How many of us wish we had more patience? I will be the first to raise my hand. It is a key attribute to being a successful trader, in my humble opinion. When the market is open and those numbers are moving around, your blood is pumping and your emotions are probably running high. But a trader needs to be calm and not let these moves take away from his or her objective, which is to extract money from the market. As I often say, the most important part of any trade is that the underlying performs as forecast.
Potential Breakout
So many times traders bet against support and resistance holding, and that is usually a big mistake. Support and resistance have a better chance of keeping the underlying from moving through that level. Take a look below at a recent example we covered in MTM’s Group Coaching class. This is an hourly chart of Alphabet Inc. (GOOGL).
Potential Resistance
The stock had some potential resistance around the $151 to $152 area as designated by the horizontal line. The area was tested numerous times. Going back to what you know as a trader, resistance has a better chance of keeping the stock from moving higher. In fact, it was turned away several times.
During Group Coaching class and one-on-one coaching sessions, I had several option traders looking for a bullish breakout. My reply was, “let’s see if the stock can break that resistance level first before initiating a bullish trade.” I told them to ask themselves what has a better chance of happening. As they are students of mine, they know resistance like support will hold more times than not. Of course, that will not always be the case, but it will be most of the time. The odds are on your side!
As you can see below, the stock busted through soon enough and made a big move higher. Granted, the stock did move up big and most of the move came in the first hour. For this example, it might have been difficult to enter a position. But the fact remains we should be patient and let the move and break of resistance materialize before trading.
Finally
Time and time again, it all comes down to patience. You generally want to see two consecutive closes (in this case one big one) through the potential support or resistance. The two-bar close principle (two consecutive closes above resistance or below support) has served me well as a technical trader. Remember to ask yourself in any trade, what has a better chance of happening?
