OK, the stock we are looking at is NuVista Energy Ltd. Why NuVista? No reason, just a random chart I picked. I can trade any stock using support and resistance. As seen clearly from the chart, the green lines are supports, the red ones resistance.
First, trading support and resistance is more for the long term trader than it is for the short term one. Though the latter can also profit from numerous key points of course.
Why would I trade support and resistance? Well for one thing, to help reduce risk.
At least, that is the way I look at it. Why do I say reduce risk? Well, those lines are IT. Support and resistance. Those lines become your trading beacon and will guide you in your decisions. They will harden you as a trader and make you stop falling in love with the stocks you are invested in.
I shouldn’t really have to care whether they have high-grade gold or one of the biggest and most gigantic of gold veins you have ever seen…according to management. I don’t necessarily have to know when they start drilling or anything.
I am now only interested in those lines and in which direction those candles break that line.
That does not mean you shouldn’t let those other things weigh in, just let them weigh in less than you normally would.
Trading support and resistance to me is sometimes even ignoring good news. If that line breaks, exit! That is trading support and resistance to me.
If that means you need to miss out on some of the up rides. Tough luck is what you need to tell yourself. It will end up saving you a whole lot more in the end than it will costing you.
Remember, profits not taken aren’t real profits until they are safe and clear in the kitty. The same goes for losses, a loss is only a loss when taken.
It is always up to oneself to determine a fixed percentage of loss you are willing to incur on each and every single trade. Change it only if market conditions do so provide.
Should you always use this trading technique? Tough question! I’d say no though, to be honest!
That’s not me saying it’s a bad technique, hardly. I just mean, my advice would be take from all the best and combine into the better or at least try to.
Trading on the stock market is about learning by experience. Long term traders will surely during the course of their trading careers have compiled a list of stocks and their own methods to trade each and every one of them. You see, some stocks are better fit to trade on MA then they are support and resistance, or divergence or a combination of some of them or whatnot.
What I’m trying to say is. This is one of many good trading techniques which you should master but not grandmaster in. Spent the time it would take you getting from master to grandmaster Support and Resistance in becoming a master in other trading techniques but learn and practice it nonetheless!
I don’t think I really need to go over the chart and will let the chart do all of the talking. Only important thing to remember is, I exit the stock when support is broken. That is in the beginning of the chart. I enter the stock when I see a resistance being broken. There is a speculative entry and a less risky one. My advice, stick with the less risky ones, these are the ones when the re-test has already happened and the support thus has been tested again so the risk of downside is minimized by a yet not to compute percentage.
Another reason why I didn’t enter the stock where I made the comment about being ‘cheap’, well remember, we are only using support and resistance. At that time there was no mention of a support. At least not to me. I prefer to draw them out over a longer time frame. So, the action in October 2006 is to small for me to consider into the equation. But like I said, that is personal preference.
The fun only starts when you start combining various trading techniques to add on and confirm the support and resistances but that is another lesson.
Trendtrader also did an article about support and resistance. You can read his article here.
YeOldGoldNugget’s links of interest
- New Video: Crude Oil…what does the chart say?
- New Trend TV Video – Applications of Candlestick Charting
- New Video: Steve Jobs, Apple, the iPad, and King Gillette
- New Video: NASDAQ crosses important trend line
- New Video: Is the Dow in trouble?