Q. Dear Sandy, how can I trade on the right side of the market?

A. One of the many pitfalls for traders is being on the wrong side of the market. So what does it mean to trade on the right side? Essentially, there are three stages to a market move. It can move up, down or sideways.

Therefore, the first question that needs to be answered is what do you think the market will do? If you are bullish then the market should show signs of an upward bias. This can be simplified by just looking at a chart. If the chart has been rising, then clearly the immediate trend can be considered bullish. Therefore you should be trading from the long side.

Ideally, we would like to see a series of higher highs and higher lows to confirm that the trend is bullish. On the other hand, if the chart is declining, then of course we would only consider short trades to stay on the right side of the market.

But the problem arises when a market is range-bound. At this stage, we can look to see where previous support and resistance levels have formed. Then we would be buying on support and selling at resistance.

Q. Dear Sandy, what are support and resistance levels?

A. Let’s say that by looking at a chart, we notice that a stock has been struggling to break above £20. Over the past three months, it has attempted to break above this level three times but so far has not has any success. It can then be considered that £20 is a resistance level for the stock.

At the same time, if this stock has fallen from £20 down to £10 but then stayed above this price, then we can say that this is a support level.

Q. Was crude oil trading at support and resistance?

A. In May this year crude oil was trading at $92.18 and then suddenly declined to $69.62 within two weeks. This was clearly a bearish downtrend and only short trades would have been profitable. Thereafter, oil proceeded to trade sideways between $70-$80 for 46 days. During this time the commodity was stuck within a channel or, in other words, range-bound. Each time oil traded towards $70, one could have looked for opportunities to buy and each time it reached $80 the trader could have closed their position for a profit and/or even initiated a short position looking for a move lower back towards the $70 support level.

Last week however, September crude oil broke above $80 and brok out if its channel. If it stays above $80, this points to further gains ahead.

Learn more about technical analysis with Sandy at his free City Index seminars.