Support and Resistance
Price Is King
Mark this chapter right now. It is one that you will want to revisit many times in the future. The concept covered here on support and resistance levels is one of the keys to understanding price movements. Once you understand these ideas, you will understand why prices move rapidly from one pattern but do not form a similar-looking pattern.
Patterns tell us what has happened in the past and what might happen in the future. The idea behind pattern recognition is that patterns reflect the analysis and thoughts of the other investors and traders. People often act emotionally, especially when it comes to their money. These thoughts and emotions form patterns and since emotions and human nature are universal, similar patterns form in all tradable instruments. It does not matter if you trade stocks, commodities, currencies, or bonds, the patterns are universal to all of them. Once we recognize one, we then have to put that picture in the context of the bigger picture or structure of support and resistance. When we see that pattern or picture again, odds are that result will be similar.
As I touched on in Chapter 1, we must remove all forms of subjective analysis from our charts and our thought process. Reference points of support and resistance analysis must be based on what is real, not on analysis tools that we can fit to our liking. As always, in any type of technical analysis of markets and stocks, price is the truth ...