Bella forwarded this question to me from one of our readers, Cher Yee:
I have a question on Adam’s entry under “Technical Plays” on 12th November where he introduced a simple setup where the market tests the support several times. The more times a level is tested, the more it is likely to break and this setup applies to all timeframes and markets.
I am confused by this as so far. What I read and was taught is that a support level is stronger the more times price touches support levels and rebounds. What is the reason(s) for the setup that the more times support is tested, the more it may break? Does the teaching that “the more support is tested, the stronger it is” still apply?
I’m currently new to trading and iIm learning how to trade at support levels. What are the entry points when trading stocks near support levels? Like should the entry be 1 bid above support after price has reached support, to wait for one bullish candle to form first and enter one bid above that bullish candle or to wait for retracement?
This is a good question. First of all, yes everything you will read will tell you that the more times a level is tested, the more “valid” it is. I think this is one of those nuggets of conventional wisdom that is wrong. I guess maybe I am not sure what those authors mean by “valid”, but in my experience, really strong support/resistance levels immediately push price away from them. There is, for instance, enough buying pressure at support (= enough buyers waiting to buy at the level), that the market is immediately bid up and away from the level. If price can hang around the level or quickly comes back to the level, it suggests a certain lack of conviction on the part of the bulls. If the market is able to retest the level many times, especially with lower bounces (lower highs) each time, then you have a fantastic setup for a breakdown through the level.
I have seen this many times where traders buy in front of the same support over and over. Psychologically, you usually feel a little more confident each time, so the first time you buy 500, the next 1000, the next 2000, and eventually you have your max size and buying power in front of the level. When it finally breaks, there’s enough slippage that you have given back everything you made and then some… it’s a bad play but is makes sense to us psychologically on some level! The same concept applies to daily and weekly levels as well.
As for specific entry techniques, there are many ways to do this. Speaking personally, buying at support is not in my playbook because the numbers do not work out well for me. I would rather see a test and enter on a pullback in the trend that begins at the level. I can tell you that the best entry is the one where they drop support out and quickly rebid, leaving a long shadow on the candle that dropped through support. This does require a fairly large stop at times, but it shows you that buyers are waiting to step in at/below the range and quickly bid the market higher. I would much rather buy “ragged” support than clean support… that play is 100 times better (to me) than buying a clean, exact support level.
Don’t trust what you read or what you have been taught. You have the same information that the authors did (price data, both raw numbers and in charts) and two eyes! You can, and must, do the research for yourself. Look at 500 examples of support levels on all time frames and draw your own conclusions. What you verify, and what you learn, from this process with be so much more useful to you than what you read in a book.
I hope this helps. Please ask again if anything is unclear.