I'll now show you what I mean by „natural“ support and resistance. Let's look at a nicely trending market in Crude Oil.

Natural support and resistance points are those places in a trend where prices either move sideways for a brief period or where prices make some sort of correction by moving counter-trend for a few bars.

These stops usually work because price action in the market has previously held at those levels. If recent price was too high or too low at that level, then price will probably be considered too high or too low at that level in the near future. These stops take advantage of the natural support and resistance in the market.

If prices at a natural point of resistance or support do not hold, then the probabilities are that we have been wrong fn our estimation of market action, and we are better off being stopped out of the trade.

I have a tendency to use natural support and resistance points when planning a longer term trade for the time frame fn which I'm trading. The next chart will illustrate this concept. The main thing is to set the stop in light of my objectives and strategy.

On the chart below, we see major basing action by March Soybeans. If I were anticipating a long term trade, I would want to place my stop below a natural support point as opposed to perhaps a step based upon market voatility. If I were anticipating a short term trade, I would use market volatility as opposed to a natural support point. Mу stop placement should reflect my trading objectives and strategy.

Advantages and Disadvantages of Natural Stops

The single greatest disadvantage to using natural stops is at one and the same time its greatest advantage: Prices may be too far removed from the current price action.

Natural stops are easy to see on a chart once prices move away from them, and in a trending market prove to be remarkably safe. They tend to keep you in a trade for a long time.

A big disadvantage to using natural stops is that at times, when you wait until they are hit, you may see a rather nice gain turn into a loss. Natural stops are of little or no use in non-trending markets.

The next chart gives you an idea of what I mean when I say a natural support point may be too far removed from the current price action.

Anticipating a bull move in Corn, technically supported by the strong basing action on the chart, I would want to use a natural support point. However, if I took the most natural support point, I would have a stop substantially away from current prices. I've shown the alternative stop placement point I would have used.

The following shows a brief overview of shorting signals in a downtrend. The setups resemble buying signals in an uptrend. There are, however, subtle differences. The below figure illustrates three key shorting signals.

Read them like this:

1. The breakdown from support.
2. The breakdown after the stock rebounds to resistance (supply), then drops back into its downtrend.
3. The add-to-position point for position traders. Here, the price collapses below the previous pivot low, or support.