Why You Should Give Up Support & Resistance
November 7, 2014
3 Min Read
The internet has an abundance of truly useless information about trading. The vast majority of online learning resources for trading are written by unprofitable traders who are too fearful to open trades of their own due to their lack of ability that they choose to teach the techniques instead. This is one of the main reasons we started The Duomo Initiative, as a way of teaching an exclusive and consistently profitable method, which overshadows the rehashed and useless content already available.One of the most common techniques taught to all traders is the use of Support and Resistance lines. Some traders even swear by this technique as the sole tool in their trading strategy. Although I do rate this higher than many of the other useless tools that are available, I still find it frustrating that as a technique it is not quite the ‘finished product’, but is followed religiously by the majority of traders. This may sound a bit controversial, but let me explain why The Duomo Method sees Support and Resistance lines as redundant and simply one part of a wider tool; the ‘Reversal Zone’.For those that don’t know, a Support or Resistance line looks like this:
While a reversal zone looks like this:
That will make things easier for reference while I now go ahead and rant.The market is dynamic. We cannot measure activity based on just one parameter, yet many traders do exactly that and this is represented by the use of Support and Resistance. These lines suggest that the market is only based on static price points and that a revisit of a previous significant price point will result in high levels of activity at the exact same point.Of course it is true that the market will find high levels of activity at a previous significant point, but in a dynamic way; not in a static way as the Support and Resistance lines represent. Through the mass placing of stop losses, take profit levels and buy/sell orders at previous significant levels, the level retains some form of significance, but no longer at the static level deemed as significant previously. In reality, there is no such thing as an exact significant price, but a price region where an asset finds an exhaustion of supply or demand.As a result of this, a ‘Reversal Zone’ is built up over an area of a chart, with varying ranges within that zone representing a higher probability of reversal (and greater momentum is a breakout occurs). This tool should then be used with a secondary dynamic tool for additional clarity and precision on trade entry, such as trend lines (although, these must be used correctly).If you want to place horizontal lines on a chart and trend them independently, these must be derived from a dynamic method of measuring market movements, not just on price alone. An example of this would be through the correct use of Fibonacci extensions and retracements, which take into account the movements over time of the price.