June 22nd, 2010
Clearly, everyone seeks greater certainty about something that by its very nature is unknowable …. the future. We all look to protect our capital by reducing investment risk and continually look for clues, signs and signals that divine what the future holds. Through trial and error, or by what we’ve read or heard from others, we settle on trading rules we believe offer the best chances for achieving this goal.
I frequently and somewhat heatedly discussed (if you’re still here, Marc, hope you’ve had good fortune in this crazy market) one such trading rule: whether to buy a stock at what appeared to be a support area or, instead, on breaks above what you believed were resistance areas. The former approach assumes that the odds were better that a trend would reverse at support than were the odds that a trend would continue and, often, accelerate as it passed through resistance. Of course, both assume a correct read of past price action as to where these resistance and support zones will be. That’s often reduced down to the simple, subjective and often erroneous concept of a trend line.
I’ve always followed the breakout approach encapsulated in the slogan “buy high and sell higher”. I had come to believe that a resistance area was where bears continually overwhelmed bulls in their struggle for control until, finally, bulls succeeded wresting control, finally hold on to it and moving the stock until bears regained their strength for a new fight at some higher level.
The alternative approach argument is that buying at support offers a jump start in that bear/bull battle under the banner “buy low and sell high”. It’s not clear whether having bought at support, the advocate would then sell should the stock ultimately reach a resistance level. What I was sure of was that a failure at support flew in the face of my desire and need to “preserve capital” while failure of a break above always had the fall back position of another quite attempt at crossing over the resistance or, at worst case, relying on the support holding.
To test the other side (“buy at support”), I initiated the following trade today (click on images to enlarge):
On the other hand, I had hoped that PCX, which I unfortunately did not sell all of, might also bounce off its support; so far today that doesn’t to be working:
What say you?
- Which do you believe is the most conservative?
- Which the most aggressive?
- Which has the highest probability of success?
- Which has the lowest riskof loss?
- Doesn’t matter?