In this issue:
Main Article
Importance of Understanding Support & Resistance Levels
Contributed by Dr. John Keppler
Trending & Non-Trending Markets
If we take a close look at any price chart of a liquid and active financial instrument, we will immediately notice that prices usually move in a series of waves or peaks and valleys on the chart.
The direction of these consecutive peaks and valleys provide us with a lot of valuable information about price action and market sentiment. They actually help us to determine the direction of a trend and identify key levels of support and resistance. These valleys and peaks create trading opportunities for traders to enter or get out of trades. Professional traders always like to buy at support and sell at resistance, since these trades will usually have a much higher probability of success.
To help us in understanding theses valleys and peaks, traders need to always keep in mind that an uptrend is defined by a series of consecutive higher peaks or higher highs and higher lows. A down trend, on the other hand, is established when prices follow a sequence of lower highs and lower lows.
In a non-trending market prices stay within a sideways range, we tend to see prices making equal highs and equal lows. The highs and lows are not always at the exact point, but they are usually close to one another. When this occurs in the market, prices are usually consolidating prior to a move. There is no directional conviction in the market when prices become range bound in a sideways market. It is a period of uncertainty; many traders take a wait and see approach to the market.
Support & Resistance
The valleys or lower pivots help us in identifying the support levels, while the peaks highlight price resistance points. A price support point or level is a place where buying interest is sufficiently strong to overcome selling pressure. As a result, prices hold at this level and eventually start to rise. Consequently, they provide great buying opportunities. On the other hand resistance points are the exact opposite of support, they represent price levels where sellers dominate and are able to overcome buyers. Price increases are halted by resistance and eventually prices start to drop.
It’s important to understand that in an uptrend, resistance levels may represent pauses or resting periods in the uptrend and not necessarily reversal points. Similarly, support points in a downtrend may also be a brief intermission in the downtrend and not a reversal of price direction.
It’s critical for a trader to recognize that an uptrend is not broken until prices start to create lower highs and lower lows. Similarly, a downtrend ends as soon as prices start to make higher highs or higher lows.
If a corrective drop occurs in an uptrend that causes prices to drops all the way down to the previous low, but then prices continue to move back up, it may be an early warning sign that the uptrend is weakening and may in fact be close to ending. However, technically speaking as long as the prior low was not broken the uptrend was not broken. Sometimes, the trend is not broken and prices will move sideways for a period of time before continuing to move back up again. Trends are very powerful forces in the market and smart traders should always do their best to stay on the right side of a trend.
Support & Resistance Psychology
To understand the psychology of activity at support and resistance, we need to first understand the different postures or positions that traders may have at any price point. When we arrive at a support level, we are going to find traders that are holding long positions, traders that are holding short positions and traders that are holding no positions but are looking to get in.
At the support level, strong buyers are stepping in and prices are starting to hold. Traders with a long position that entered the trend at a wrong point, and were previously in a losing position, are now pleased that their losses are starting to dwindle and that new prices will start to move their way. They may in fact be looking to add to their positions.
On the other hand, when traders who are short will recognize the support level, they will exit and cover their shorts generating more buying power. Traders that are still outside will fall into two groups, one group realizes prices are rising and they decide to immediately enter and thus help propel prices higher. The other group is still waiting for prices to dip back so they can enter at a better price.
So as you can see there are several groups that are eagerly waiting to buy a price dip. Naturally, if and when prices decline back near support more buying takes place. The support level becomes stronger and prices get an upward lift. Consequently prices continue to push up, until they encounter resistance.
Once again, when we arrive at a resistance level, we are basically encountering supply or strong selling pressure. Recognizing this fact, many traders that are holding long positions will want to get out quickly to capture their profits and thus create an increase to the selling pressure. Traders that did not exit quickly are now dealing with the psychology of watching profits slip away as prices continue to drop before their eyes. They are praying and wishing for prices to move back up to capture a little more profit and capture some of the gains that they had previously seen.
As soon as prices pull back up towards resistance they see this as their opportunity to immediately get out and sell their long position. This in turn creates another wave of added selling pressure. Traders on the sidelines are watching prices and they can see that even when prices pulled back towards resistance they dropped again, this gives many traders on the outside their queue to short and get into the market. Sure enough this creates more added selling volume and continues to push prices lower. The resistance point holds and prices continue to drop until buyers decide to step in creating a level of support.
This behavior occurs continuously in the market in every time frame. Consequently, it’s helpful for traders to understand the psychology behind the opportunities that present themselves. It helps them to time their entries better and gain a greater sense of confidence in the market. Knowledge and education are always the best foundation for profitable trading.
About Dr. John Keppler
The Strategic Trading Institute was founded by Dr. Keppler. It provides traders and investors with an outstanding education and powerful set of trading strategies. Its programs deliver a solid & practical market education for trading Stocks, Futures, Forex and Options.Our lead instructor, Dr. Keppler, brings an exceptional level of expertise and teaching experience to all of the courses offered.
Dr. Keppler holds a Bachelor’s degree in Electrical Engineering, a Bachelor’s degree in Business Finance, an MBA and a PhD in Business. He has taught at the University Of Utah School Of Business, the University of California and the College of Notre Dame. He has been a business professor and a strategic trader for over twenty years.
Dr. Keppler has developed a variety of proprietary strategic trading systems and indicators. Utilizing his trading knowledge and educational expertise, he has designed and developed a number of strategic trading educational program. These simple and systematic programs help guide beginners, new traders and investors through the maze of financial markets. Dr. Keppler is nationally recognized for his unique and dynamic style of teaching; he thrives on interacting and coaching his students towards the path of financial freedom.
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Support Tip
How do I install Reuters Tools into Excel so that I can set up a DDE link between QuoteCenter and Excel?
Contributed by MetaStock Support
For QuoteCenter Only
Have you ever wanted to combine the power of QuoteCenter with Excel? This tip helps you do just that! Linking QuoteCenter and Excel together allows you to export data directly from QuoteCenter into Excel with minimal effort. Once exported into Excel, the data will continuously update itself as long as the market is live. This is also a great way to take advantage of Excel's charting capabilities with QuoteCenter data.
1. Click Customize Quick Access Toolbar pull-down menu.
2. Click "More Commands".
3. Click "Add-ins".
4. Select "Manage Excel Add-ins".
5. Click "Go".
7. Click "Browse".
8. Browse to: C:\ QuoteCenter\USERFILES\XL_Files or C:\Program Files\Equis\QuoteCenter\XL_Files (in older versions of QuoteCenter).
9. Double click "Btools.xla".
10. Click "OK".
11. To use, open Add-ins menu.
12. Select Reuters Tools and desired tool (such as symbol table).
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MetaStock Power User Tip
Backing Up MetaStock
Contributed by Breakaway Training Solutions
Do you have a backup of your important MetaStock files for safe keeping?
Computer problems are no fun for anyone so it's extremely important that you always have a backup of your important files. Here's a really simple way to back up your MetaStock program so you don't lose your hard work.
First of all, you need something to store your backup on. If you don't have something already, I would recommend that you take a look at an external hard drive. For less than $100, you can get one that will hold 500 gigabytes or more. One of the nice things about an external hard drive is that when you're done, you can disconnect it from your computer and store it in a safe place.
To make your backup of MetaStock, all you need to do is make a copy of the Equis folder and paste it in the storage device location. If you installed your program using the default settings, you'll find it located under C:\Program Files. Locate the folder called Equis, right-click on it and choose Copy. Navigate to where you're going to place the backup folder, right-click and choose Paste.
To make a backup of your MetaStock data files, you'll find a folder called MetaStock Data located directly under your C drive. Once you find it, just right-click on the MetaStock Data folder and choose Copy. Navigate to where you want to place the backup data folder and paste it in that location. It's that easy!
To see Kevin Nelson demonstrate this lesson, just watch this three minute video.
For more MetaStock training, make sure to visit us at www.learnmetastock.com or email us at admin@learnmetastock.com.
About Kevin Nelson
Kevin Nelson is the founder of Breakaway Training Solutions, Inc. He has spent the last 17 years becoming an expert on MetaStock software and a serious student of technical analysis while working for MetaStock. Prior to joining MetaStock in 1993, Kevin was a stockbroker for a well-known NYSE firm. In his role as Sales Manager at MetaStock, Kevin interacted extensively with MetaStock customers via phone, webinars, and public appearances. His experiences while working at MetaStock have enabled him to gain a keen understanding of the needs of technical analysts worldwide. While with MetaStock, Mr. Nelson was a featured presenter for four years. During this time, he traveled the U.S. introducing the MetaStock program to thousands of people and teaching them how to use its many features. His easy-to-understand approach is considered by many to be the best in the industry.
©Breakaway Training Solutions, Inc. 2011
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