Unlike gambling, where the odds are in the house's favor, trading stocks, futures and forex by first determining support and resistance heavily puts the odds of success in the hands of the trader.
The price chart is the window into market price behavior. By examining what prices have been doing in the past, we can extract a lot of information as to what it will likely do in the near future.
Unlike gambling where risk is created out of thin air and the house has the advantage, trading comes with its own risk built-in and the advantage goes to the one who does his or her homework before taking a trade.
With the opportunity to put the odds in your favor, most traders relinquish the chance to tilt probability for self-gain and take additional risks by following tips, rumors, here-say, TV gurus and talking-heads, as well as putting too much stock into government reports and announcements.
Time and time again, the price charts have clearly shown that there are certain "price points" where market tops and bottoms have a high probability of occurring. It is these "tops and bottoms" where the best trades are executed with the lowest risk possible.
While there are techniques to solve the "when" equation for the formation of these market tops and bottoms, and that is what I do professionally for my clients, traders should also try to solve the "what price" equation, which is not very difficult to do.
As already mentioned above, price charts tell us what the market has done so far up to now. In addition, we can examine the past and derive excellent approximations and sometimes precise price points that have a high probability of stopping price dead in its tracks and causing price to change direction (form a top or bottom).
One approach is to simply note what prices in the past formed previous tops and bottoms. Often, prices that turned market direction around in the past continue to act as support and resistance to future prices. Evidence of this is the formation of double and triple tops and bottoms that most traders are aware exist on price charts.
There are several other techniques available for solving price support and resistance. There are DYNAMIC ratio and STATIC ratio (common) techniques, for example, that have proven extremely useful for this purpose.
There is not enough room in this article to go into all the math for this, but I have done one better for you. A software program that was once a retail product in the late 1990's called The Trading Calculators (TTC) program is now available for download at no cost. This program will allow you to enter or load in price data and solve for support and resistance using different effective methods. This program is available at (http://www.amazingaccuracy.com/TTC251.htm) or from a link at the main AmazingAccuracy.com website.
If you do not take a few minutes to solve for support and resistance before taking a trade in Stocks, Futures or Forex, you are taking unnecessary risks, limiting your profit potential, and not putting the odds on your side.
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