M4 Support & Resistance

Front 1

Why is price the most used (and even overused) analysis tool when trading the markets?

Back 1

Price is raw data and cannot be manipulated or considered biased. This raw unbiased data allows us to make appropriate market assumptions.

Front 2

Why is it that 80-90% of traders don't make money or only break even?

Back 2

Because they use price analysis alone or, at best, with a bit of pattern analysis. The 10% who consistently make money use price, pattern and time analysis.

Front 3

What is an indicator?

Back 3

A series of data points that are derived by applying a mathematical formula to the price data of a security.

Front 4

What are the most common and overused support and resistance levels?

Back 4

Previous peaks and troughs - because they are easiest to recognise.

Front 5

Why is it not recommended to trade a stock once it breaks through a resistance level or to go short once it breaks support?

Back 5

This form of trading in isolation is inconsistent and regularly results in false breakouts. This is because many traders use this method and because fear and greed motivates us to over buy or over sell shares at a support or resistance level.

Front 6

What is a support level?

Back 6

A price point where the market stops falling.

Front 7

What causes a stock to fall?

Back 7

Disequilibrium where there are more sellers than buyers.

Front 8

What causes a stock to stop falling?

Back 8

Either:
1. Equilibrium - whereby the buyers and sellers are equal in number, which results in the price trading sideways; or

2. Disequilibrium, where we have more buyers than sellers causing the price to stop falling and start rising again. This occurs either when we run out of sellers wanting to sell or when new buyers enter the market and outnumber the sellers.

Front 9

What is the most common way support levels are formed and how stock market crashes cease?

Back 9

When we run out of sellers or more buyers come into the market to take the price up. If no one wants to sell but there are still people wanting to buy, disequlibrium occurs and the price stops falling and starts to rise.

Front 10

If the market falls through a support level, then...

Back 10

...this is a strong indication that the downtrend has not yet finished, which sometimes results in increased selling.

Front 11

What happens to a support level once it is broken?

Back 11

It becomes a resistance level or a point at which the stock may stop rising in the future.

Front 12

What determines the strength of a support level?

Back 12

The more times a support level holds prices from falling further, the stronger it is said to be.

Front 13

What is a resistance level?

Back 13

A resistance level is a price point where a market stops rising.

Front 14

When a stock finds resistance and stops rising we either have:

Back 14

1. Equilibirum whereby the buyers and sellers are equal in number resulting in the stock trading sideways; or

2. Disequilibrium where we have more sellers than buyers causing the price to stop rising and fall once again.

Front 15

Explain disequilibrium in the context of resistance.

Back 15

Disequilibrium will form a resistance level when we either run out of buyers or we have new sellers come into the market to take the price down.

Front 16

If no one wants to buy but traders still want to sell then...

Back 16

we will have disequilibrium and the price will fall.

Front 17

What is the most common way resistance levels are foamed and stock market crashes unfold?

Back 17

Because no one wants to buy, sellers will have to lower their bids in order to entice new buyers into the market.

Front 18

what happens if new sellers come into the market?

Back 18

They can create disequilibrium by out numbering the buyers which causes the price to stop rising and start falling.

Front 19

If the market rises through a resistance level...

Back 19

this is a strong indication that the uptrend is not finished, which sometimes results in creased buying.

Front 20

What happens once a resistance level is broken?

Back 20

It will become a support level.

Front 21

What determines the strength of a resistance level?

Back 21

The more times a resistance level holds prices from rising further, the stronger the resistance level is said to be.

Front 22

Support and resistance levels will vary in strength depending on?

Back 22

1. The amount of times a level has provided support or resistance to a stock.

2. The distance in time between the support or resistance levels. eg. the greater the distance in time between two peaks the stronger the resistance level and the longer the distance between two troughs the stronger the support level.

3. Whether the price is a round number or previous all time high/low - people tend to remember major numbers far easier and psychologically these numbers can provide support or resistance.

4. When the support or resistance level was created - people tend to remember levels that were recently created.

Front 23

Why do we use support and resistance levels?

Back 23

We use support and resistance levels to tell us:

1. Where a stock may stop falling or find support in a down trending marketing.

2. Where a stock may stop rising or find resistance in an up trending market.

3. Where a stock may reverse its current trend.

4. Support and resistance levels increase the probability of reversal patterns and signals changing the trend of the market.

Front 24

Why are support/resistance levels often found at whole numbers?

Back 24

Whole numbers can be psychological barriers and thus price can tend to find support/resistance at such points as traders decide on whether to take price to a higher/lower level.