Do support and resistance levels strategies work in trading?
These are two of the best known trading techniques to use for Technical Analysis whether for long-term investing or short-term trading, although it is more popular in the latter.
The definition of support and resistance makes reference to the points in the chart where there are supposedly inflexion points, after certain maximum or minimum prices in the past.
As those maximum and minimum prices sort of repeat themselves, without being surpassed substantially, there could be that we get a formation where the prices seem in range.
Sincerely, trading supports and resistances by themselves we will not be able to win in the short or medium term. However they can give us some interesting point of view of when it is better to trade or not in the long-term movements of the market.
Unfortunately this “indicators” are not valid for the day trading world.
People who do day trading try to look at the supports and resistances of last season or even the same season.
You can see it in uncountable videos throughout the internet of supposedly day trading experts.
Those type of analysis are very good when you are doing videos or webinars, but trust me, they are not very good for attaining long-term results. This is well known among those who have bought courses related to become “professional day traders”. Well, they have been professionally scammed to tell the truth.
Something different occurs when you look to the long-term charts and want to establish the inflexion points.
This big inflexion points we can find in similar points where other indicators like RSI can give us acceptable long-term signals.
It is there, in the long-term moves, where the money needs to be searched.
This is also valid for long-term investing, as investing in the most negative moments of the bear markets is when we can expect to have better returns for the long-term.
For instance, let us see a clear example of “trading”, or “investing”, depending on what you think of those terms.
We can see the Apple example.
As you can see, Apple had a terrible bear market in 2008, along the general market.
As we can see in the charts, in 2009 we had some sort of picture with “regional” maximum prices for a while at 14,50 dollars.
The stock traded for a while between 12 and 14.
Those prices therefore formed what we could have considered support and resistance, being our reference for the future.
The thing to do here would be to buy Apple stock when it went above 14 dollars.
In April of 2009 the price went beyond 14 not to go back anymore.
Actually, if you see the chart the “buy signal” is approximately similar to a 150 Moving Average indicator, one that I have already talked in the past.
This, even though seems arbitrary, is something that repeats itself quite often, especially in stocks.
This is so because stocks are the most efficient market a trader or investor can use.
The rest of the markets, including Forex or commodities are much more complex.
Support resistance Forex
In a short-term example using a 30 EURUSD chart we can see that there are many support and resistances.
As we can see there will be a lot more confusion in the short-term.
In this case we find supports in 1.1210 and 1.1190 but we do not know how long they will last.
What is worst, the asset can give us this kind of supports and resistances for many days.
The result, finally, will be operating in excess and going bankrupt because we will have lost so many trades looking for so-called entry points.
It is true that we can find a short-term chart with significant price movements, but it is very likely that we will encounter erratic movements quite often, very far from the more fundamental movements that we find in long-term charts.
5 and 15 minutes, and 1 hour charts will give us more headaches than anything else.
The quantity of false support and resistance signals there is so big that it is not worth trying there.
However, there are those dreamers who spend years thinking that they can decipher that kind of market with those indicators.
Unfortunately, short-term behaviour usually ends up in the total loss of our capital.
Until here I have tried to talk about what it would be to try to beat the market trying to “break” the support and resistances, but not doing the reverse: buying supports and selling resistances.
This last strategy would be good in lateral markets.
slippages are of the utmost importance.
It is possible that in some asset during some time, like months or even some years, we could get some good results with this kind of strategy, but even so, we will not find a miracle system to beat the market forever.
The message is clear: try to avoid this kind of support and resistance in short-term charts because it is the worst thing you can do as a trader.
The best thing you can do is to use it as a long-term indicator.
The longer the time frame, the better for you.