Today I got a question from a student who’s only made a few posts in the course, so just getting started.
They asked a question which points to a critical aspect of trading.
Here is what they asked below:
I think this is a fantastic question many developing traders struggle with.
How do you ‘know’ if the key level you’ve chosen is the right one?
What happens when the level you chose just got sliced through like Swiss cheese?
And do I look for ‘confirmation’ whether this key level will hold or not?
I’ll address these questions in this article to clarify your understanding of trading with support and resistance levels.
Isn’t Finding Key Support & Resistance Levels Subjective?
I think many beginning traders struggle with the more ‘discretionary’ elements of trading.
It’s easy to want things to be fixed, to be purely scientific or mathematical. That is nice because it means for every situation x comes up, you should do y.
Lamentably, trading isn’t that simple, especially when trading price action. Risk management would be one of those components of trading which is purely scientific. It all boils down to math and the risk of ruin.
However, trading key support and resistance levels is part scientific and part artistic. This means there are rules to trading them, but part of working with them will entail a ‘discretionary’ call.
Hence the answer is yes, there will be a part of your trading with key levels that will be subjective which you cannot avoid.
It should be noted I do not look at support and resistance levels as pure lines in the sand. I look at them as zones of order flow.
Why do I say this?
Because when you look at the order flow and liquidity around key levels, you’ll notice a pattern. That orders and liquidity vary at several prices above & below the key level.
This is because there are varying institutional players out there who will place their orders at varying prices above or below any key level.
A great example of this is when we consider time horizons for trading. If someone is trading intra-day, then they will likely have a smaller stop.
This will require them to have greater precision in terms of their entry price and trade location. Thus they will be as close to the level as possible.
However someone who is swing or trading long term will not be so concerned with this as a few pips difference on a +500 pip profit target and 150 pip stop loss.
Keep in mind, this is just ONE factor regarding how orders are placed around key levels (as there are many).
But when we look at the order flow around key support and resistance levels, we can see there are going to be orders at many prices above and below a key level.
This is part of the reason why I consider trading key levels to be more like zones of order flow. There are other reasons which I explain further in my price action course.
How Do I Know The Levels I Selected Are Key Levels?
This is another critical question that I often see amongst developing traders. The reason why I say ‘developing‘ traders is because this type of question & wording gives a unique insight into a traders mindset.
They make it seem like placing a trade around a key level is like jumping off a cliff that is only 15 feet above water 😮
As a general rule, you will never ‘know‘ anything about trading, let alone price action. This isn’t like poker where you have a fixed number of cards in the deck and can ‘know’ the probability of a hand or card being hit.
There are an infinite amount of possibilities -1 that can happen in the charts. You will never ‘know‘ with 100% certainty and you cannot avoid this.
The desire and want to ‘know‘ comes from a beginning traders mindset…of wanting pure objectivity in trading.
“Beginning traders want certainty because they are uncertain of their abilities and skills.”
The want for certainty is an attempt to compensate for their lack of skills and confidence. The problem is, certainty is an illusion in trading, so you are wanting something that does not exist.
I do not ‘know‘ a key level I’ve chosen will work or not. I’m just going on probabilities & my read of the price action context.
I’m guessing an olympic biathlon shooter doesn’t ‘know’ when the wind will blow. But they can take measurements, read the wind speed and direction (constantly in flux), then make the best shot they can.
Trading is very similar.
And professional traders will never ask this question about ‘knowing‘. Why?
Because professional traders trade and think in probabilities. They know that certainty is an illusion. They know what you are really working with is ‘probability‘.
Hence the best you can do is align the probabilities in your favor as much as possible.
Are There Ways to Improve Your Ability To Read Key Levels?
Yes, I have an entire lesson dedicated to this in my price action course. We cover how to work with key levels across multiple time frames and context.
Do I Look for Confirmation Whether The Key Level Will Hold?
I’ve talked about this how hedge funds do not trade confirmation price action signals. They give you a worse entry and actually lower your overall profitability and accuracy.
Hence I do not look for confirmation signals at key levels. You can read more about why I don’t trade confirmation signals at key levels here.
Until the Hal 9000 is available for trading, I’m not sure we will have an ‘objective’ way to trade key support and resistance levels.
It’s important to understand where this mindset comes from and why you should trade and think in probabilities.
It also helps to think of support and resistance as a zone of order flow, not pure lines in the sand.
Most often, traders who struggle with the probabilistic nature of trading are wanting certainty. But this is an illusion in trading. We have to get comfortable with certain parts of trading that will simply be ‘unknown‘.
Your ability to read key levels will improve over time, and there are many things you can do to improve your ability in this. We teach these methods in my advanced price action course and how to increase your skills trading key support and resistance levels.
Eventually you’ll develop the confidence to trade them without confirmation. And when you do, you’ll see your profits, accuracy and profitability increase tremendously.
Have you been wondering how you will ‘know’ if a key level will hold? Do you find yourself constantly looking for ‘certainty’ and ‘confirmation’ around a key level?
Make sure to comment below and share your thoughts.