Trading Futures or Forex, You Need To Be Able To Recognize Support And Resistance
So often we hear traders talking about support and resistance. Yet when you ask them for the exact definition, they cannot provide one. Ask them to look at a chart and say, absolutely, without hesitation, support or resistance, and they cower. Why? Because most traders haven't a clue what support or resistance really are. And as a result, they tend to get stopped out. If you can't recognize support from resistance, you should not be trading.
For day trading, whether you are trading futures, the S&P500 Emini, currency trading, buying and selling crude oil prices or spot gold, the key to technical analysis trading is being able to identify support (the floor price) or resistance (the ceiling price). If you can't recognize support from resistance, it is difficult to be profitable. This is true whether you are day trading or night trading.
What is Support and what is Resistance?
Let's check out the definition of support by Investopedia. Support is defined as "the price level which, historically, a stock has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock."
What does support really mean? Say you are trading the S&P500 Emini Futures contract. The price has been steadily going down, lower and lower. Suddenly as if out of the blue, the price reverses and uptrends. Several things might have happened. Price could have run into a barrier of some kind, a pivot, a moving average, the bottom end of a bollinger band, a fractal. For the moment, the enthusiasm and momentum of downtrending is completed. It is difficult to break through barriers, especially when there is no agreement on direction in the market, or when the market's agreements peter out.
What then is Resistance?
Investopedia defines resistance as "the price at which a stock or market can trade, but not exceed, for a certain period of time."
This definition is simple but how to apply it. In fact, with resistance, it functions the same as support, but in a topsy turvey way. Again, you are trading the S&P500 Emini Futures contract. The price has been steadily going up, higher and higher. Suddenly as if on a dime, the price reverses and downtrends. Again, several things might have happened but in the reverse of support. Price could have run into a barrier of some kind, a pivot, a moving average, the top end of a bollinger band, a fractal. For the moment, the enthusiasm and momentum of uptrending is completed. As with support, it is difficult to break through barriers, especially when there is no agreement on direction in the market, or when the market's agreements peter out.
So here's the point. If the market direction turns on barriers (pivots, fractals, bollinger bands, channels), and you cannot identify that barrier as support or resistance, your chance of being stopped out has just skyrocketed. You'll go long thinking there is support (a floor) for the price and you watch your trade plummet. Or you'll go short thinking you have a barrier above the price that limits further movement up, and again, stopped out.
When the barrier is far away from the price, and price begins to approach the barrier, either from above going down to the barrier (going short), or from below coming up to the barrier (going long), it is easy to recognize support or resistance. The further away, the easier to identify. However, once at the barrier, and needing to know if the barrier has been breached, that is a horse of a different color. Most traders simply cannot recognize when a barrier changes its properties from support to resistance or from resistance to support, and that is why they get stopped out. It is mathematical, it is not guesswork.
As you begin your journey becoming a day trader, if you learn nothing else, the first lesson you must learn is the difference between support and resistance. That is one of the biggest reasons traders consistently get stopped out of their trades and lose money.
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