Rayner Teo is an independent trader and used to be a prop trader.
He’s been trading for about 12 years.
His own trading blog is now quite popular.
He trades mainly on the trend.
He believes that in addition to trading skills and strategies, it is important for traders to follow principles and have good psychology.
We have previously covered a few basic knowledge points about support resistance levels in the article “Fundamentals and Applications of Support and Resistance Levels”.
Many traders may trade with only these key levels in mind, but they can be doubly effective when combined with other tools or techniques.
So, as a top Chinese trader Rayner Teo and how to support the resistance level?
Let’s find out what he thinks.
A few questions: 1. Does the more support/resistance levels are tested over a short period of time, the stronger they are?
2. Should you place your stops below support and above resistance so you are less likely to be forced out?
3. Should you buy near support where the risk-reward ratio is more favorable?
To find out the answers to these questions, read on.
# The more support/resistance levels are retested in a short period of time, the weaker they become. In fact, the more support and resistance levels are tested, the weaker they become, contrary to the theory books.
A support level means there is potential buying pressure nearby. If the price keeps testing the support level, soon the nearby orders will gradually fill up and eventually no one will buy any more, at which point the support level is breached.
There is another descriptor for this conclusion: in a short time.
Because it’s unlikely that many new orders will pour in anytime soon.
# Multi-year price highs are important levels to note for a few reasons: 1. Losing traders always look to exit when they break even. Multi-year highs mean the market is fairly optimistic because most traders are making profits.
But the market can’t go up forever. It will eventually reach a reversal point, when a large number of traders exit long trades, but there will always be some traders who hold on to their positions, hoping for a break higher.
If the market eventually falls, they are in a mood of regret, watching profits turn into losses.
The hope is that the market will retest the highs and let them at least break even.
2. Bearish traders want to short the market For bearish traders, multi-year highs represent an opportunity to short the market at a high price, which they can reference to set a stop loss.
3. Momentum traders look for breakout trades. Momentum traders trade any kind of breakout, whether it’s a breakout of a range, a volatility high, or a resistance level.
What’s interesting is the breakout of a multi-year price high.
No matter what kind of trader you are, multi-year price highs on a chart are a good thing to notice.
Whether you’re bullish or bearish, multi-year highs are important levels to watch.
It can be used to set a stop loss when bearish and to look for breakout buying opportunities when bullish.
# Support and resistance is a range, not a price line. I was confused by support and resistance early in the trade and wondered what was wrong with my trade.
As it turns out, the names support and resistance are misleading. They are not a line, but a price range.
There are two common types of traders in the market: those who always want to miss an opportunity, and those who are fearful and cautious.
The two types of traders wrestle with each other, and even a slight imbalance in power can affect the price of a certain range.
Therefore, viewing this range as a support or resistance range is more conducive to making trading decisions.
# Support and resistance levels are value areas in the chart, but are not the only ones What’s the difference between price and value?
If you buy an apple for $1, that $1 is the price of the apple, and you get the apple without having to plant the apple, and you eat the apple and you get the nutrients, that’s what it’s worth.
In other words, the price is lower than the value you’re getting, or there’s no purchase happening.
By the same token, just because you enter a trade at a certain price doesn’t mean you get value.
So how do you find areas of value?
That is the area of the chart where there is potential buying pressure that could push prices higher, such as support.
The opposite is true when shorting.
But support and resistance aren’t the only areas of value. So are trendlines and moving averages.
Here are some reasons why support may turn into resistance after a price break: 1. Loss-making traders always look to exit at breakeven. There is potential buying pressure in support areas, pushing prices higher.
But prices can break through this area, and traders who are long go into the red.
Smart traders will cut their losses in time, while stubborn traders will hold on in the hope that the price will reverse to the entry level, allowing them to at least break even.
These stubborn traders invisibly increase selling pressure around their entry levels, and if there are not enough of them, support becomes resistance.
2. Textbook Setup Traders are familiar with technical analysis and look for opportunities to sell in previously supportive areas.
That’s what the textbooks teach.
If a large number of traders do so, the previous area of support can build up selling pressure and become new resistance.
Trading near support or resistance provides a more favorable risk-reward than in the figure above, where prices are far away from support, meaning your stops are best placed below support and away from your entry.
You can see prices approaching volatility highs and there is selling pressure there.
If you are targeting volatility highs as a profit target, your potential earnings return ratio is likely to be less than 1:1.
But if you wait for the price to change and then trade around the value zone: the price is closer to the support level, and with the same stop-loss and stop-profit targets as above, your risk-reward ratio goes up significantly.
# Why do your stop losses keep getting triggered, and how can you avoid it?
Let’s say you run A hedge fund and you want to buy a million shares of Company A, and you know that the support level is at $100, and the stock is currently at $110.
There must be a lot of stop-loss orders under support, and if you can push the price down and trigger those stops, then a lot of sell orders will flood the market and you can buy those million shares at a better price.
In other words, if a large institution wants to short the market, they may set up a sell order to trigger nearby stop-loss orders so that they can get a more favorable entry price.
So how can we, as ordinary traders, avoid this situation?
Simply set your stops some distance from the support level to provide some cushion so that your stops don’t get swallowed too easily.
So you need to identify the low point in the support zone and then subtract 1 times ATR from the low point using the current average true amplitude ATR.
This allows you to have a buffer area to stop losses.
If you want a tighter stop, reduce the ATR multiple by, say, 0.5 ATR instead of 1.
# Extras: How do I draw support and resistance like a professional trader?
At this point, you know a few facts about support and resistance levels.
So how do you draw the right support and resistance levels?
There are three principles: 1. Narrow the chart to look at market movements from a wider perspective 2. Plot the most obvious price in the chart, which is usually where the market reacts most strongly 3.
Adjust prices to market movements so you get the most relevant key price information. Conclusion Summarises the important points of the day: The more often support and resistance levels are tested, the weaker they become;
Multiyear price highs/lows are important levels that deserve the attention of traders who use charts of all kinds;
Support and resistance are ranges, not a price line;
Support and resistance zones are not the only areas of value. You can also use trend lines, moving averages, etc.
After a price break, support becomes resistance and vice versa;
Trading around support and resistance gives you a tighter stop, improving the risk-reward ratio;
Avoid placing a stop just below the support level. It is best to stop 1 ATR below the support level to gain buffer space.
