The previous two discussions have been around the trading charts or the lenses to use for focusing on important matters and Stop Loss, the breaking point that would force us to make changes in our lives. Today we will discuss yet another significant aspect of trading that forms the basis of the Bulls vs Bears concept. Support & Resistance.
Read time: about 2 min.
What is Support & Resistance?
This trading concept is used by traders to refer to price levels on charts that tend to behave as a ceiling or a floor, preventing the price of an asset from getting pushed in a certain direction. It is a derivative of buying or selling pressure in the market.
Traders take long (buy) positions based on their hopes and perceptions, which are either influenced or re-enforced by other trader’s beliefs, evident through the price levels. Traders behave this way, hoping the price will go higher, supporting the overall sentiment of all buyers. Interestingly, no facts support these sentiments. The crowd mentality takes over, and the traders with a buyers’ bias get on one side of the market, conforming to their beliefs. This creates the Resistance Level, where the bulls (buyers) try to breach the price ceiling, which is pushed down by the bears (sellers) who are on the other side of the market.
Bears, unlike the bulls, take short (sell) positions in anticipation of the price to nose dive. Again, these sentiments are also driven through hopes and perceptions based on their interpretation of the market and crowd mentality biases with similar beliefs. The bears on one side try to push the price down and bulls on the other fight back, creating a floor or a Support Level. As price reaches a point of Support or Resistance, it does one of two things—bounce back away from the support or resistance level, or violate the price level and continue in its direction—until it hits the next Support or Resistance level.
At a macro level, buyers and sellers or Resistance and Support levels are nothing but differences in ideology or beliefs as to what is currently occurring in the market. Look around, and you will find that we behave similarly in our personal or professional lives.
We, based on our own beliefs and ideology or those imposed or influenced externally, tend to hold on to certain biases whether they are fact-based or not. If we scroll back to history, we will find countless strife dividing tribes, communities and even nations based on crowd ideology. On the positive side, communities and societies have also been built on common ideologies and beliefs. That centers my point in this discussion as having a strong opinion or supporting a cause or holding on to a position is essential. Still, it does pose an important question that I often wondered while trading the Support & Resistance levels:
How do we know we are on the right side?
As traders, knowing the answer to this question is akin to finding the Holy Grail. The search for this bounty continues to feed the market in this zero-sum game. Opposing views are the life-blood for trading because if everyone wants to buy, then there won’t be any sellers, which will bring an end to the market.
It is equally challenging to be on the right side of our non-trading lives. We are drawn to a flock, based on Common Interests (pun intended), and that forms the crowd, forming the crowd mentality. The beliefs get recycled within the same circle, further re-firming the views, and creating a bubble. We don’t need to convince each other of our beliefs; however, to validate whether we are on the right side, it’s better to have the opposing views persuade us. If they can move you off your current belief, then you have the advantage of evaluating both sides. And if the new beliefs result in the welfare of the nation, the community, the neighbourhood and yourself, then you are probably on the right side.
A trend may be your friend in trading, but in life, if everyone is going right, then it’s wise to question ourselves – should we be going left?
Thank you for sharing some of your precious time with me each week.
Until next week.