In this post I’m gonna be going through with you the support and resistance trading strategy that works like a charm in any market that you can think of. It doesn’t matter if its stocks, forex, cryptocurrencies or commodities. They all work. You will get to see why support and resistance are some of the most important levels in the trading and investing world.
And after going through those pointers, I’ll show you practical examples of the trading strategies that use support and resistance. It doesn’t matter what kind of trader you are, whether you are a day trader, swing trader or long term investor because practically everyone looks at the support and resistance. It is something that you simply cannot escape. And because everyone is using it, that makes it all the more effective as they have a higher probability of playing out like they should, compared to less common patterns out there.
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In one of my previous video, I talked about why support and resistance work so well. And it is because of mass psychology. That is the main reason for it. But of course there are other reasons as well so if you want to check out that video, the link to it will be somewhere in the video or description below. If you really think about it, support and resistance are one of the easiest methods of trading but they still work very effectively. Because it is easy to use, more people use them and in a way, when you trade them, you have got tons of other traders supporting you as well, pun totally intended, because they are going to be trading off those support and resistance levels as well.
And when you have more people acting on the same price level, that price is going to hold up much better than other less used strategy like the williams alligator. Another reason they are so crucial is that these support and resistance levels, they are the foundations for other chart patterns out there. Chart patterns like double top, head and shoulder, triangles and wedges are extensions of the regular support and resistance and they form because those support and resistance levels hold. Otherwise the chart patterns wouldn’t form.
So now that you know support and resistance are the real deal, it is time to move on to the types of support and resistance out there. The 2 commonly known types are static levels and dynamic levels. Static support and resistance are price levels that don’t change and these are the ones that are more commonly used because they are easier to spot. Dynamic support and resistance are price levels that changes over time because they are based on indicators such as the moving average which changes as price change as well.
So the dynamic support today could be different from the dynamic support for tomorrow. Although they are not as frequently used and have many variations depending on which indicator is used, they are still useful because being dynamic means that it changes according to the current market conditions and can provide more immediate feedback on what’s going on in the market. Examples of this are bollinger bands and moving averages.
Alright so now that you know why they work well and what are the types of support and resistances out there, let’s move on to the next part which is how to actually use them.
The 1st step – How to find and draw the support and resistance, this might seem easy but here are 5 key pointers to remember
Number 1 – ask yourself how obvious is the support or resistance because good support and resistance should be obvious and very easy to spot. If they are not then they are probably not very good levels anyway because chances are that if you didn’t find them easily, others won’t be able to as well.
And that means that there won’t be as many people paying attention to it and ultimately less people using it. That’s not what we want because we want to be using the support and resistance levels that everyone is using as well.
Number 2 is to take note is How did price react after touching that level, good support and resistance should have price bouncing off it very strongly, otherwise it might not be a very reliable level.
Price bouncing off strongly a support level indicate that there are lots of buyers willing to buy at that level and that makes it a very attractive support in the future. You should be seeing large and long solid green candles which shows strength.
If you see a short candle with long wick on the top then you should be wary of that support level because that’s not how a candle that bounced off a solid support should look like.
Number 3 is How many times did price already bounce off it. This one is a bit tricky because initially the levels are stronger when price bounces off it but when there are too many retest, which is price going back to that level, then it becomes weaker.
The rationale is that when price bounce off the support the first or 2nd time, the support level becomes obvious and hence stronger because more people sees it. But after too many retest, it means that there is a very strong downward pressure which is why the price kept going back to retest the support.
What usually happens is that there will be a consolidation and tightening of range and you will see some kind of triangle or wedge forming. And price can break through that support level if there are too many retest and the price doesn’t break out of the triangle or wedge formation to the upside.
Pointer number 4 is that Support and resistance levels don’t have to be absolute and can have a range. This is especially true in volatile or illiquid markets because prices move very quickly when the order book is thin.
What this means is that there may not be enough bid orders placed at the support and prices may momentarily drop below it but when it does, it shoots back up above the support very quickly as well and you are left with a wick below the support but the body of the candle stick bar above the support.
This means that number 1 even though there are not enough bid orders to hold that support level, it is still a very strong support level that buyers are willing to quickly buy up any prices below it. Or number 2 is that there just happen to be a very large sell order that ate through all the bid orders but overall there are still more buyers than sellers in the market at that moment of time.
And because of the scenarios that I just mentioned, sometimes you will see that prices sometimes extend just a little further out beyond the support and resistance levels. It doesn’t mean that those levels are not good but simply that prices got over extended by a little.
What you can do is to use a range of price levels instead of a singular price for your support and resistance if you think it is more suitable for whatever you are trading. So instead of a straight horizontal line on the chart, you can use a rectangular zone as support and resistance instead.
The last pointer, 5 is that When support are broken, they turn into resistance and When resistance are broken, they turn into support. The reason for this is because those price levels are significant levels that traders are going to be looking at.
And because prices reversed at those levels before, traders will be betting that price will reverse again in the future for those levels. So if you see a strong support being broken and price goes below it for a while, you can be sure that price level will be an important level that many traders are going to be looking at and can be a resistance level in the future when price goes back up to revisit it.
OK so now that we have covered the 5 pointers, let’s move onto the 2nd step which is to actually trade them. There are 2 main ways to trade support and resistance. First would be using them to trade price reversals and second would be using them to trade break outs.
Generally using support and resistance to trade price reversals are safer than using them to trade break out because they have a higher chance of the trade working out. Also they offer very good risk to reward ratio because you are able to get very good trade entries by putting your orders in the market at the support level before price reaches there.
It is a simpler and less stressful method than other methods out there that requires you to make trading decisions on the spot according to how price moves. The rule of the thumb is that the better entries you get, the better risk to reward ratio you can achieve because you are able to risk less when you enter into a trade with good entry as you can set a tighter stop loss compared to entering into a trade with a not so ideal entry.
For break outs, although they don’t happen as often, they offer a very high reward in return because they are usually the start of a new trend and there can be a lot of profits to be made if it is a long trend and you ride it all the way to the top. But you have to watch out for fake break outs where price look like it is breaking out but then reverse back down.
A good time to trade break outs will be in patterns where prices are consolidating like a wedge or triangle because they are more predictable than a normal horizontal support or resistance break out.
If you are just starting out, I would recommend trading price reversals first and try trading break outs only later on when you are more familiar with how prices tend to react.
3rd Step – The third step is to set stop loss and take profit. Support and resistance are great ways to enter into the trade because price tend to reverse there. And because of that, they can also be used to set stop losses and take profit targets as well.
If you think that you have found a solid support, you can place your stop loss below the support so that you know if the support doesn’t hold, the price will break out and you can safely and quickly exit your trade. For taking profit, you want to set your target before or at the resistance level because price will usually not go past that level.
And that is how you trade support and resistance like a pro in any market you want. Remember the key to making this strategy shine is to find really solid support and resistance so keep in mind the key pointers we went through earlier. And practice makes perfect.
The more u find and draw support and resistance and trade them, the better you will get at it. A useful tip is to review when the levels hold up and when they don’t, from there you will likely find that there is a certain behavior that whatever you are trading will have so use that to your advantage.
Thank you for reading and I hope you have found this post useful. Remember to subscribe to my Youtube channel and give the video a thumbs up. Comment down below if you prefer using support and resistance for price reversals or for break outs.
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