What is your biggest trade killer?
The Definitive Support and Resistance Trading Manual
"Support and Resistance is the basis of most technical analysis chart patterns whether you trade forex, the indices, commodity futures, options, stocks or yes, even Bitcoin. Virtually all successful traders, even professionals who use order flow, have a working knowledge of how support and resistance functions."
I was in a trading chat room when one of the attendees made the observation that any successful trader has to have a thorough knowledge of support and resistance.
While that thought had never occurred to me, the more I thought about it the more I came to realize that it was probably true. In order to be a successful trader you need to understand how support and resistance works. Why? Because quite simply, support and resistance is how the markets work.
Support and resistance permeates trading. Many of the popular market formations such as head and shoulders, 123 tops and bottoms, channels, pennants, triangles, pitchforks and wedges all rely on the laws of support and resistance to make them work. Elliot waves and Gann lines also rely on support and resistance as do Fibonacci retracement levels.
Support and resistance is at the core of just about every trading strategy in use today. Yet in spite of knowing how important support and resistance is to trading, very few traders are able to correctly identify support and resistance levels and fewer still know what to do with them once they find them.
If this has been your plight up until now fear not, as you have in your hands a resource which will not only help you learn to spot support and resistance, but show you how to deal with it as well.
Now you too can have a better understanding of what makes the markets tick and hopefully this will help you become a better, more successful trader in the process.
So if you ever wanted to learn a simpler, more effective way to trade you’ve come to the right place. Sit back, relax and let’s learn to trade using support and resistance.
Erich Senft, B. Comm., CTA
Before we begin
I just wanted to bring a few things to your attention about this manual.
First, the information presented in this course is written from the point of view of a short term position trader. This type of trader is in the market anywhere from a day or two to a week or two but rarely longer. This does not mean however, that this information is irrelevant for other trading time frames, such as day traders or long term position traders. Far from it!
As you will see, support and resistance in trading is universal and not dependent on any particular time frame; however I thought it was important to bring this to your attention so that you could make minor adjustments to suit your own particular trading style where necessary.
Lastly I wanted to mention that this material has been organized so that it is easy to print off of your computer. I realize that some of you will want to have a hard copy of this manual available; therefore the text has been arranged to use as little paper as possible. If your printer has the ability to print on both sides of the page (duplex) you can do that too. It will turn out fine.
Okay, that’s it for the housekeeping. Shall we get to work?
Chapter one - the Big Picture
The first step to understanding support and resistance and good market analysis is the easiest of the steps to do, yet it is surprising how few traders actually do it. The first step to analyzing a market is to determine where the market is relative to where it has been. In other words you need to get a “feel” for where the market is right now. Trying to make trading decisions without doing this first step is equivalent to trading in a vacuum.
When most traders analyze a chart, they begin by devoting the majority of their attention to the daily chart. A few of them might occasionally consult a long term chart out of curiosity without paying too much attention to the information presented therein. Their reasoning is that the information from the daily charts eventually makes up the data on the weekly and monthly charts anyway; therefore the daily chart is where their attention should be.
While it is true that the data on the daily chart does eventually make up the weekly and monthly charts, what these traders fail to realize is that the longer term charts “drive” the short term charts. Gaining a longer term view has a way of smoothing out the fluctuations experienced in the short term to give you a better idea of what is really happening in the marketplace. Therefore it is vital to consider the longer term charts before beginning any analysis.
Consequently the correct way to analyze a market is the exact opposite of what most traders do. Instead of starting with the daily chart and working to the longer term, it is important to begin with the longest term perspective and work back to the shortest. For position traders this is normally means beginning with the monthly chart and working through the weekly to the daily. Day traders on the other hand, might begin with the daily chart and make their way through the 30 minute chart, eventually ending up at the 5 minute chart.
Long Term Charts
There are basically two sources for long term market information: the monthly chart and the weekly chart. Monthly charts condense all the trading activity from the month into a single bar on the chart and normally go back in history anywhere from 10 to 25 years. Similarly weekly charts give a summary of the trading that occurred week by week and will usually go back in history five to ten years.
Important questions to ask when looking at the longer term charts are:
- Given its history, is the market trading at an extreme price, either high or low?
- Which way is the market trending, up, down or sideways?
- Is the market trading near important support or resistance levels?
- Has the market made any recent retracements in trend?
Because they condense so much trading activity into a single bar, monthly and weekly charts are especially effective at highlighting important support and resistance levels.
Likewise the weekly chart in particular is very useful to position traders as it identifies the predominant trend that the daily chart is likely to take. Although every trend will eventually end, the more out of sync the daily chart becomes with the weekly, the more pressure there is on the daily chart to conform and return to the weekly trend.
Now that you have examined the weekly and monthly charts you have a much better idea of where the market is relative to its history. You are now ready to focus your attention on the daily chart, which is the one you will use to make your specific trading decisions.
Just as with the longer term charts, it is important to take in the whole picture when first examining the daily chart. Don’t make the mistake of immediately zooming in on the last few bars, look at the whole chart.
Ask yourself the same questions you did when examining the longer term charts:
- Which way is the market trending?
- Is the overall market trend moving up, down, or is it trapped in a range?
- Is the market trading near contract highs or lows?
- Does it look as though it has made any retracements in trend?
- Do the indicators suggest the market is overbought or oversold?
- Is the market moving together with, or against the trends on the monthly and weekly charts?
Once you have gained an overall “feel” for the market you will be in a much better frame of mind to begin the actual market analysis. Including this one simple step will place you above the majority of losing traders that fail to consider the big picture before making their decisions.
Don’t let the simplicity of this first step fool you. It is important.
"There is nothing that gives you more of a "feel" for the market than "seat time". Nothing." -- Tom Ganley S&P Trader