Why is it called a “test”?

Q&A from an avid reader:

Jim,
You can say that again (“money psycho” market)…
….on the bright side, this is indeed an opportunity for me to ask another question…
…in the context of crude oil you said yesterday:

Crude bottomed, bounce for four days off the low, and technically is testing the move back to support. If it holds that would equal an opportunity to trade the upside continuation. If you are a technician and understand that trading opportunity… by all means trade it.

…so my question: What the heck is a “test” anyway?? Is the above “testing”  just a conglomeration of money psychos spontaneously selling crude just to see if they can (micro term) push crudes price below support (before they then believe in the support) ???? …or is it more likely a  huge hedge fund doing that???
….or maybe both?? (meaning, the hedge fund or institution starts the crude selling towards support, knowing that money psycho’s will join the selling, and then if crude doesn’t break support the test held)???

— Avid Reader

Thus my point if you are technician trade it. If not…. Don’t

(See chart)oil_chart

  • Note the support/resistance lines drawn at 11.23 and 10.70
  • A test is a move back to those lines of support (on a test) or near them, between them, etc.
  • Wednesday’s bar (red) showed a test between the two lines (10.81 low) @ 2:20 pm
  • It then bounced off the low (TEST) and held higher into the close.
    1. If you are an educated, experienced and disciplined trader you add the position into the close @ 11.05 as example and go today with a stop below 10.70 support (10.65).
    2. Risk of the trade 40 cents or 3.6%
    3. Target for the trade = Tuesday’s high 12.45 or 12.2%
    4. Risk/reward 3.4 to 1
    5. If you are not experience, etc. you wait for today to confirm the entry by opening at or above the close. Entry 11.19 at open (you can see premarket it will open higher)
    6. Risk of the trade 54 cents or 4.9%
    7. Target same 12.45 or 2.3 to 1 risk reward.
  • With move higher I would move stop to the 11.05 price  and watch. Limiting my risk to even on first, and 14 cents on second.
  • Don’t worry too much about all who is creating the test or direction… conspiracy theories only create emotions in trading and there are already enough.
  • There is never a sure thing only statistical percentages that put the momentum, cycle, retracement, etc. in your favor.
    1. Remember this:
      1. Everything works sometime
      2. Nothing works all the time
  • When my money on the line the question is will it work this time.
  1. Putting things in your favor means aligning:
    1. Trend
    2. Momentum
    3. Cycle
    4. Support/resistance
    5. Time frame
  2. Remember what moves the market…
    1. Not technical or fundamental data
    2. People move the market – institutional traders are people they just happen to know and see more than the retail trader.
      1. Driven by feelings and beliefs
      2. What separates the winners from the losers… experience, practice, education and discipline (good habits).
  • Charts are just a recording of the actions taken by people – plain and simple
    1. Some psychos
    2. Some disciplined
    3. Discipline wins over psychos 95% of the time

You can now teach your own webinar on testing of a breakout move.

Enjoy,
Jim