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Should you draw a resistance area on this chart?
Here, the price moved down strongly, so it definitely found resistance from this level.
So, the big question is, should you draw it as a resistance area and wait for the price to come back to it?
If you said yes, then answer this question.
Who told you the price will reverse from it again?
Did a trading guru tell you that, or did you learn from some beginner trading course?
Who told you that the price reverses from the resistance areas?
Maybe I am not giving you enough information about this chart, so let me tell you a secret.
This is a stock market chart.
Now, with this secret information, answer me this again.
Should you draw this resistance area?
Remember that this is a really important hint.
If you said yes, we should draw this resistance, then let me ask you, if you knew that the stock market is in an uptrend most of the time, do you think an uptrending market matters to the resistance area?
If you said no, then why not?
Do you think since it is an uptrend, the price will easily cross it and this resistance will be completely ignored?
If you said that this resistance still matters even after knowing it is an uptrend, who do you think is the stronger one?
The uptrend or the resistance area?
Which one will have a higher win rate?
If you didn’t understand anything I just said and are just nodding at every question I asked, then don’t worry.
By the end of this video, I will give you tested data proof of whether you should draw resistance in the stock market or not.
I will give you its win rate, and you will be surprised at the results.
To test if the resistance works or not, I made this simple indicator that basically sees if the price reversed strongly from a price level, something like this, and then draws a red box at the reversal point.
Something like this box.
I have designed this indicator to only show this resistance area if there was a big reversal of more than 10 percent.
This way, we only draw the strong resistance areas, which ultimately will have a higher chance of working according to trading gurus.
How am I going to decide whether a resistance worked or not?
Well, it is really simple.
When the price comes back to that resistance again, I will manually check if it completely ignores it and goes straight past like this or not.
If it goes straight past then it didn’t work.
The price completely ignored that resistance.
But after a big reversal point, if the price reversed from that same resistance multiple times and went in the sideways direction, something like this, then it worked.
And after a big drop, if it drops again from that same resistance, then it also worked.
Basically, if the price doesn’t ignore the resistance like a politician ignoring the real problems, then the resistance worked.
Basically, if the price ignores the resistance like a politician ignoring the problems, then it didn’t work.
I am going to test 200 resistance areas on the S and P 500 and other stock market indices in total.
Basically, I am going to see all the major resistance areas in the history of these major stock market indices.
I picked this because they are popular and usually move in an uptrend, like many popular stocks that people trade.
I drew resistance using the one-day timeframe, but since one-day resistances are visible on every single timeframe, this testing data also applies to most timeframes in the stock market.
But there is an important fact you should remember to become a successful trader in the stock market.
The uptrend becomes clearer and clearer as the timeframe gets higher and higher.
Smaller timeframes, such as the one-minute, have their own little world where random trends happen frequently.
But as the timeframe gets higher, the long-term uptrend becomes very clear.
So, this tested data becomes more relevant as the timeframe gets higher.
So, after testing the resistance 200 times, this is the win rate it got.
But there is a big twist in this that I will tell you in a moment.
It completely changes the meaning behind this win rate.
But first, let me ask you a really important question that will really test your trading knowledge.
When I tested the resistance area in the stock market uptrend, it got a 50 percent win rate.
Do you think this 50 percent win rate is a random win rate?
At first thought, 50 percent means 50 50, right, like it worked half of the time, or in other words, the resistance didn’t work.
But think about it for a moment, because there is a big twist.
I am going to take another 200 trades in a moment and show you the hidden truth.
But to understand the hidden meaning behind this 50 percent win rate, answer this.
If the price is moving in the sideways direction and I only take trades in the downward direction, do you think my win rate will be 50 percent, assuming I lose and win the same amount?
That makes sense, right?
Since I am taking random downward-direction trades, my win rate should be 50 percent.
But what if the price was in a downtrend?
What do you think my random win rate will be?
Think carefully.
I have given you a really important piece of information.
Do you think my random win rate will be higher than 50 percent or lower than 50 percent?
If the price was in an uptrend and I still took trades in the downward direction randomly, do you think my random win rate will be lower than 50 percent or higher than 50 percent?
Lock in your answers, because I made another indicator that drew random resistance at random points to find the real random win rate in an uptrend.
If you didn’t understand what I just said, don’t worry.
But this is where the real magic happens.
The 200 times random test proved that the win rate of taking random short trades in an uptrend is not 50 percent.
It is actually around 44 percent, which means that the 50 percent actual proper resistance win rate we got earlier is above the random win rate.
This is really important, because this makes you ask two very important questions.
Number one, does this mean that resistance in the stock market uptrend actually works, since its win rate is higher than random?
And number two, what is the even bigger plot twist that made me completely stop drawing resistance areas in the stock market higher timeframes?
To understand the reality, remember these 4 facts.
The win rate of taking random short trades in a sideways market is 50 percent.
But in a downtrend, the win rate of random short trades jumps above 50 percent.
That means, if you flip the direction, long trades in a downtrend gives less than 50 percent win rate.
And if you take long trades in an uptrend, the win rate will be more than 50 percent, which means taking random trades in the uptrend has a higher win rate than the resistance win rate.
Remember what I just said, the resistance is literally worse than taking random trades in the uptrend.
If you use a proper uptrend strategy, then your win rate will be even higher, like 60 percent.
This makes the resistance win rate even worse in comparison.
The price has a much higher chance of moving in the upward direction than the resistance has of making it reverse in the downward direction.
This is an absolutely amazing piece of data that will instantly make you a better trader.
Here is how it changed my mind completely.
In my 10 years of trading journey, I have made bad decisions related to profit booking because of stock market resistance.
If I took a long trade in an uptrend, something like this, instead of setting big profits, I used to set it below the swing high resistance.
My logic was, because it’s a resistance, there is a chance of price reversing from it, and I don’t want to miss out on the profit which was already made.
So, by booking profits below this resistance, I was always happy.
I’ve booked so many trades like this.
Because this makes perfect sense in normal swing trading.
Setting a profit target below the resistance is a good idea when the uptrend is not a permanent uptrend like the stock market.
But I like to follow data more than my neighbour follows people at night.
So after this stock market data, I have changed my mind.
I have realized that setting profit targets above the resistance area is actually good in the stock market higher timeframes, because the price has a much higher probability of moving towards my bigger profit target than it has of reversing from the resistance area.
Does this mean I will never pay attention to the resistance areas in the stock market?
Well, unless the price is ranging too much, I will probably ignore resistance areas from now on.
But on smaller timeframes, and outside the stock market, where a permanently good uptrend doesn’t exist, I will always draw the important resistance areas.
Because the way I draw support and resistance actually has a 60 percent win rate according to tested data.
You can check out that testing video and my method by clicking on this video on your screen.