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Demystifying Support & Resistance

Why do stocks bounce when they reach yesterday’s lowest price?

Why do they reverse when they hit last week’s highest price?

Why do you see the same levels repeating over and over again?

I’m talking, of course, about support & resistance. One of the most fundamental and yet very misunderstood concepts of trading.

Open any book on trading and I guarantee you there is a chapter dedicated to support & resistance. If there isn’t then it’s not a very good book.

It is a concept that is so basic and fundamental and yet so many traders have no idea why these important levels form or why they are important. Newer traders have such an intense desire to make money that they will take everything at face value as long as some experts tell them it works and never question why it works.

So I will try to explain why support and resistance levels form on your chart and how to trade them effectively and I’ll try to do that in as few words as possible.

The Market Is An Auction

The stock market or any other market we trade is nothing more than a continuous auction. An auction with no end.

It is basically a large group of people who buy and sell to each other, all the time.

The price of a stock climbs higher simply because buyers are willing to pay higher and higher prices and it goes lower because buyers are not willing to pay higher prices so the sellers need to lower their offers.

An uptrending stock will continue moving higher until the buyers decide that the prices they are paying are too high. At that point, the supply (sellers) will overwhelm the demand (buyers) so naturally, prices will fall like shown on the screenshot below.

The price will keep falling until it finds enough demand to overwhelm the supply and at that point, the trend will reverse again to the upside.

Now here’s where the resistance of this auction process comes.

The market has memory. It remembers what has happened in the past, especially the recent past and that’s because the market is composed of people and people, of course, have memories!

As the price reaches the level that nobody wanted to buy previously it is very likely that those groups of traders will not want to buy this time around either. If that happens, the price will reverse at exactly the same area it did last time. And that is what we call a resistance level.

The same is true, of course, in the opposite sense. As the price is falling it will keep falling until people think it’s cheap enough to buy. If it bounces at that level and then at a later stage returns to it then it is very likely that people will once again think that it is low enough to buy. That would be support.

You see, there’s nothing mystical about prices reversing from the same price it did in the past. It isn’t algos or mathematics or anything like that. It’s just people.

If you went to the store and you wanted to buy apples and you saw that they were on sale you would buy. If you went back the next week and saw that they were on sale again the probably you would buy again.

In that market, the sale price would be support. If the store owner increased the price beyond the regular selling price of apples then maybe you wouldn’t buy them and instead wait for another sale. If you went in the store the next week and saw the price was still too high then it’s likely you wouldn’t buy this time around either. That high price would be resistance.

So you see, the stock market is not very different than the farmer’s market.

How do you find these important support and resistance levels? Always look left on your chart. Support is where the price has bounced from one or more times in the past. Resistance is just the opposite.

If you just remember that traders are likely to repeat what they did in the past that made them money and trade accordingly then you will be on the right path.

– Jacob

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TrendTraderPRO Review. Is It Worth It?

A while ago I wrote a post on the tools I use for my trading. For some reason, it seems Google liked that article because I’ve been getting a lot of visitors who are finding through the search engine.

I have also been getting a lot of private messages from readers who are curious about a particular tool I mentioned in that article as my main trading strategy. I’m talking, of course, about TrendTraderPRO.

It seems that many people have discovered that indicator through my blog and they have been asking me for a long time how exactly I use it. I was confused at first because I think it is pretty obvious but I thought I’d write a post to answer some questions and hopefully help some people.

Trend Trader PRO (TTP for short) is a suite of indicators for the thinkorswim platform and I was introduced to it through a close friend. At that point, I was trading, rather successfully (mostly commodities) for a little over 4 years so I didn’t think I needed to pay for any fancy tools. I was doing just fine on my own but because I trust my friend’s judgment very much I went ahead and bought a copy of my own.

TrendTraderPRO is, essentially, a trend following strategy of buying when price starts going higher and selling when it starts going lower. What was most impressive was the set of tools that they had devised to make trading this way as simple and profitable as possible.

They had essentially condensed a pro trader’s years of hard-learned trading techniques into a simple tool that any newbie could follow and trade like a pro. A PRO Trend Trader. You get it?

How Does It Work?

The indicator is fairly easy to understand. Basically what it does is it calculates the average open, high, low, and close prices of each bar over a certain period. For example, if you are looking at a 5 min chart you can set up Trend Trader Pro to a period of 20 and it will calculate the average of the 20 previous bars.

Based on the calculation it will determine whether the price is generally going up or down and it will show it graphically on your chart as a serious of smooth hollow uptrending bars or filled downtrending bars.

That’s all nice but the real power of it lies in its ability to detect a shift in direction. Take a look at the 1 hour chart of Boeing (BA) below.

You see the actual price as the thin, jumpy line and TrendTraderPRO as the smooth green and red bars.

The idea is that you buy when the color of TTP changes from red to green and an up arrow appears and you sell only when the color changes to red and a down arrow appears.

As the price is generally moving upwards, TTP remains green, despite the ups and downs of the actual price. So following TTP, you would go long and stay long until you get an opposite arrow (pointing down) and the change in color (red).

So in essence, it helps you trade with the trend. It handles the actual analysis of whether the price is generally going up or down and gives you a heads up if it is starting to head the other way.

Is It Worth It?

I became of fan of TrendTraderPRO since I was first introduced to it. I was drawn to it because of its simplicity but I continued using it over the years because of its profitability.

Lots of indicators and tools look simple enough in hindsight and in theory but perform miserably in real market conditions.

But no TrendTraderPRO. Because it has been designed as an actual trading strategy and because it follows the basic law of every market (buy low, sell high and always go with the trend) I use it to trade profitably with it almost daily.

Is it worth it for me? Absolutely.

Is it worth it for you? It depends.

I find that TrendTraderPRO is fantastic at allowing beginners to start making money trading right from the start. As opposed to other systems and strategies that take years to learn and get good at, TrendTraderPRO offers a working system that even someone brand new to trading can start using and profiting from right away.

It is ideal for beginners, struggling traders, or just people who don’t really want to spend years and years learning to trade before they can make money.

However, if you are already a profitable trader and you can already trend trade on your own then perhaps you don’t really need TrendTraderPRO to hold your hand and tell you when to buy and when to sell.

You might say, hold on Jacob, I thought you are a professional trader. Why are you using it then?

Because I’m lazy! I’ve been a trader all my life and I paid my dues to the market. Yes, I love the thrill of solving the puzzle but doing it daily for 30 years takes its toll.

I have a playbook of strategies that I use and work for me but most of them require a lot of work, analysis, and planning before each trade. With TrendTraderPRO I just slap it onto my chart and wait for an entry signal to enter a trader and an exit signal to exit. I take my money and call it a day.

Some days I like to trade my own strategies and can spend hours in front of my charts without even noticing the time. Other days I like to focus on other things so I have TrendTraderPRO running in the background and only trade when I get a sound alert.

What it allows me to do, in essence, is make money even on my lazy days so why wouldn’t I use it? Would you say no to making money while being lazy? I don’t think so.

So this is my “review” although I don’t think I did a very good job at actually reviewing it. This was just a brief overview of how I use it.

I know that TTP has added more tools to the arsenal now like the TimeHeatmap which does multiframe analysis and other ones but I haven’t really gotten around to try them yet. I will update this post when I do.

In conclusion: it’s simple, it works, it’s perfect if you’re lazy but you like money.

You can learn more about TrendTraderPRO on their website, Twitter and Facebook pages.

– Jacob

UPDATE OCT. 2, 2020 —

I tried out the TimeHeatmap tool that TTP released and I’m impressed. It does boost my win rate by a lot. What this tool does is it adds the color of TrendTraderPRO on higher time frames as a sort of heatmap under the chart.

When all the lower TimeHeatmaps are green we ignore the short (sell) signals and only take the buy signals. A brilliant way to filter out a lot of losing trades.

So in essence, you only want to be buying when all the different timeframes have an uptrending TTP. On the screenshot above you see why. Almost all long TrendTraderPRO signals were profitable but most short signals were breakeven and small loss trades.

By trading in the direction of the higher timeframe trend, you are stacking the odds in your favor.

You could do this multi-timeframe analysis on your own by switching back and forth between timeframes but TimeHeatmap neatly displays all of them much better on the lower part of your chart.