Is support and resistance a trap?

Published by Sharekhan Education | February 21, 2022

Is support and resistance a trap?

The most common terminology on Dalal Street is support and resistance. It is the topic of every technical analyst’s discussion. The very simple rule for trading support and resistance is go long near or at support level and go short near or at the resistance level. In general price is expected to reverse from those levels. During the years that I have been engaged in the trading game, I have researched a lot of trading educational content, and the rules are almost common. That doesn’t mean, adopting these rules is a poor decision or that they don’t work. It is actually my observation that these rules of support and resistance have proven useful in numerous examples. In order to make them easier to implement and more effective, there must be complementing set of rules. A trader can get trapped when rules are followed in isolation.

Here is an example that illustrates what I’m trying to say;

Several support and resistance lines are drawn in the examples, and this leads to several trading opportunities. Having applied the support and resistance rules from earlier, where should we buy or sell? That makes us scratch our head. Another confusion that a lot of traders run into is which support and resistance to consider for execution. When faced with so many options, it is nearly impossible to remain objective. Here we have so many trading opportunities but lower probability and high risk. Instead, if we apply basic understanding of demand and supply, if price rises strongly from a particular price point we have more buyers than sellers which creates more demand and when price drops strongly from a particular price point we have more sellers than buyers that creates supply. Institutions such as banks, mutual funds, hedge funds have the capacity to move the market. Let us look at example of demand and supply on a chart. 

Clarity is more by using demand and supply, though we may have less trading opportunities but with higher probability and lower risk this makes it a better proposition. It is good to wait and watch for what institutions are doing before taking any action. Institutions create the levels of demand and supply, so traders must learn to identify the buy and sell footprints on the chart. Price chart contains all the information if we know what we are looking for, institutions always wait for competitive price and show their footprints on the chart. To be successful in trading, we just need to follow these footprints.

When it comes to trading it is not about quantity, it is always about quality.

To conclude:

A professional trader doesn’t play with common rules, they have their own set of rules and most important a trading plan. Choice is yours if you want to play along with professional trader or against them.

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