The core of technical analysis is to identify either a potential support or resistance level. A support level will not only exist in an uptrend; it should also confirm the uptrend. A good resistance level will not only exist in a downtrend; it should also confirm the downtrend. Sounds easy? In reality, unfortunately, it is not simple at all!
Plenty of School of Analysis to Choose
There is plenty of school of analysis to choose from when it comes to selecting an area of analysis to identify potential support and resistance levels. It is not easy to discover which school has an edge in identifying potential support and resistance levels. The following lists out some schools of analysis, but the list is not exhaustive.
|Fundamental analysis||Breakout analysis||Inter-market analysis|
|Candlestick charting||Market profile||Chaos trading theory|
|Market timing||Momentum analysis||Contrary opinion|
|Pattern analysis||Cycle analysis||Pivot point analysis|
|Dow theory||Elliott Wave theory||Fibonacci analysis|
|Fractal analysis||W. D. Gann theory||Volume analysis|
When you look at the variety of methodologies out there in the market, please keep an open mind and embrace the choice you have. You should learn to ignore any prejudices you may have against certain schools of technical analysis and welcome all ideas about trading. However, you should reserve the right to decide whether an idea has value for you in your hands.
Hearing or reading about trading techniques does not necessarily make them true. Just because I or another author may write about an idea on trading, it doesn’t necessarily make it true. An idea on trading can only become true for you through your own independent validation.
In short, be a sponge and soak up all the ideas you can on trading, but as you do so, please remember to remain a skeptic and be prepared to do your own work to independently provide expectancy for your trading strategy. It is important to keep asking yourself whether the idea will help you identify support and resistance levels.
Subjectivity of Analysis
To provide you a solid proof about subjectivity of analysis, I invited three of my friends who are traders to perform one experiment. That is to use their own methods to identify support and resistance levels. They could not consult with each other or hear each other. I asked them the same question: “What are the current support and resistance levels of EUR/USD now?”
I do not tell them my preferred time frame. The reason is the market does not care what my time frame is. It is not sensitive to my needs. Besides, I do not care whether their method is correct because the market does not care either.
The following table shows the support and resistance levels that identified by the three traders. The identified levels are totally different. As you can see, different traders from different schools will identify different levels of support and resistance. Disregards time frame and method they use as well as their own risk appetite, they will trade according to their own analysis. Again, the market just does not care!
|Trader A||Trader B||Trader C|
|Date||5 Dec 2010|