The market is pure psychology. In fact, prices on the chart represent the operational outcome of what traders’ minds perceive from their screens.
If one wins, another loses, and vice versa.
Therefore, logically, one will be right, and the other won’t.
Where am I going with this?
Every trader, even with the same information and charts, will interpret the market differently.
This interpretation depends on many factors: experience, others' comments, news, data, luck...
The goal is to make accurate predictions as often as possible, and when we’re wrong, to minimize losses.
Getting it right isn't easy. You need to remember that even if you do, not every trade will have the same result. Sometimes you'll regret not closing earlier, and other times you’ll wish you'd let the trade run longer.
Trading is very hard to interpret; in fact, not even the most seasoned professionals achieve consistent accuracy.
That's why money management is crucial to avoid depleting your capital. Losses should be minimal, and profits should outweigh those losses to keep the balance positive.
As mentioned earlier, when you're in a winning trade, you won't always manage to close it at the right spot—not you, not any system, not any indicator, nor any premeditated technique.
That’s why I emphasize that the money goes to the discretionary trader—someone who, after securing their losses, has a certain talent or experience to somehow sense, because trading is intuition, when a trade will go in their favor.
Support and resistance levels are there to be surpassed. Ideally, you catch a trend with enough strength to break through all obstacles.
But until that happens, prices move between these so-called support and resistance levels, and it’s our fault as traders that they exist. These are psychological levels that often work quite well.
Of course, the larger the timeframe, the stronger these levels will be.
The same goes for levels that have held in the past.
So, again, encountering one of these levels doesn’t mean the price won’t break through, but rather that it will face some difficulty, and sometimes they’ll need to be tested several times (weakened) before being broken.
If a support or resistance is broken without being tested, the move likely has a lot of strength.
A broken support will often act as resistance later, and a broken resistance will act as support.
But back to my point. Traders are to blame for the creation of these levels, and in many cases, whether they are broken or not coincides with the release of key data or important news. Hence the saying, "Prices generate news."
It’s precisely when prices reach these levels that we must pay attention to those data or news reports to get clues about whether they will be surpassed.
Here’s a psychological example of these support and resistance levels:
(First, one reason they work is because all traders are closely watching them.)
But as mentioned, let’s look at an example of their highly psychological nature.
When the price is nearing a support or resistance level, the trader assumes it will be easily broken.
The speed of the price approaching the level and the surrounding sentiment leads them to believe, with total certainty, that the level will be broken. Therefore, the trader enters the market in favor of that movement, typically at a point very close to the support or resistance.
They think that the sooner they enter, the better, because if the level is broken, they’ll make more money by anticipating the breakout.
However, in most cases, the price reverses at that exact point, quickly putting the trader in a loss, which, if not cut, can become substantial.
That’s where novice traders get the saying, “They’re watching my position.”
So, the trader has two options:
1. Trade against those support or resistance levels, aiming to capture a quick gain on the reversal.
2. Trade in anticipation that the support or resistance levels will be broken, i.e., a breakout.
There will always be trades available for either technique or both, but in my experience, I’ve always found it better to try to latch onto the primary trend and let it do its work, breaking through all the obstacles in its way.
When you manage to get into the primary trend, the money comes quickly.
You must also consider that this type of trading involves:
- Doing very few trades since primary trends aren’t frequent and last a long time.
- Likely having several losing trades before catching a good one.
- Having strong mental fortitude to avoid closing trades during the inevitable pullbacks in the primary trend that can erode profits, sometimes by more than 50%, before the trend resumes. These pullbacks can be more significant or prolonged, the larger the timeframe you trade.
- And having even greater mental strength and detachment from money when, after accumulating substantial unrealized profits, the price reverses and hits your stop loss. (For this reason, it's wise to place stops farther away and, if necessary, sacrifice tokens for distance.)
