|
Tradingourway
Volume 1, Issue 5 Sept 2, 2007
Up-coming events:
April 2008 Seminar at Sea cruise to Panama Canal
At TradingOurWay, we are currently planning a
Seminar at Sea cruise departing out of FT. Lauderdale on April 12th, 2008. It’s
an 8 day cruise to the Panama Canal with 4 sea days of classroom activities. We
would love to have everyone join us! Complete details can be found on the Tradingourway website.
Previous issue:
I asked you to take a survey of topics you
would like to see covered. You can view the Survey
Results. If the link does not work then paste this into your
browser.
http://tradingourway.com/surveyresults.html
I
plan to keep the survey open for several more weeks in order to give newcomers
and those that haven't gotten around to taking the survey a chance to so. If
you haven't taken the survey and would like to then click on the survey results
above and then click on the Survey link. Unfortunately, the
survey does not allow you to retake or modify your initial response.
However, you can always send an email to kermitp@tradingourway.com
with
your suggestions.
This Issue:
We will look at a few methods of finding
support/resistance. Keep in mind there are several ways. Last issue, I asked if
Fibonacci's really work. The correct answer is - sometimes. Just like any other
indicator they work sometimes. Trading is all about getting the probabilities
in your favor. That is the purpose of any indicator to help you obtain a better
probability. This issue will use Fibonacci retracements and extensions to
project the future price points and show you how well those line up with
previous price support and resistance.
There many comments on the charts below so please be sure to
read those as well as the text in the newsletter.
In this issue I am going to show you only a few pages of
the Support and Resistance document that I put together last year
when one of my sons asked how do you come up with these price targets. He asked
very difficult and very hard to answer questions. I had asked him if he was
still in his positions on COH and MSFT.
His response was:
Still in this one, although Coach sold on its pull
back. I think my stop is low 25 range. Do you just pull your target prices
from mid air? Where do you get those? Still seems like this trading stuff is
really just a bunch of voodoo!
Well sometimes it seems that way to all
of us. It really isn’t magic or voodoo, its Technical analysis. Problem is
there are many flavors of Technical Analysis. I use Worden Brothers’ TC2007 and
Esignal’s AdvancedGet software products for charting. The charts I use in this
article are from both. AdvancedGet is an Elliott Wave software and it projects
price targets based on the Elliott Wave theory.
Microsoft
I am going to show Microsoft charts on a daily, weekly
and monthly time period to illustrate how the price projections actually
reflect previous price Support/Resistance points. When we are done I hope you
will realize you do not need $4,000 software to find Support/Resistance but it
helps.
Before we begin, there is one other point I
need to make. In my examples you will see that I key on the price reversals for
Support/Resistance. The point needs to be made that Support/Resistance also
occurs at price areas where there is a lot of consolidation or congestion.
The
chart below is the chart that prompted the question on how are price points
determined. Its easy if the software is projecting the targets for you as
AdvancedGet does here.
The
chart below is the daily chart for MSFT where I simple drew horizontal lines to
mark the price projections. I, also, put a 1 period moving average of the highs
(Green line) and a 1 period moving average of the lows (Red line) on the price
chart. This was just to help aid in seeing the support/resistance points
better.
As
we look at the longer time period charts you will notice how the horizontal
lines match up with the previous support/resistance points. Just to review
support/resistance are simply the peaks and valleys where the price reverses
direction. Notice the horizontal line between $28.00 and $28.50 how many times
it touched the previous high points which will now become resistance as the
price moved toward that area. I used the term “area” just now and “zone”
in the chart they really mean the same. They refer to a span of prices because
it is impossible to know exactly where price will go. Having multiple hits in
an area (zone) makes it more likely that is where price will encounter
resistance or support. Remember once price has gone through a resistance area
that area now becomes a support area when price reverse again. The same is true
for the support area it will become a resistance area to price.
The
monthly chart spans 10 years and provides an even better picture. Remember, we
drew these red lines on the daily chart. Notice the red line around $32 area
how it touches at 3 points and the $35 redline touches both the green
(resistance) points (June 2001) and the red (Support) points (May and June
1999). Many traders think MSFT will never reach those levels again. Well,
remember, “Price has Memory” if its been there once it will someday get there
again. Just maybe not in my lifetime, though.
The
above chart comments point out that while we only identified one Stop-Loss
price point there are actually many such points. We identify them exactly the
same way we have the target points. That is by the previous price reversal
points and price consolidation areas. Every trader or investor has a different
tolerance for how much loss they are willing to initial take in order to let an
open position develop. It does not make sense to look for long-term targets and
then pick a short-term stop-loss. Typically, the shorter your trading style the
closer your initial stop-loss will be.
With
this background, we are going to look at several stocks and decide if we would
trade them at their current price. We are going to do this without looking at
candlestick patterns, such as Bullish Engulfing, Hammers or Doji candles. Nor
will we look at Western patterns such as triangles, wedges, double bottoms or
top.
This is not to say those patterns aren’t useful. They most
certainly are in a lot of cases. This especially true the shorter your trading
period. The point of this lesson is that you can trade successfully just by
identifying the Support/Resistance areas.
You
can view the complete Support
and Resistance document or at
the link below.
you
may need to copy/paste it into your web browser.
http://tradingourway.com/docs/Support_resistance_basic_charting.pdf
|
