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Support and Resistance

I received a couple of emails asking whether or not I believe in support and resistance. In fact, one subscriber said if I didn't believe in support and resistance, then I couldn't possibly believe in trend! Why? Because in all cases the situation ends.

Here's what I believe: The trend is your friend until the end. The swing is the thing until it goes "ding."

What is support and what is resistance? Are those not simply convenient terms to describe an area of fair value? Prices bounce off of those areas of so-called support and they bounce off of areas of so-called resistance. Why? Because temporarily no one is willing to sell for less than "support" and no one is willing to pay more than "resistance." "Support" and "resistance" are equally as mythological as "trend." Why do I say that?

Every market is in a trading range between the highest price it ever achieved (resistance) and the lowest price it ever reached (support). So what is all that stuff in-between? Can we call the junk in between "support" and "resistance?" What are trends and swings? Are they not simply connectors connecting the temporary areas of fair value? So-called support areas fail to support, are broken, and are connected to a lower fair value area by a swing or trend. So-called resistance areas fail to resist, are broken, and are connected to a higher fair value area by a swing or trend.

Trend lines and swing lines are also broken, and lead to areas of fair value, where prices chop sideways for awhile. So, what's the bottom line of all this clap-trap about support, resistance, swings, and trends?

As far as I'm concerned, the only thing that counts is whether or not you have found a way to make money from any of this. If you are able to make money when prices bounce off of so-called support and resistance, then congratulations, you have probably made it as a trader. If you have found a way to make money from trends or swings, or have found a way to make money from broken trend or swing lines, then you deserve praise and are well on your way, or have already succeeded as a trader. The rest is just a mincing of words — semantics. Support, resistance, trend, swing — all are nothing more than ways to identify what prices appear to be doing. Any one of them can see the beginning of the end with the next price bar. If you tell me prices are at support, I will probably know what you mean. That is all the word "support" is good for! If you tell me prices are at "resistance," I will probably know what you mean. The same thing is true for the words "trend" and "swing" — I will probably know what you mean. We will have found a common way to communicate to one another as to the condition and location of prices.

Do I believe in support, resistance, trends, and swings? The answer is no! I do not believe in any of it. What I do believe, most of the time, are the numbers on the statement of my trading account. If they are getting bigger, then I am winning.

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Sunday, 14 July 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.