Having automated stock trading systems can definitely make your trading activities more convenient and efficient. But it doesn’t hurt to learn about resistance and support levels, which are essential concepts in trading and applicable in any market whether it’s the stock market, cryptocurrency or forex.
We have discussed the nature of support and resistance (S&R) and their importance in our previous articles. To briefly summarize, a support is the level where a downtrend is expected to bounce up due to increasing demand or buying interest, while a resistance is where an uptrend is expected to swing to a downtrend. There’s also a possibility of the price pushing beyond the S&R and will either be a breakout if the price movement continues or a false breakout if it goes back to the S&R zone.
You shouldn’t rely solely on S&R
The S&R is one of the basic concepts in trading that can serve as a basis for more complicated technical analysis. Plotting the line may seem like a no-brainer, and thus, it’s no surprise that many traders, especially amateur ones, tend to heavily base their decisions solely on S&R. However, there’s actually more to it than meets the eye. For one, you need to understand market psychology to get a feel of a possible breakout and do your trades with greater success and efficiency.
As what we mentioned in our previous articles, the S&R levels should only be considered as a guide and an indication that something interesting is happening.
Any random line can be perceived as S&R
Amateur traders may waste some time meticulously plotting their S&R in an effort to find the perfect horizontal line that hits as many highs or lows as possible. The truth is, however, even if you randomly draw horizontal lines on the chart with your eyes closed, you’ll discover that any line may hit at least two swings at some points.
Not all S&R levels are “good”
Even if you find a pair of resistance and support lines where the price action consistently reverses many times within a timeframe, this doesn’t mean that they’re “good” S&R levels. While buying and selling as the price fluctuates within the channel or zone can provide you with profit, you could miss out on lucrative opportunities in case of breakouts, which you didn’t expect or have no idea of identifying.
Having forex, cryptocurrency or stock trading systems can essentially save you the hassle of manually finding your S&R. Especially those with Heatseeker technology, the system can automatically track thousands of prices every day and identify the trends that you’ll find rewarding.
The number of times price rejected doesn’t indicate a “strong” S&R
Many amateur traders, and even long-time ones with insufficient understanding of the market, will think that the more frequently the price revisited and rejected the S&R, the stronger the level. On the contrary, frequent hits on the S&R will ultimately break the level because stop loss orders accumulate in increasing numbers each time the price revisits the level. Eventually, the S&R breaks.
Historical S&R may not apply to current times
When the swings where your S&R is based happened a long time ago and the price is now about to revisit the level, it’s tempting to take a trade. But bear in mind that every moment is unique in the market, and thus, you should check if the same traders who reversed the trend in the past are still in the game. You should also consider whether the market conditions and context of the price action are the same as before.
If the prices in the market you’re following have been historically falling, this may indicate that you should be shorting. Monster Short is a valuable tool for traders who want to make the most out of bearish markets through short selling. The system utilizes the Heatseeker technology which automatically tracks at least 22,000 stocks on a daily basis in order to identify the trend that will provide the most lucrative opportunity based on your trading style. The system also sends you real-time entry and exit alerts via SMS and email, and thus, you can be sure of taking immediate action.
False breakouts can trap traders
Without considering or understanding trading volume, such as those indicated in candlestick charts, you won’t have any idea why the price breaks through a defined support or resistance line. Worse, you’re clueless of how the price moves after that. For example, a price action within a zone that suddenly rises very steeply and breaks through the resistance but there’s no change in the trading volume prior to the rise may indicate there’s panic buying especially if the volume increases right after the new highest high.
Panic, anger, excitement and other emotions can rule over your trading decisions when there’s a breakout, and you could end up making the trade at the first sign of a swing beyond the S&R line. But doing so potentially traps you especially when the price quickly goes back to the zone i.e. there’s a false breakout. You’ll have a hard time exiting your trade.
Save yourself from the misery of getting trapped in false breakouts by utilizing dependable, feature-packed automated stock trading systems. Many of them can analyze price action and send you real-time alerts when a trend becomes profitable to you.
Bottom Line: There’s no rigid system
Don’t get stuck in flawlessly making your S&R lines with as many swings as possible or following through financial gurus’ rigid “steps” or instructions. In the end, your efforts won’t really matter if you don’t have a clear understanding of how S&R should be used and analyzed. Remember that every moment is unique to itself that requires a unique approach. Knowing the rigid steps is helpful though, as you will have an idea which ones to use and how to use them in the current moment.
For a more convenient trading experience with greater efficiency and accuracy, make sure to use reliable forex, crypto or stock trading systems. They generally do the complex computation and tracking for you so that all you have to do is make the decision once you’re notified of lucrative opportunities based on your trading style.
Get in touch with us here at Monster Trading Systems to learn more.