The trick is to keep it very simple.
by Makoy Velasco, Certified Securities Representative
Any views or opinions represented in this blog are personal and belong solely to the columnist and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.
It’s a myth that the more complicated the analysis is, the better the results. Unfortunately, a lot of traders think that way.
Keeping things simple is a key in succeeding in stock market trading. The simpler things are done, the better.
Having been in the industry for quite some time already, I’ve observed that most people who are really doing well and successful
in trading are those who have simple systems while most people who struggle are those who tend to complicate things (knowingly or unknowingly).
The thing is, how would we know if we’re keeping things simple or unknowingly complicating things? Simple. If you stick to the basics then you are keeping things simple. One of the simplest yet very effective ways of trading is using ONLY support and resistance. Though using these two WON’T guarantee returns all the time, they can instantly turn the odds in your favor.
Theory tells us that support refers to levels where either buyers are abundant or sellers are scarce. Resistance on the other hand, refers to levels where sellers dominate and there is a lack of buyers.
Translating it, support levels are where price levels bounce back going up while resistance levels are where prices bounce going back down. The rise and fall of prices when support and resistance levels are hit or at least the price gets near these levels are caused by the shift of supply and demand, buyers dominating at support and sellers dominating at resistance.
Support and resistance levels can be identified by drawing a horizontal line hitting either at least two lows (support) or at least two highs (resistance).
So what to do with support and resistance? Buy when prices are at or closest to support levels and sell when prices are getting closer or ideally at their resistance levels.
Here are other examples of simply buying at support and selling at resistance.
Buying at support and selling at resistance is a very simple yet very effective way of trading. Sticking to this strategy can result in enormous gains.
Support and resistance levels though don’t indicate anything about momentum and liquidity of the stock (amongst others), which are also as equally important as the other tools in trading. However, both can instantly increase the odds of making money.
Support and resistance levels aren’t fail-proof strategies. There are times wherein the price drops below the support while there are also times wherein the price rallies past the resistance. However, keep in mind that as a trader, your objective is to make money by taking advantage of price movements. If the price went past the resistance after you sold, let it be and be happy with your gains. Find another stock that is trading near its support. Be consistent.
The concept of support and resistance is one of the most basic concepts in trading. Master it and it will reward you handsomely.