broad market dropping? If the market is not behaving the way it normally does then take this as a loud sign or message. Take a clearer indication where to target your ideas the way you wanted. Thus, you will learn where that areas you need to improve.

Support and Resistance: How do these two work?

The concepts of support and resistance are one of the most highly discussed among technical analysts. It is also often discussed after understanding the notion of a trend to fully utilize its concepts. At first glance, the value behind them is that it is easy to understand given that they seem to be self-explanatory, but as you venture more in depth, you will soon discover that there is more to learn and they come in different methods.

These words are frequently used by traders to talk about the level of the price seen on charts that could possibly stand as an obstacle, which then averts the value of an asset from going to a specific course/way.

Support can be defined as a level of price wherein a possible downtrend is predicted because of the focus on demand. For example, when the value of a security falls down, the demand for it splurges up. This then, draws the support line.

Meanwhile, Resistance is the contradictory term for support which means that it signifies an area or price level over the market where trading is solid enough to assume that it will eliminate the possibility of the prices from going any higher.

Now that we have defined support and resistance, you might be wondering how to use these concepts in the market.

1. It helps you detect the ideal time as to whether you should sell or buy your current stocks.

-You might think that it is a simple and practical use of support and resistance but it is still one that is used by traders and is shown to be in effect. 

For instance, you would be purchasing stocks as it approaches the support level. By the time, it reaches; there would be an increase in demand than the supply. With that, more people would be chasing after it to buy it, resulting in the increase of price.

On the contrary, traders put their stocks on the market as the price approaches closer to the resistance levels because it is the time where you can sell it at a huge price. When it does reach the resistance level, it is where people would want to sell and thus, the prices of the stocks falls down once more.

2. Recognizing a sturdier support and resistance based on the time frame

-How someone sees and interprets a chart may vary for each person, but it cannot be denied that looking at the whole picture helps the traders get a clue as to the direction of their stocks, and how rough the road will be in order to reach there.

You could probably spot a number of support and resistance levels on the chart basing on their span of time- the long and short ones. The longer the time frame, the harder it is to break the support and resistance levels. For instance, a support on the daily time frame will hold more weight compared to a support on a 5 minute time frame.

3. Helps you identify possible breakouts, resulting to increase in profits

-When resistance levels become ruined, there arises a new support level. But if it does not, it delivers a clue to the traders that a strong demand for the stocks in the market exists.

When breakouts like these happen, it is usually a clue that there may be a rise in the major price trend. This is why it is a good idea to look out for instances like this so you can be able to a trade when the breakouts happen.

What is Moving Average and How to Trade Them

Moving average is a very flexible term and is commonly utilized in technical indicators. They are also known as one of trading tools that are most commonly used. This may be due to the reason that they are simple to experiment with and calculate. It is also often utilized in determining the trends and reversals in the market.

You may get the gist of what moving average means just by the second word. It refers to the average of a specific group of data or information. The ‘moving’ word would mean that the average is computed and constantly changing on a timely basis.

It is great when the trader using it also knows how to efficiently use it. However, there are still instances when they make a wrong move when it comes to moving averages. This is why we will be helping you to get a better grasp as to what is moving averages and how to use them.

Common ways moving average is used:

First, they are often used for mean reversion trading strategies. There are instances that stocks would embrace the moving averages they have in the long run, the mean reversion traders will then try to search up for stocks that have reached above or below the moving averages they have. They would then set out trades that would profit if only they would go back to their previous lines in time.

Second, we can see traders using moving averages as probable support and resistance levels in the market. This is because stocks that are currently in an uptrend would find the need to rely on the major moving averages, such as those 50-day simple moving averages. The usual scene in the market is that traders would usually purchase stocks during an uptrend as they approach major moving averages from the under.

A different way traders would use moving averages is through trading signals. For instance, the 50-day simple moving average passes over the 200-day moving average; it is often a clue that is termed as the “golden cross” in the market. But if the opposite happens, meaning the 50-day goes below, it is often termed as the “death cross.”  One thing you should take note of is that moving averages cross over do not work well in the ranging markets. When the value bounces up and down between support and resistance, you can often see that the moving average is situated around the middle of the values.

Conclusion

A moving average helps keep the price data stand in more simplified terms, aiding to create this one flowing line in the charts which makes the trend much easier to see in the charts. It may seem to you that moving averages are predictive, since they are grounded on the basis of the historical data and they simply display you a picture of the average on a specific time frame.

Overall the moving average is one of the most commonly used indicator but it is still very effective in what it does.

Day Trading Strategies for Beginners

Strategies in Day Trading are important if you would want to take advantage and earn from the multiple small movements of the price in the market. A comprehensive analysis in a technical sense, the usage of charts, the various indicators to help see the movements of price in the future, would be the foundation if you desire a constant and effective strategy that you can use in the market.

Fundamentals of Day Trading

It is always best to start at the basics as to what day trading really is and to better understand the following concepts it would entail. A lot of people would think that the more complex the strategy is, the more it would prosper in the market. However, that is not always the case. You should keep in mind that the gist of the strategy should be emphasized in a more straight-to-the point manner for it to be effective and robust. A complex strategy would have you looking at way too many indicators and leave you hesitant to make a decision.

Make sure to at least involve the following elements into your strategies,

  • Managing your finances

-As a trader, you should be aware that often in the market, the most prosperous traders know themselves that they should not place over 2% of the capital they have for every trade. This is why, if you are having doubts, you should choose to what extent you are willing to put on the line. Risk management is of utmost importance if you are going to be placing a lot of trades in a day, which you will be as a day trader.

  • Allotting your time

-if you are still starting, it is better to exercise your mind and keep a good mind-set. If you want to succeed in this arena, it is important to allot your time in trading- and by time, not just an hour or two. You would have to persistently check the market especially for any opportunities that may arise. The market could move very quickly in shorter time frames and you have to be ready to react to them.

  • Begin at a small-scale

-For starters, it would be advisable to go with a maximum of 3 stocks a day. It’s better to take it slowly and surely especially when you are still exploring the world of trading. Once you start seeing consistent returns, that is the time that you can consider scaling up and take it to the next level. Until then it is better to be prudent.

  • Train/Educate yourself

-In the world of trading, it is important to be on track and to be updated with the trend. It is not enough to just be able to comprehend the complexities of the market since it is often changing so as with trading. Even the best traders who rely on market events to trade will still be on the lookout for important market announcements such as company earnings, Fed policy meeting, economic events etc.

  • Mindset

-How you perceive something greatly affects how you perform as well. It is best to consider that you need to think logically and strategize efficiently when it comes to market as it involves prices and money. You should not let your feelings or avarice consume you. Your strategies are only good when they are followed and having a strong mindset will allow you to stick to it.

  • Your choice and timing

-As I’ve mentioned before, the market is always changing. There are times when it is predictable and times wherein it unexpectedly goes the opposite.  Together with the other elements, it is important to know that you still got a number of hours ahead of you, and holding back for a few minutes would not hurt. When in doubt, it can be better not to enter the market at all and just watch safely from a sideline to see how it plays out before making an informed decision.

The different Day Trading Strategies:

  1. Scalping

­­-It is a one of the most popular strategies wherein it is grounded on the quantity- having to check out to sell once you think the trade can be profited. It happens fast but entails risks as well. You will be entering in and out of trades much quicker than other strategies and although the profits earned per trade might not be as impressive as other methods, multiple profits quickly add up over time.

  • Momentum

-it is a method used by traders wherein they would be basing on the strength of the latest price trends. This strategy would require you to be updated with the upcoming news as even a few seconds or minutes could greatly affect the profit you’d be earning. This method yields serious potential if you are able to catch a strong trend and ride it to the top.

  • Breakout

-This strategy focuses on instruments that are breaking out of their previous price action. There are multiple chart patterns that this works on such as head and shoulder, cup and handle and much more that once there is a breakout, there is a strong price movement with high volume. To ascertain whether the breakout is real or a fake out, check the volume accompanying it. If there is strong volume behind the movement and it is increasing on each candle, it is likely a real break out.

  • Reversal

­-This strategy is quite risky as it is a contrarian strategy and you would be riding against the current trend. There are several categories of reversal, some easier to pull off than others. One of the categories are popular reversal chart patterns such as double bottom and rising wedge. There are also certain indicators that can signal potential reversal in price movements such as the relative strength index (RSI) which shows whether a stock is overbought or oversold. Typically the reversal strategy offers higher risk but also higher reward as you are able to enter at the very beginning of the new trend if the price reverses.

  • Pivot Points

Pivot points are usually to identify the bigger picture of the trend at different time scales. Traders could utilize it to know the possible entry points in the market. The points could also be used as support and resistance as they are formed over important price levels.

It cannot be denied that Day trading is challenging to learn. It requires you the mindset, the proper investment of time, and experience. But with enough practice as you explore the world of trading, you would be able to discover various ways to go about it. It can be an incredibly lucrative opportunity once you get a hang of it.

The Importance of a Trading Journal

Have you ever tried keeping a journal in a form of multiple annotated charts? If you haven’t you should consider in doing so when you venture in the trading industry. Some traders like to look for every turning point in stock market and try to investigate every major pattern in indicating the price/volume pattern that is prone for potential change in the trend.  

Tips on how to start your journal

1. You can begin your trading journal by tracking your individual trade and focus on every situation in which your mind-set took out a proper execution of those trade ideas

2. Replay these trade in your mind or take a video while you’re trading and observing them. Make sure to jot down what set you off

Example Column A – What set you off; Column B – What is going in your mind; Column C- How it is affecting your trading.

3. Zero in on how much money that trigger situation cost you; with practice you started developing your internal observer and can easily start to notice these situations whenever they occur.

When we keep a trading journal, the principles and learning are not that different. At first we see that it’s a tool in recognizing every possible pattern as traders. So here are some factors which includes

  • Behavioural patterns— When you have the tendencies to act in particular ways in given situations.
  • Emotional patterns— When you have the tendencies to enter particular states or moods in reaction to particular events.

  • Cognitive patterns— When you have the tendencies to enter into specific pattern of thinking or frame of mind in a face of personal or market-related situations.

Many of the trading patterns are amalgamations of its three patterns: in response to an immediate environment, we think, act, and feel a certain way. These characteristic pattern works against every trader’s best interest. These then lead us to make a lot of rash decisions and interfere with the best market analysis and planning. It is with this kind of situations, we look at journals and other psychological exercises to help us change our patterns of distress.

But how does this pattern exist? Why would someone repeat the same unfulfilling pattern of behaviour and thoughts all over again? Sometimes traders get frustrated with their consistent failure or negative pattern that they are sabotaging their future. This just magnifies frustration instead of easing it. 

Maladaptive patterns usually begin as a manifestation to any challenging situation. We learn a lot of way how to cope with any difficult events. As a result, we learn from at it and thus set a healthy habit or pattern. 

One good example is when you blame yourself when there are conflicts with others. This then triggers to self-blame and depression, and can lead to someone beating up himself with his losses. When we repeat certain pattern in trading that consistently lead us to loss of a lot of money. The odds are actually good that we are replaying coping strategies from our early phase in our life. Our task then is to unlearn these patterns. That is where our trading journal comes useful- to be keenly aware with our actions and pattern, feelings and thus prevent us to repeat any negative decisions.