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Support and Resistance:Вр the MAC

Perhaps two of the oldest, most well known, and most time-tested ideas in stock and futures trading are support and resistance. As the names imply, support and resistance are specific price areas or price levels which either support prices on declines in up trends or which resist prices on rallies in down trends. In an up trend, short-term and day traders will attempt to buy at support or at levels of support. In a down trend, short-term and day traders will attempt to sell at resistance levels or in resistance areas.

The concept makes a great deal of sense. No matter how complex or intricate methods of market analysis and trading systems become through the years, ideas of support and resistance have been pervasive and enduring. The only problem with these ideas is that they require a reasonably objective method for determining support and resistance in order that trades may be entered based on these ideas. If support and resistance cannot be determined, then you cannot define concise levels or areas in which to establish and/or exit positions. Therefore, it behooves traders as well as investors to develop effective strategies and technical methodologies for calculating or determining support and resistance levels.

For many years such levels have been determined using a wide range of tools such as support and resistance trend lines, various chart formaВэtions, Gann angles, ratio retracements, Fibonnaci numbers, the golden mean constant, point and figure charts, and others too numerous to mention. Many arcane methods have been employed in efforts to deterВэmine support and resistance, some successful at times, others successful frequently, and all too many unsuccessful a vast majority of the time.

Regardless of the fads in market timing methods which have occurred in the futures markets since the 1950s, ideas of support and resistance have endured, and with good reason. The simple fact of the matter is, that if calculated correctly, they work. It is the purpose of this chapter to explain and illustrate for you my ideas of support and resistance, in particular as they pertain to the day trader.

The day trader is in an advantageous position when it comes to the use of support and resistance levels, inasmuch as the day trader's relaВэtionship with the market ends when the day is over. Therefore, a bad decision or a bad position which was entered based on expectations of support or resistance will not return the next day to haunt the trader. As I have said many times in this book, the single greatest benefit of day trading is to force exit of positions by the end of the day. A day trader who does not do so is not a day trader and will, of course, suffer the consequences of riding positions beyond their ideal exit.

Determining support and resistance levels is somewhat different for the day trader than it is for the position trader. This is because support and resistance levels for the day trader must be closer to the current market price than they are for the long-term or position trader. Markets can only drop so far in one day (in most cases), and consequently the determinaВэtion of support and resistance levels by the day trader must be realistic in terms of what can be expected. This does not mean that the day tradВэer must "chase the markets." It does, however, mean that day traders must be willing to use realistic technical support and resistance levels in order to establish their positions.

As I mentioned earlier, there have been many attempts through the years to develop methods which will define support and resistance levВэels as precisely as possible. I wouldn't be surprised if there are as many traders as there are techniques. However, I have developed a technique which has shown itself to be extremely valuable and highly specific. Although this technique was originally developed for use in long-term trading, I have found it to be applicable to short-term and day trading.