Hy guys, hi from Andrea Unger!
Support and resistance do they work?
Well, I think most of you if not everybody knows what support and resistance lines are in trading, those are levels on a chart, levels of price, where a move is supposed to stop or even to reverse, okay?
This is theory and the question is: do they really work?
If I start plotting support and resistance lines on my chart do I get the information I need to trade?
Well, many people claim that these lines do not work at all, they are only maybe a psychological help or something that works afterward and they give examples.
For example, in the stock market if you plot lines and you have a stock that paid dividends on a regular basis, all the prices are most likely back adjusted by the data provider so that there are levels which did not exist in practice, because those levels have been “invented”, recalculated, after dividend was paid.
So it’s a nonsense to say support at 3.35 because of this 3.35 changes every while when a dividend was paid.
Futures have an expiry and there are normally back adjusted prices plot on your chart.
These prices again don’t represent exactly what the prices were when we traded it, they represent levels that have been back adjusted just “canceling” let’s say or adjusting the gaps between one expiration and the other.
Crude oil is one classical example in having prices in a great rally and now you’ll see on the charts prices which are completely different from those which were actually traded during that uptrend.
I think it was 2011 but please don’t take this as granted.
So actually to say that there is a resistance or support at 75 for example because five years ago price is there demonstrated to stop over and over again, according to many analysts does not represent any truth because 75 was not 75 when the prices were stopping.
In everything, there are truths and some let’s say different versions of the truth.
Also, in this case, I can tell you, that these lines do work actually.
So if you want to work with support and resistance plotted on your chart, you can do it because they do produce a positive effect on your analysis on how to trade.
Price action guys normally work on monthly charts plot their lines, then go down to weekly plot new lines, and up daily and so on.
The most important are those seen on the monthly, then on weekly and so on.
They trade these levels that have obviously a kind of analysis based on the levels.
The point is that you cannot obviously pretend that one specific level works at its specific price.
One level is per definition “a number ” so 1320 for example.
So obviously you cannot expect that a move will exactly stop at 1320.
Some guys on Facebook claim that they can get a tick precision with their analysis, which does not really work, so obviously that level can work at 1325, 1289, I mean it can work in an area around that level, but it will never produce a reaction exactly at that level.
So if you want to use these lines looking at the exact price you probably don’t get any result doing so.
The areas around these can produce an effect and I can tell you for the experience that this effect is stronger when prices arrive from far away.
So if for example we have support here and prices fall very quickly from much above, then this support is likely to act as a support, is likely to create a barrier to the movement of these falling prices, the same if we look at the rising market and we consider resistance.
While if there is a stagnation of prices around the level, then it is more likely that this level will be broken and there will be a breakout through the level to the downside or the upside depending which direction markets are trading.
This is pretty obvious, the stronger the fall, more likely is to stop somewhere, but it happens normally where there is valid support, valid which you plot on your chart, monthly, weekly, daily and so on.
So this is something that you should always consider, when there is a sudden move, a strong move, it’s likely to act as you have supposed, I mean as you think it should, if there is a choppy move around the levels then, these level miss a bit of the strength, this is important.
On automated trading, on the contrary, I don’t like this very much, simply because it’s pretty much difficult to code them well.
Now you can say: “You’re stupid guy…” yeah I’m a stupid guy but to tell the truth also the computer is stupid and when you program into a computer a concept as a support area, not a precise level, as I said, in that area, then you have to define what that area is and how wide this area should be and a lot of information that It’s not easy to put together.
So you have to consider that it’s possible to program.
I mean, I am not saying it’s impossible, but it requires a number of information and script lines that I don’t like so I don’t use it and I think that you can get a much higher benefit in programming our kind of concepts rather than a pure super resistance trading on your trading systems that’s it.
So guys, I mean this is just introduction on support and resistance, if you want to further discuss this and if you have a question to ask, please put your comments here below the video because I’m open to discussion about this because I think it’s a very interesting topic, so I stop here, for now, I gave you my point of view about support or resistance.
We keep in touch and we’ll see you next time.
Ciao from Andrea Unger.