For the next month, people around the world will become hard-core soccer fans. The reason for this kind of excitement is the World Cup. The World Cup comes around every four years, but it stirs the kind of excitement that can only compare with the Super Bowl. The excitement of such an event is the drama of the athletic competition. More importantly, it is seeing (arguably) the best athletes in the world compete against one another. The players are constantly running almost at full speed for over an hour and a half.
The players were not always the best though; it took years of training to develop the skills to be one of the top of their desired endeavor. The reason people like to watch the sport is that the fans and the players understand two very important concepts that make the sport a fun game to watch. The concepts are strategy, and learning the basics of the game.
If a team has a strong enough strategy, they can overcome any obstacle and defeat the strongest of competitors. Without truly understanding the basics of the game, it is difficult to succeed even if you have huge amounts of talent. You also have to be able to execute the basics as well or you cannot succeed.
People that trade commodities successfully, understand the same thing that soccer fans do. You have to have a sound strategy, and you need a strong
understanding of the fundamentals of trading. One of the tools is to understand the principle of support and resistance.
Support and resistance, as a concept, is one of the keys to your trading strategy because it helps you to analyze the information you need to wade the deep waters of an investor and to come out potentially on the other side unscathed. To understand the two terms you need to remember that the market is fueled by the concept of supply and demand. The more a commodity is in demand, the higher the price usually will be, and on the flip side the higher the supply of that commodity the lower the price is usually going to be.
The essence of support is that it represents one of the lowest price points that a commodity sells for on a particular trading day. Although the price may hit that point, once the commodity drops to a lower point, it creates a new support point. Using the support points you can potentially figure out a starting point to enter the market. Alternatively, you can also use the support point as a reason to wait on a particular commodity.
The resistance point entails usually one of the high price points that a
commodity trading has sustained for a period of time. It is normally also volatile such as the support part of your analysis. This means that a commodity can hit a price, however that would not necessarily be its resistance point because it may immediately fall or the price may jump up; that is just the fluctuation of the market place.
Using this general knowledge of support and resistance can help you potentially achieve your goals on your trading day. The data that you use is there to help you figure out starting points to buy a certain commodity, or when it is time to sell a certain commodity. Using support and resistance is also a way to know when you do not necessarily need to enter the market at all. Sometimes it is better to keep your cash than it is to speculate and potentially lose your money. The idea of support and resistance will help you build a solid strategy that will assist you in your goals of achieving setting proper limits for exiting a trade as well as an idea of where to place stops once you enter the market.
The players of the World Cup know the same thing that a successful trader knows, that it is important to know the basics. Understanding the support and resistance points of your trades daily will make you potentially a more successful trader and make you potentially more profitable. If you are consistently profitable, you may wish to consider yourself a superstar of the trading world just like the players at the World Cup. Who doesn't want to be known as the best? Maybe you will only know, but without the basics of support and resistance and a sound strategy you may never know how good of a trader you could become.
Disclaimer - Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.
This specific article addresses the use of stop loss orders. Please note that placement of stop loss or stop-limit orders will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.