What Has a Better Chance of Happening?

I ask traders this all the time when I am teaching technical analysis: “When you look at a chart, what has a better chance of happening?” In fact, we should ask ourselves this question in many situations that do not involve trading, but that is a discussion for another time. As option traders, we try to put the odds on our side through various means to gain an edge, and one of the most important is technical analysis.

Support and Resistance

Just using the simple thought process that support and resistance have a better chance to hold than break makes you a better technical analyst. Look at the chart below. The stock is down to a previous pivot level (double bottom). Knowing support has a better chance to hold and move higher than break, you would have put the odds on your side if you initiated a bullish strategy.

It Works Both Ways

Even though the market has been setting record highs as of late, there are times when potential resistance should jump out at you and maybe make you wait for a better entry. Consider the example below. The stock is moving up into some potential resistance on the hourly chart. You would say it has a better chance of not breaking that level. It might be prudent to wait until resistance is broken before implementing a bullish strategy.

Final Thoughts

Doing little things like asking yourself what has a better chance of happening can do wonders for improving your odds as a trader. The key is, do not let emotions get in the way of your technical analysis. If you do, the market will exploit you and that never helps anyone.

John Kmiecik, Market Taker Mentoring

Trader Education