Successful traders know losses are just a cost of doing business.
Inevitably some trades are out of synch with market and a loss is the price for being wrong. Other times you can be ‘right’ about a trading idea and get stopped out anyway. Typically, this happens when you enter too early or at the wrong price.
Either way, if you’re getting stopped out too often, it’s worth pausing to explore how to improve your entry criteria.
For example, as you can see in this daily S&P chart, being off by a couple bars can make the difference between getting smashed and counting windfall profits.
To improve their odds, many traders look to past support and resistance levels to determine entry and exit points. Others also use Fibonacci analysis, trend lines, or indicators like moving averages, too. But the challenge remains: How do you know which price level actually hold.
What’s tricky is that markets seem to be designed to bait and switch traders into taking the wrong position at the wrong time. On the S&P chart above, in hindsight it’s clear that the market has fluctuated in a range for many months before breaking out to new highs. So for most of the year traders who bet on a trend continuation got smashed. And those who bet on the range before the breakout got their heads handed to them, too.
The dirty secret is that not all support and resistance levels are created equal. As individual traders, we know all too well that our orders won’t move the market. But when it comes to hedge funds and other large institutions with their teams of traders and computer algorithms, they can cause a market or stock to turn on a dime.
That’s why a critical part of a successful trading plan is to have a reliable way to identify when a price level is likely to hold. As mentioned above, there are a whole variety of tools designed to help tackle this challenge. The more you can get in synch with these market turning points, the better your entries will be in terms of time and price.
With that said, if you’d like to learn more about how to identify when a support or resistance level is likely hold, checkout our Bullseye System class.