Although it goes against
human nature, and isn’t necessarily the most popular approach, I
believe the most efficient means of technical analysis might be in
relation to countertrend trading. In other words, rather than
using tools and indicators to identify a trend and go with it,
traders might be better off determining overextended market
conditions and trading against the tide. If the goal is to buy low
and sell high (which it should be), being bullish near technical
support and bearish near resistance should offer
the best odds of success. This theory could be even more valid in
markets such as the currencies, which typically trade within
long-term ranges, as opposed to perpetual bull and bear markets,
although there can certainly be relentless intermediate-term trends.
Peter Lynch once had the
following to say about trading in the stock market: “The one
principle that applies to nearly all these so-called ‘technical
approaches’ is that one should buy because a stock, or the market,
has gone up, and one should sell because it has declined. This is the
exact opposite of sound business sense everywhereelse, and it is most
unlikely that it can lead to lasting success in WallStreet. In our
own stock-market experience and observation, extendingover 50 years,
we have not known a single person who has consistently,or lastingly,
made money by thus ‘following the market.’ We do not hesitate to
declare that this approach is as fallacious as it is popular.”
CounterTrend Traders
(Support and Resistance)
Support and resistance
represent the price at which supply and demand meet. Specifically,
support is the level traders feel demand (buyers) will increase
enough to prevent further declines. Resistance is the area traders
believe supply (sellers) will increase to prevent further price
gains.
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| CounterTrend Traders |
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