What is important to know about S/R levels is that many often use them only as potential reversal points, when in fact, they become reliable BREAKOUT LEVELS. This is the importance of integrating trend analysis with S/R levels.
There is an old saying that goes *There are no support levels in falling markets and no resistance levels in bull markets.* What this old saying teached is that support levels are not reliable as reversal points in a bear market. This is because the TREND usually has the power of momentum behind it as more money flows in that direction. This is why selling off resistance in a bear market is the way to go… as opposed to trying to buy off support in a bear market. Same goes in a bull market. Buying a retrace and test of support in a confirmed bull market has a higher probability of profit than buying off support in a falling market.
Many times I have preached about the virtues of keeping a method simple. By following a simplified method one avoids the doubt, confusion, and second-guessing associated with trading. Especially when short term trading or daytrading. Without a doubt our own internal belief systems are the biggest obstacles we must overcome. We all bring certain bias, behavior patterns, and unique personalities into the trading arena. If not careful, our own mind can sabotage the best of efforts. Thus, the argument for a simplified and streamlined approach. Yet in this article I have mentioned several different analytical methods like multiple trend analysis, cycles, S/R, momentum. To the novice trader these multiple concepts sound anything but simple.
But the market itself is anything but a simple creature. The markets are dominated by mass conciousness. It is the collective thoughts and emotions of the market participants, that moves prices. Crowd behavior and perception rule the markets. Crowd behavior, being an extension of human behavior, is a natural phenomenon. Thus, it is my belief that human behavior can also be understood by natural laws. This is why I use trend analysis (which shows the evidence of a directional bias by a large group of people), momentum (showing the strength of conviction in a trend or directional bias), and S/R (which demonstrates that the markets are coherent and have memory… where masses of people collectively remember and act upon key price levels). These factors mentioned clearly demonstrate that markets ARE NOT RANDOM. There is an underlying order to price action. This is what makes studying the markets underlying structure SO important to me… which can reveal certain habitual patterns of behavior that occur over and over again.
The characteristics occur in multiple time frames. Furthermore, individual markets themselves will display certain patterns of behavior unique to itself. The S&P 500, the market I use for my daytrading, has her own behavior patterns that can be exploited, if one knows what to look for.
(BTW: as I write this, I am now trailing stops and locking in profits on my short position taken earlier. This is not a mysterious trade set-up or something being said after the fact).
For continuation, see part three of this rather long original article.