Make Your Millions From Stock Market Crashes!

Foreword from ShareInvestor

This article “Make Your Millions From Stock Market Crashes!” by Binni Ong was first published in the Oct 2010 – Nov 2010 Issue of INVEST magazine and is reproduced in this blog in its entirety. In this article, the author, through a personal anecdote, shares with you a simple ‘buy support, sell resistance’ trading strategy using historical prices to identify strong support or resistance price levels on the assumption that previous support or resistance can be used to predict future support or resistance.

How history provides you with clues

Market Outlook

I started my relationship with the stock market when I was just 17 years old. That should be the age when many young people like myself then should be busy studying. However, the flickering stock prices on the Teletext screen were a huge attraction to me than the many lines of Physic or Chemistry theories found in books. Of course, my initial role was to help my mother watch over her stock positions and to read announcements issued by companies. Slowly, I built my own portfolio of stocks that I was interested to invest and trade. That was about 17 years ago.

In these 17 years, I went through many financial events such as Asia Financial Crisis, SARS, Tech Boom and Bust, 911,USfinancial crisis etc. I am glad to have seen and experienced a part of the financial history. Most importantly, during this period, I have witnessed many individuals making their millions. Of course, I have also seen many others who lost their millions.

I will like to share one particular story that has left a huge impact on me. This is not a story about how someone becomes a millionaire. But a story of a doctor, a widow and a mother of two girls. This aunt of mine does not drive a BMW or Mercedes-Benz (she drives aToyota). She does not look at the stock market prices often (probably once a month) and thus she does not do active trading in the stock market. She is only interested to look at the stock prices when her patients share with her how bad the stock market is. By now, you would have deduced that she only buys her stock investment when the stock market falls steeply for a period of time. Of course, she sells her stock holdings when her patients share with her how everybody is involved in the stock market and how bullish they are.

You have guessed correctly – my aunt buys her stock investment during stock market crashes. She sells for profit when everybody is starting to rush in to enter the market. You can call her a contrarian if you want to. However her method funded the purchase of many luxurious properties and she could just retire anytime she wants to.

What is her secret? You will be surprised. She remembers historical stock prices.

History tells Future, Previous Price indicates Future Price

Identification of strong significant support level. Current price as shown is $35.34. The lines drawn below are strong support levels predicted base on historical prices.

One important concept in the study of technical analysis is the assumption that previous support or resistance can be used to predict future support or resistance. For example, if the previous historical support of Stock A was $2 and now the stock is trading at $3.50, then the previous support of $2 will act as a floor again should Stock A falls. Likewise, if previous resistance of Stock B is $10 and now the Stock is trading at $8, then the previous resistance of $10 will act as a ceiling should Stock B rises.

My aunt remembers historical prices – it is not just any price but a level that is significantly strong. She told me that is her sixth sense. I smile. It is hard for me as an educator involved in investing and trading strategy to teach sixth sense. So, in this article, I am going to impart my experiences of how to determine significantly strong price levels by looking into history. 

Identification of strong significant resistance level. Current price as shown is $3.94. The lines drawn above are strong resistance levels predicted base on historical prices.

3 Steps to determine Significantly Strong Price Level

You can identify strong support level by following these 3 simple steps:

  • Step 1: Switch to weekly chart
  • Step 2: Identify peaks or troughs that are below price and draw a horizontal line above the peak or below the trough. These are the support levels
  • Step 3: Identify peaks or troughs that are above price and draw a horizontal line below above the peak or below the trough. These are the resistance levels

Historical Prices as a Trading Strategy

One strategy of using historical prices is to use the method of ‘buy support, sell resistance’. This strategy is best applied to fundamentally strong stock. When price reaches a strong historical support, you can place a buy order at that price with stop loss at your money and risk management percent. Likewise, when price reaches a strong historical resistance, you can place a sell order. In the short sell strategy, it is best applied to fundamentally weak stock.