Do You Really Need Support & Resistance?
Price Action Lesson #6
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“To a man with a hammer, everything looks like a nail”
To a trader looking for an entry, everything will look like a higher low or lower high.
Besides being careful with the three white soldiers/three black crows, so far we’ve learned that we, as traders, have higher chances of success if we buy after a higher short-term low or sell after a lower short-term high.
But can we trade all situations where that condition exits?
That can be dangerous because not all short-term lows or highs are made equal. Generally, when the retracement starts, we don’t know where it will stop. Look at the next chart.
Can you tell where the correction will stop? As you can see, the orange rectangle is showing quite a big area where it might end. Or it might not be a correction at all. We might witness, how the previous trend (down in this example) is resuming itself and the price will go below the Lower Low point.
Since we can not guess that what we need to do is to read the chart and find can this be the bottom (top) we’ve been looking for?
So to avoid a lot of losing trades chasing something that hasn’t happened, we have to be very selective. We do that by following a proven list of criteria which, in the past, led to a formation of a bottom. If one bottom doesn’t check enough criteria, we do not consider it as valid.
What we are doing is adding extra levels of security checks. We are buying after this, which happens after this and after this and that has to be present.
A few lessons will be devoted to this topic. For now, let’s begin with the most obvious, something we’ve already touched upon in a previous lesson but which require more attention.
Look again at the chart above and I want you to quickly answer one question. Say out loud the first thing that comes on your mind.
Where will the red line (the correction) stop?
I don’t know you personally. Well, with some of you, we have known each other for years. Others I had the pleasure to meet and discussed trades online, btw thank you for sending the feedback about the book and this course. But as it comes to the majority, I don’t know how you trade.
But I can make a bet that most of you answered: “the red line will stop when it reaches support or Fibonacci level”.
How do I know that? Because we were all taught the same way. No matter where we live in this world, when we start with trading, somebody will teach us how important support and resistance are. This is true for everybody, and that is why we are so often victims of a stop-loss hunting.
I won’t say that support and resistances don’t work. It is notoriously hard to find the right line, out hundreds possible but they do work. Unfortunately, not in the way we’ve been told.
Anyway, I have good news for you. With the HL and LH concept, we don’t need support and resistances. It is because the first top or bottom, the ultimate high/low, has already hit such level.
How do I know that? If we are looking for where the second top/bottom will be, that means there is one top/bottom already in place. And this is where the support/resistance lays.
Check this picture:
It shows how real support was made.
And more market secrets for you. Most traders think of the market in a very limited way. They see it only black and white like there are big guys who are robbing the small traders. But the beauty of trading is that it is a very colourful business. This is a really large topic to discuss, but for now, you must realize that different market participants are buying/selling in different ways.
Some are buying not because of some technical stuff but because of fundamental value. The price has reached a point where that particular instrument is considered, by some large players, as undervalued. And they will not sell more and/or will start to accumulate. That could be Warren Buffett, the Commercials if you are familiar with the COT reports and so on.
This is how the real support is being formed (green line)!
Then what is happening on the higher short-term low should be considered as the first test will those large players add more to their positions and will the price action trigger other types of players. In other words:
Will somebody buy more at higher prices/ sell more at lower prices?
So supports and resistances will not help us a lot with finding the lower high or higher low. Then what will?
It is coming in the next lessons.
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