Trading support and resistance is the easiest strategy one can start trading with, all you need is to point out the strong support levels and trade when price breaks or bounces off these levels. Like any other strategy, always set your stop loss targets to limit your losses in case of anything.
Now let’s take a small recap on what we have just studied and get the main points to our finger tips.
As you try to analyse your charts and see price hanging at a certain level as it pulls back several times watch out for a resistance level.
If the price is falling and at a certain point tries to bounce back up then expect a support level. You will realize that the trend is moving in a zigzag form as it makes highs and lows showing price rejections.
As it makes the zigzag movements, identify the pivot points as you draw lines to relate with past price level to see if price has been behaving in the same manner.
Either way price will tend to consolidate in such levels on the chart indicating a strong fight between the buyers and the sellers.
Whoever gets stronger determines the direction of the new trend.
So you are warned in advance to either prepare for abreakout or a bounce.
If price bounces back from the identified level prepare for an entry at the close of the confirmation candlestick.
If it’s a break your entry should be at the close of the breaking candlestick or after a retest back for the conservative traders.
Least but not last, when a major support is broken, it becomes a new resistance and the same happens to the resistance, it becomes a new support.
A broken resistance is the next support level. Watch out for that too.
Lastly, mind where you place your stop loss levels. Your stop loss should not be set exactly on the support or resistance level otherwise you will be knocked out of the market on a short notice.
Trend lines summary
Trend lines are support and resistances drawn at an angle. Ok I may call it tilted support and resistance.
In a down trend, a trend line is drawn above the price while an up trend, a trend line is drawn below the price.
To draw a trend line, you must have atleast two points. On a down trend two highs must be connected by a line and on up-trend two lows must be connected and at least three points to make it valid.
The more times the price touches the trend line the stronger it becomes.
Never try to force a trend line to fit, if it does not fit on the chart it’s invalid.
These are two parallel trend lines drawn on a trend, one on above price and the other below price. The upper boundary works as a resistance as the lower boundary as a support.
There are three types of channels
- Ascending channel for an uptrend
- Descending channel for a down trend
- Horizontal channel for sideways trend.
To trade support and resistance you need to master two things.
- A breakout on the support and resistance level or a bounce on the support and resistance level. Both give sell and buy signals.
- You can enter a trade at the confirmation of the breaking candlestick (aggressive trader) or wait for a retest after the break of the support or resistance level (conservative trader).
Like we mentioned before, being a conservative trader may save you from fake out signals but you are likely to miss out on potential trades because not all the time will price pull back to retest these levels.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...