One of the most challenging concepts for beginning traders to grasp is that of support and resistance. This is perhaps so because support and resistance are invisible until they are encountered, and even then, without using multiple timeframes, it can be hard to recognize what is happening.
Enormous amounts of time and effort are spent trying to use technical analysis training to determine where support and resistance levels are in the market. Many different tools have been used, including moving averages, trend lines, candlesticks, and retracement levels.
Some work, some do not, and more aggravating, some work some of the time but not always. Knowing when a tool or indicator will be reliable is information worth a lot of money.
Most efforts fall short because they attempt to use a single tool, and try to apply it to a single timeframe, and try to apply it under all circumstances. Better results come when a variety of tools, each optimized for particular market conditions, are employed in a well-thought-out and highly organized program that encompasses both trends and congestion action. Technical analysis training will show that further progress towards accuracy will accrue when these tools are simultaneously applied to several different timeframes, and the differing results are taken into consideration.
The best results come when a comprehensive theory of market action is employed that can help the trader understand what the market is doing right not, and why it is doing it, and what is likely to happen in the near-term future, and supply the trader with projected levels of support and resistance that can be monitors in real-time as the market steps forward.
A tall order? Well, perhaps, but it has been accomplished in several major technical analysis systems.
Let’s start with some definitions.
Support is something below the price, and it is a force that, when encountered, pushes price back up into the range from where it came. It consists of buyers who are present in the market but waiting to take action until price reaches a certain level, or of short position holders who may be forced to buy if the market runs against them. It is this bunching of buyers around a specific price that causes support to act as support.
Resistance is something above price, and it is a force that, when encountered, pushes price back down into the range from where it came. It consists of sellers who are present in the market but waiting to take action until price reaches a certain level, or of long position holders who may be forced to sell if the market runs against them. It is this bunching of buyers around a specific price that causes resistance to act as resistance.
Support and resistance can be identified with conventional technical analysis like a 10-period moving average. Or it can be represented using a more evolved system taught in technical analysis training like Drummond Geometry.
With this method, we see a more evolved use of tools to create a higher period of overlays of support and resistance areas from the weekly and monthly charts onto the daily chart. We also see support and resistance shifting from bar to bar as the market state moves between trend and congestion. These more developed methods give the trader a lot of support in his buy-sell decisions. With this method, you will see that the support and resistance areas are projected into the future, so the trader can prepare himself as the market steps forward.
In future articles, we can discuss how to use support and resistance projections in making these entry and exit decisions. Proper tools make good traders, and good traders can create very impressive financial returns.