Boxers or Briefs?
If you look anywhere on the internet, there are so many people that tell you how to trade. Whether it’s with indicators, trading naked, or using the positions of Jupiter and Sirius to determine the tidal flows of Neptune, you are constantly bombarded with articles or PDFs telling you how to trade. Some people make it seem easy; some people make it look hard. In this article, you will see that it isn’t necessarily hard to learn how to trade, but that the application of that knowledge is. This article will also deal specifically with mostly price action based trading. No astrology or chicken bones here. Most of the methods described here can be learned elsewhere, but that isn’t the point. The point is to show you in what order to learn these things. In order to describe the best way to learn how to trade, it’s time to look at a super awesome analogy: clothes.
In order to start getting dressed, there is one important set of garments you need to put on before the rest of your clothes. These are your undies. The cool trading method that underwear is supposed to represent is support and resistance. If you don’t get the whole connection between support and underwear, you need to talk to Michael Jordan. If you don’t get the lame underwear commercial reference there, I’m sorry. I give up.
Support and resistance levels are zones in the markets where price action occurs. These are places where the price either bounces or breaks depending on the strength of buyers and sellers in the market. A bounce occurs when the price reaches a level, touches it, and moves the opposite direction. A break occurs when the price reaches a level, touches it (tests it) a few times, and then continues in its original direction through the level. By the way, support is below the current price, resistance is above, or, support levels are near the valleys, resistance levels are near the peaks.
The reason these levels are so important in Forex is that all price action occurs along or around these levels. All of the moves in the market either start at a support or resistance point, or after consolidation, break through these points. A few things to note about support and resistance (from now on abbreviated as SR) are that these levels aren’t specific prices, they are more like zones, and that some SR levels are stronger or weaker than others, but that’s for a later day.
SR levels are one of the most important aspects of trading. Now that you know the market from your naked trading, you can start trading these SR levels. You know how the market reacts in certain conditions or certain times of day. Now, using that information, you can look for SR levels and try to base your trading around these zones. For example, you know from your naked days that during the shift from the Asian session into the Euro session, the EURJPY makes a big move either way. The current price is 130.05. You see a support level at 127.50 and a resistance level at 131.75. Once the shift occurs, the price starts moving down. There is no other support level except the one that you found before. There is a pretty good chance that EURJPY is going to move to your support level. Congrats! You are making demo money! That’s super fun, right?
So basically, SR trading is the means with which to apply the knowledge you gained from trading naked. Also, you will continue to learn how the market acts by looking at SR. These levels open up a whole new realm of market activity for you to explore and learn about.
To view POYTC Part 1, click here.
