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Strategies & Market Trends : DAYTRADING Fundamentals
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To: ynot who wrote (3619)9/6/1999 10:15:00 AM
From: Robert Graham  Read Replies (1) of 18137
 
I started out by trading stock and ended up trading options. I find option trading more rewarding in more ways than just the money. IMO S&R is very important to the option trader.

I would not try to over-analyze S&R, just trade what is there. This means you can use S&R as defined on the chart to *anticipate* S&R, but trade what actually happens. I do not think it is worthwhile to take S&R analysis to the point of being used in a predictive fashion where you attempt to tell with a degree of certainty before it happens if price will break through or hold at a support or resistance on the chart. I do not think this would serve the trader's purposes well. Better results in your trading based on S&R can be obtained by placing your attention in other areas. The same thing goes with the more formally recognized predictive techniques of Gann and Fib, even though when used intelligently as an aid to anticipating future S&R can serve a useful purpose to the trader. Trading as through these support and resistance levels will definitely happen IMO can lead to significant losses.

I think a focus on trade and money management would provide a more worthwhile benefit in the trader's use of S&R levels. For my purposes, trade management is where the trader enters a trade based on some criterion like a setup but due to indications that show up through price action that followed the entry the trader exits prematurely of his price objective. Trade management to me involves both the monitoring of the trade and determining at what point decisions are to be made. This can also involve adding to an existing position and later determining points at which it can be unwound. So here trade management would go hand-in-hand with money management.

I also think understanding and observing price action is the key to managing the trade. Here is where candlesticks are very useful for evaluating a move at a juncture in the price action of the stock. The trader with experience can have a good idea if the end of a swing is near, or a premature reverse will happen making for instance the breakout to be a false one. I think this will be found to be more true for some of the more liquid and actively traded stocks, and for a given stock more true for some its the longer time frames than other shorter time frames. For instance, I see it works well with the intraday trading of S&P Futures down to the 5-min time interval. But I do not think this time interval will work for many stocks in giving price action that means anything to the trader. Another technique that utilizes an understanding of price action is the time element. If a setup that happens usually when there is directional strength to the price action of the stock is tripped but does not follow through in a timely fashion, then I get out. Usually this means something is wrong. Quite often the price reverses at this point.

Anticipating S&R levels together with trade and money management skills will make effective use of what S&R turns out to be of consequence for your trade. Time spent in this area will IMO prove to be much more productive that attempting to refine your analysis techniques that will allow you to attempt to predict the response of price to the next S or R level. This will allow you to focus on what does happen rather than what you think will happen. Price action will be seen more clearly which I think is the important aspect to understand as the stock trades that leads to good trade management. And the management of the trade comes from experience that no amount of charting and testing of ideas will substitute for.

Just some thoughts.

Bob Graham
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