Online Trading Academy Article of the Week
by Sam Evans, Online Trading Academy
Coming up with the title and topic of this week's article was a simple task for me this time around, as it was directly inspired by a question that I received from a regular reader of these articles. As you know I do like to respond to my readers e-mails as often as I can and when a great topic is brought up during those communications, I always like to address it directly to a wider audience, as I'm sure that the question is not exclusive to just one person alone.
Earlier this week I was e-mailed and asked why I very rarely talk about the terms “support and resistance.” The writer asked me how I could ignore such huge analysis techniques in my articles because support and resistance are so well known across-the-board and in multiple formats of technical analysis education. This gave me the perfect opportunity to address this and answer the question directly.
The beauty of the Online Trading Academy patented core strategy is in its simplicity and ease of execution. With the strategy itself coming directly from the behavioral patterns of the largest institutions and banks who dominate today's markets, our instructors and students alike, tend to focus on their trading opportunities from the perspective of what the most successful professional traders are using to carry out their own analysis techniques. While there are multiple streams of strategies and theories about how and why prices move in the manner they do, this doesn't always mean that they are necessarily the correct ones. I will never be surprised by how many people assume that successful trading in the currency markets and also the other asset classes is a highly complex practice. After all, we are making it our business to predict the future I guess and so that dynamic alone tends to raise questions of how challenging trading can be.
Firstly, I would like to shut up all illusions before we go any further: nobody knows what is going to happen next in any market. In fact one of the most important lessons that I have ever learned early in my career was to approach the market every day with the assumption that I really didn't know what was i going to come next. This helped to alleviate any biases or subjective analysis leaving me unemotional and objective in the process of trading. With this taken into account, it should be obvious to us then, that the only thing that really matters is price and why it moves in the manner in which it does. Prices change and markets go up and down purely as a result of the ongoing changes in supply and demand at any given time. If prices rally higher, this is because there were more willing buyers than sellers, or put simply, because demand was greater than supply. When we see prices fall we know that supply was now greater than demand due to the undeniable fact that there were more willing sellers than buyers at the point of the directional price change.
With these basic and fundamental lessons taken into account, let's now address the question of the role of support and resistance and how effective it can be when used as an analysis technique in our trading. Pick up any textbook or look at any website about conventional technical analysis and you will no doubt find A number of simple rules around support and resistance. They are as follows:
Trust me, I have scoured a wealth of trading educational content over the years in which I've been active in the markets and without a shadow of doubt, the rules above are pretty much universal. Now, I am not saying in any way that using these rules is incorrect or that they don't work. Personally I have seen many times when these support and resistance rules have proven their effectiveness. However, there must be a solid set of accompanying rules to go with these rules, so as to make them easier to implement and increase their effectiveness. Without a number of filters to accompany these rules, one can become easily confused and fall into the danger of overtrading. Let's take a look at an example below to show you what I mean:
