In my experience, out of the many trading systems and strategies out there, only a few of them actually work; and support and resistance is one of the few trading strategies that work. Whilst many potential traders may be put off by the sheer simplicity of trading using support and resistance it is one of the most effective trading strategies there is providing the market traded is suitable for it. Sometimes, the simplest strategies are the best, and there is certainly nothing to be gain by over complicating anything.
Support and resistance levels work because support and resistance levels are one of the few things in the market that aren't random, these levels don't simply appear by chance, they have a cause and some statistical significance. Simply put, speculators cause support and resistance levels to form. Therefore trading using support and resistance can only work on markets that are driven (or at the very least strongly influenced) by speculation. These days speculators have far more influence in the markets than they used to and many markets are now heavily influenced if not out and out driven by speculation. Markets that are driven by speculation tend to be stocks/shares, stock market indexes and most commodities. Markets that are NOT heavily influenced by speculation are markets like the major currencies and interest rates.
Support and resistance tends to form at round numbers, recent highs and lows and along slopping trend lines. Traders often try to buy at support levels and sell at resistance levels; this is called buying high and selling low and it is generally the best way to trade markets that are driven by speculation. Sometimes traders use support and resistance to trade breakouts, that is, they go long when an area of resistance is broken and short when an area of support is taken out. But breakout trading isn't the best way to trade speculative driven markets; breakout trading is good way to trade fundamental driven markets that trend well.
Technical trading systems can make use of support and resistance. It is easy enough to make mechanical trading systems that buy when the price falls back to recent lows and sells when the price reaches near a recent high, however building a mechanical system to target ‘round' numbers is much harder to do algorithmically. Having a mechanical system target areas of support and resistance around slopping trend lines is also difficult but likewise it can be done. For example, a mechanical system could find a slopping area of support by taking both yesterday's low and the day before yesterday's low. If the most recent of the lows is lowest then today's target for buying could be yesterday's low minus the difference between the two lows. And if yesterday's low was higher than the day before yesterday's low a target price for buying at the upward slopping support could be at yesterdays low plus the difference between the two lows.
Support and resistance levels work because support and resistance levels are one of the few things in the market that aren't random, these levels don't simply appear by chance, they have a cause and some statistical significance. Simply put, speculators cause support and resistance levels to form. Therefore trading using support and resistance can only work on markets that are driven (or at the very least strongly influenced) by speculation. These days speculators have far more influence in the markets than they used to and many markets are now heavily influenced if not out and out driven by speculation. Markets that are driven by speculation tend to be stocks/shares, stock market indexes and most commodities. Markets that are NOT heavily influenced by speculation are markets like the major currencies and interest rates.
Support and resistance tends to form at round numbers, recent highs and lows and along slopping trend lines. Traders often try to buy at support levels and sell at resistance levels; this is called buying high and selling low and it is generally the best way to trade markets that are driven by speculation. Sometimes traders use support and resistance to trade breakouts, that is, they go long when an area of resistance is broken and short when an area of support is taken out. But breakout trading isn't the best way to trade speculative driven markets; breakout trading is good way to trade fundamental driven markets that trend well.
Technical trading systems can make use of support and resistance. It is easy enough to make mechanical trading systems that buy when the price falls back to recent lows and sells when the price reaches near a recent high, however building a mechanical system to target ‘round' numbers is much harder to do algorithmically. Having a mechanical system target areas of support and resistance around slopping trend lines is also difficult but likewise it can be done. For example, a mechanical system could find a slopping area of support by taking both yesterday's low and the day before yesterday's low. If the most recent of the lows is lowest then today's target for buying could be yesterday's low minus the difference between the two lows. And if yesterday's low was higher than the day before yesterday's low a target price for buying at the upward slopping support could be at yesterdays low plus the difference between the two lows.
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