Alright, welcome to another video! Today, we’re going to talk about a common mistake I see people make when drawing support and resistance lines. I often notice this during my one-on-one coaching sessions. By the way, if you’re interested in a coaching session, you can check out the TradersFly website. We can work together via video, or you can join the chatroom on our Discord channel where I post charts and technical analysis.
So, let’s get into it.
The Mistake: Looking for an Exact Price Point
When most people draw support and resistance levels, they tend to make a big mistake by looking for an exact price point. For example, let’s say we’re looking at Home Depot. We can see the stock bouncing at three points, so you’d think there’s support there. But when you try to draw a line, it doesn’t always match perfectly. You might hit one point but miss the others. This happens because people look for an exact number, but that’s not how support and resistance work.
The Solution: Thinking in Zones, Not Points
The better approach is to think of support and resistance as zones rather than single price points. The market isn’t precise; people buy and sell at slightly different prices. This is known as “confluence.”
Real-Life Example: Dinner Invitation
In real life, it’s like inviting friends to dinner at 5 PM. One friend might show up at 4:55, another at 5:05, and someone else might be there at 5:15. They’re not all showing up at the exact time, but they’re close. The same thing happens in the market — prices fluctuate within a range.
Drawing Support and Resistance as Zones
Instead of drawing a thin line, you should make your support and resistance areas a bit thicker. This allows for the natural wiggle room in the market.
For example, a stock like Amazon, which is a large stock, might need a wider range, like 25 points, while a smaller stock like Harley-Davidson might only need a range of one to two dollars. It all depends on the stock’s price and volatility. The larger the stock, the more room you need to give it.
Resistance Levels and Overshooting
Now, looking at resistance, you might see the price break through temporarily before reversing. This doesn’t mean the resistance failed; it’s just part of that range. Stocks often overshoot before settling back into their range.
Key Takeaway: Think in Ranges, Not Numbers
So, the key takeaway here is that support and resistance are not exact levels but more like zones. The larger the stock, the bigger the zone. Always leave some room for volatility, and don’t get too caught up on a specific number.
Conclusion
I hope this helps you get a better understanding of how to draw support and resistance lines. If you want to dive deeper, feel free to visit my website for freebies or sign up for a coaching session. Thanks for watching, and I’ll see you in the next video!
