Here is the perfect way to start this wonderful trading day. Know and remember there are 3 steps that will create a perfect option-trading life:
Think about your dreams as if they are already a reality. Talk about your dreams as if they are already real. Behave and live life as if these things have already happened and have come true.
Before long, you will look back and say, “Wow, when did that happen?” You’ll then realize your perfect life has been wonderful before and after the actuality of being a super option-trader.
Here’s What Is Covered Below:
- What are Support and Resistance Levels?
- What information do they share?
- How to use that information?
- What happens next?
Today, we are going to discuss Support and Resistance levels. I often call them ceilings and floors. Those are my terms, in the trade industry they are referred to as peaks and troughs. They are created by high and low turning points.
An example, price rises and then, turns and drops creating a ceiling level or peak or price drops to a low, creating a floor level or trough. Let me post a chart to illustrate.
This concept is pretty easy to understand. Price rises to a point and then, it stops as if it hits its head on a ceiling. This level then creates a barrier that can be hard (not impossible) to get through in the future. Often, it can rise and hit its head on this level and pull back again until it finally drops more to regain its strength to eventually try again. Look at the Resistance on left side in April. It touched and tried this area about 6-7 times before pulling way back.
As mentioned, Support is like a floor. Price drops to this level, can’t seem to go lower, no matter if it tries several times, and then, it rises.
Price then often rises to a past support level or new ceiling to try to breakthrough.
Quite often it is as if it hits its head and can’t rise any further and pulls back. It takes several attempts unless the movement is super strong.
What causes support and resistance is traders who were involved in trades. Perhaps, they bought an equity, it hit a resistance level and pulled back. The trader says, “I am going to hold this stock until it gets back to that level and then, I will sell so I haven’t lost any money, whew”. Other traders who perhaps, bought at the low know it is apt to be hard to break through that level, so when it gets close, they sell, and say, “Thanks very much. I am off to trade something new.”
I also think of Support and Resistance as memory levels. Price gets to those levels and remembers it was a stopping point from the past. Sometimes, it will ultimately breakthrough, but often it struggles, so these levels are something to be conscious of and to anticipate that there could be issues when it reaches this level again.
Let’s look at another chart.
Once you become aware of these ceiling and floors, when you look at a chart, they jump out at you. There is no 100% rule of what is going to happen when price gets close to a level, but you are alerted to watch more closely, knowing that price may stop moving at this level. It could be a place to take profit.
These levels are indicators that tells a story of what has happened in the past and may be repeated in the future.
Note how past support levels (level of a drop) become overhead resistance in a future move. Is price strong enough to rise above this level now? My mind always draws pictures or tells stories.
Perhaps, it says, look price rose and broke through to the 3rd floor of an apartment building, then suddenly, it tries but can’t go any higher. It drops back down to 2nd floor apartment and then, back down to the first floor apartment level. When it eventually decides it is strong enough to rise, the floor of the second story is there overhead again and perhaps, because of the earlier break-through, the floor has been repaired and seems even stronger than before. It takes great effort to get back through- if it happens at all until a later date.
If it does rise and breakthrough, price then rises a bit and often comes back to floor level to test its strength to see if indeed that floor is strong enough to hold. If it is, then it will rise further until it comes to the 3rd floor again and it will try to push through. Does it happen? It certainly will try. Perhaps, it will be successful or will pull back again to try again.
Being able to spot Support and Resistance levels makes you feel like a mind-reader since you have a real hint as to the areas price will struggle, push through or stop.
My goal is to teach everyday people (like me) to successfully trade options. I do my best to write in an understandable way as if we are talking while sitting on the deck of my house in a relaxed atmosphere.
The trading tools you select, and use are important, and can make your trading easier and more effective.
In a sense, life is pretend or what we can visualize. It is based on what we “know” to be true for ourselves at this time, at this moment.
So, in this moment, let’s pretend and “know” we are healthy, really smart, wealthy, super kind, thoughtful…. which are true or will become true, right after we quit pretending we not those things.
Have a great weekend.
And I wish you the very best,