Hello again traders, and welcome back for another edition of notes from a newbie. This week I wanted to dive into a pretty simple yet often overlooked concept we as traders like to call “Support and Resistance.” I will do my best to make Coach Mark proud this week as he is an avid believer in the power of S&R and does his best to beat this in our heads every day in the coaches’ lounge. I have always understood the concept, I mean it is literally one of the first things you learn during any technical analysis class. However, understanding how to identify S&R and truly understanding the power that it has to influence stock movement are two completely different things. And let me tell you, I am learning more and more every day about just how powerful it can be. See, for me, seeing and believing were two completely different things. There is an old saying that goes something like “I would have to see it, to believe it,” well early on for me it was more like “I see it but I’m not confident enough to believe it.” So what changed you might ask? Well, what builds confidence in anything you do? REPETITION! Repetition builds confidence and confidence builds belief, and belief is what dreams are made of! See what I did there! Ok, so I may have been coached into believing but my willingness to trust the power of S&R even when it was breaking the rules of the trade was a giant leap of faith and one that taught me a valuable lesson. So without further ado, let me set the stage for you.
The first lesson in this particular trade or any trade for that matter is to always identify support and resistance, no kidding right! Well on this particular trade I got more caught up in the delta rule (finding the strike with a .20 delta or lower) and paid less attention to exactly where that strike price fell in regards to resistance. Newbie mistake, I know! But hey I knew what I wanted to do, I was trying to find a bearish trade to lower my portfolio delta as I felt I was too bullish in unpredictable market conditions. I wanted a trade that would be unaffected by earnings so opted for a sector ETF. I used the market scoreboard to find historically weak sectors by month that happen to be in a downtrend and came up with XLB.
I entered a Bear Call Spread on XLB on 02 May. I chose a 36 day option with strikes at 59/59.5 with deltas under .20. As previously mentioned the mistake was not taking into account where these strikes fell in regards to support and resistance. As luck would have it the stock immediately turned against me and began to run higher. It took 5 trading sessions for me to come to a decision point. At this point I realized what I had done and I had a pretty big decision to make. See I have been a habitual breaker of the rules and have taken it on the chin almost every time, so enough was enough in my book. Based off past experiences I was determined to follow the rules, but something here was different. As I referred back to previous blogs about the power of patience and trusting the coaches and resources that have been provided for me I decided to have some faith in the system. I had been listening to Coach Mark emphasize the power of resistance for weeks and finally decided “what the hell let’s let it go and see what happens!” So I did just that.
I’m not going to lie, the next week of trading as this thing continued to climb towards that infamous resistance level was not easy for me to take. I am pretty sure I asked myself “what in the hell I was doing” at least 10 times a day. The only thing keeping hope alive was that the candles were shrinking every day as resistance was fast approaching. I could see momentum was slowing! Then on 21 May (the first trading day after my birthday) I was given a little market present, a doji! I never thought a candlestick would be a great birthday present but hey, I never thought I would be a trader either! And if you are wondering what happened next, I won’t spoil the surprise, take a look below and see for yourself!
Pretty cool huh! And that folks, is why resistance is such a powerful tool. This was a game changer for my trading confidence. Now, will it always work like that, probably not but I have to believe the odds are in my favor. This was just another valuable lesson provided by our great coaches at Tackle and verified by my willingness to believe in them. So as always I will close with the moral of the story:
1. Always, always, always identify Support and Resistance before placing any new trades. If the delta rules align with S&R than that is a double whammy! When it doesn’t, always side with S&R or find another trade that aligns both factors.
2. We have a saying in the Army that goes “Trust but Verify.” Trust the system but verify it works for you. Practice helps with this, but every now and then you might have to take a step outside of your comfort zone. When verification meets confirmation, confidence will increase and profitability will follow.
3. Lean on your coaches and fellow traders, most of them have been there, done that and even have a T-shirt! I learn as much from them every day as I do from the markets themselves. Plus they are pretty cool people anyways!
Well that does it for this week. Hope you have a great trading week, see you next time!
See you all next time,