1.7 Trading Support and Resistance Levels

1.7 Trading Support and Resistance Levels
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    I can't emphasize enough how much managing losses is very important and
    how much technical analysis is key to helping you do that. Let me give you
    an example: if you guys lose half of your money, hypothetically speaking,
    if you lose half of your money, that's a 50% draw down. How much money do you
    need to make to get back to break even? Do you need a 50% return? You need a hundred
    percent return to get back to break even. When you lose 20% of your capital, how
    much return do you need to get back to break even? You need around 25. If you
    lose 10% of your portfolio, how much return do you need to get back to
    break even? Either on 11.1%, there abouts give or take. You lose 5% you need 5.5% back.
    The insight is: it takes more energy to make money than to lose money.
    It takes more energy to make money than to lose money. Which means that you're
    working so hard trying to make your money compound for you, that the first
    secret, the first technique that you should simply be dealing with is
    making sure you control your losses. And I will submit to you that from a
    discipline versus discipline point of view, technical analysis to fundamental
    analysis, you asked me which person will do better over the long run,
    I'll always say technical analysis. And the first reason I will always give is because technical
    analysis helps you keep your losses small. While if you look at
    fundamental analysis, the primary way that they use
    to manage risk is through diversification.
    The primary way that technical analysis uses to manage risk is through cutting losses.
    And cutting losses ironically, taking a loss while they're small is a more robust way
    of managing risk than diversification or other risk management
    strategies out there. So what's a rule? Typically, the rule that we each at least
    is our training school is that when you take a loss,
    you should never allow a loss in a single stock, whether you allocate 5%
    of your portfolio, 20% of your portfolio, or 50% of your
    portfolio into one stock. Typically, we always advise not to let a loss become
    1 - 2% of the whole portfolio. Let's say for example deploy
    It's a 1 million portfolio, you deploy 10% in NOW
    1 minute, you deploy 100,000 in NOW right? And then that NOW drops down 10%
    So the 100,000 drops 10%, you're now losing how much? Ten thousand, right?
    So, typically when that loss reaches your predetermined maximum loss,
    whether it's 10% or 1% of the portfolio or 2%, it's an
    automatic cut. Because you want to be able to make sure that you put you keep
    yourself in a position where your portfolio is still healthy enough to
    make the returns when you decide to make the returns, when the opportunities come.
    So, that's always very important for us. It's always very hard to get back
    especially in the stock market. If you think about it, there are only
    four possible outcomes whether you buy or sell a position. Four possible
    outcomes are: (1) you can have a small gain, (2) you can have a big gain, (3) you can have a
    small loss, or (4) a big loss. Those are the only four outcomes. Now, let me ask you
    what out of those four, are you in control of?
    The gains? Can you control how much gains that you make? Of course not! But can you
    control how much losses you can make? Of course, you can control it by cutting.
    So for us professional traders and money managers alike, when we manage money
    in the stock market, taking a small loss is business as usual.
    When people say, "Ah okay, nag-cut ako nang ganyan?" it's normal. But the only
    time we get into trouble, is if we allow a loss to haemorrhage into a big loss.
    Small losses are acceptable, big losses aren't. Going back,
    that's essentially the reason why we want to be able to operate disciplinely. Because your risk
    management, what you're able to control, whether it's a small loss or a
    big loss, begins at your point of entry. It begins when you decide to enter. Why?
    Because if you decide to chase prices, it sets yourself up for cutting bigger down
    the road. If you're able to operate disciplinely, buy when it's quiet or buy
    at least when prices are close to those levels. If prices go down, then when
    you cut, you cut smaller. What if you buy it on support and then during the
    day it breaks that support and then at the end of the day it goes back above
    the support? Do you cut it within the day or do you cut it at the close of
    the day? Generally, the rule that I follow is I follow a close of the day.
    This is generally speaking. Meaning if I have a
    few positions that are already breaking below my support, then I'm already watching
    them very closely. They are within my focus. However, there are going to
    be some instances where for example within the day prices are breaking down
    your position, but at the same time you're also seeing across the board
    stocks breaking down across the respective supports as well. Maybe the
    index is breaking down, maybe there's an announcement that you need to consider,
    maybe the Fed raised rates unexpectedly and all of a
    sudden foreign funds are moving out and that's causing prices to drop down or
    let's say it's just a negative announcement. It catches the market
    unexpected and prices are breaking down on volume during the day. Then at that
    particular instance, I would already start cutting. But generally speaking, let's
    say prices break down below my support, especially if it's an illiquid stock,
    like maybe for example it's PIZZA, maybe CHP, East West, I mean leigt companies but
    somehow illiquid. If it's breaking below, if it's breaking support within the day,
    while I see the whole market holding, there's no general reason for prices to
    break down, then I'm gonna wait until the close of the day. And I also want to
    see the volume that's happening, the volume present during that break down.
    But generally speaking, I would wait until the close of the day. These support
    and resistance levels that I'm showing you are also what we call "pivot points."
    Pivot points which means that they break below, we cut it. They bounce above it,
    then we add some more. So these are pivot levels meaning it's a pivot that
    determines two opposite actions. If it goes above the pivot, we add.
    If it goes below, then we decide to cut. Well in the case of an uptrend, you need at least a low, a high.
    A higher low and then a higher high. So you have those four data
    points that you need to be able to consider an up thread. Now when it comes
    to the lows, you need 2 pivots so you need your low and your higher low.
    At least 2 support pivots to see if you have a bounce of support. So later on,
    I will also be teaching you some techniques that you can use to already
    participate in the first higher low even before the higher high happens.
    So essentially, I'd say that the the gist in the meat of how stocks are entered.
    If you look at how stocks are sold on the corollary, selling is most ideal as it
    bounces off resistance. So you have resistance here. Whether it's a support,
    a sideways pattern, or let's say you have an uptrend line here.
    The line that connects the highest of your resistance
    is called your resistance. As prices are reacting off of that, that's
    also a justified window to at least lighten or sell some of those positions,
    to sell a portion, or sell those positions. So for me, every position that
    I have I'm always cognizant as to where my pivot points are.
    Should I be cutting? Should I be adding? Should I be selling? What are
    the prospect positions? What are their pivot points? Para at least when they
    enter those pivot points, I'm already executing. I'm executing already. I'm
    really prepared. I'm already executing.
    Selling is most ideal either at the bounce off resistance or at the break
    down of an area pattern support. When you have a breakdown of an area pattern support,
    as I mentioned earlier using the CHP example, what is a breakdown a
    beginning of? A breakdown and you guys might want to write this down.
    A breakdown is a beginning of a downtrend.
    While a break out is a beginning of an uptrend. And the reason why break outs and breakdowns
    are very important key events that you should be cognizant of is because
    obviously in uptrends, you want to participate at the end or at the
    beginning of uptrends? Siyempre at the beginning. So beginnings of uptrends,
    you always see a lot of uptrend start out with
    breakouts or at least a portion of those. But at the same time, down trends often begin with or
    sometimes begin with break downs. And you want to steer clear of issues like those.
    So this is what I would say, this is the most important slide here.
    Only because it gives you already how to enter a particular position, and more
    importantly gives you the big picture as to how money is made using technical
    analysis. Because most customers or at least most people that I talk to,
    after they buy a position, they cut it and they come to me and say, "Javi, nag-cut ako nang ganyan. Anong nangyari sakin?"
    People don't understand that cutting losses is really part of the game.
    It's really part of responsibly trading in the market.
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