Before we start we would like to talk a little about the most common mistakes made when it comes to trading around support and resistance.
There are only three so it’s going to be quick.
- Having support or resistance on the chart as just a line - support and resistance aren't lines, they are areas in the market that creates resistance or support. It has to be a zone of S/R, otherwise the price will go above it or below.
- Not having a consistent way of entering the trade inside of support and resistance zone. Thinking that support and resistance are a holy grail, meaning every time price got into previous support will become resistance. It is a result of not having a trading plan, lack of consistency in entering trades inside support and resistance zone.
- Overloading charts with price lines, that just make it that harder to see what’s in front of you.
Okay now let’s do this 3 step process to point out highly profitable levels of support and resistance.
Step one - Identify the trend
Step two - Identify trend continuation and counter-trend levels
Step three - Identify if the level is strong (caused a major move / tested multiple times)
Our example will be on EURUSD price chart.
Before starting trade using support and resistance, look at the chart and determine the trend, trend continuation level, meaning the latest level that was broken, also counter-trend level, that is whatever level that is below/above the price looking left. After that in order for you to be able to trade at this level, it must have either created a strong move out of price or must be tested multiple times.
Our next step would be finding entry reasons, either the price is going into our trend continuation area or our counter trend area. If the price goes to trend continuation it would probably bounce back and test the counter trend area, and if it goes and tests the counter trend area it will probably completely reverse.
Let’s go to the most interesting part - support resistance strategy
As we already talked about in our early articles it’s important to have consistency and to ensure that you will need a trading plan based on rules.
Here are the rules for support and resistance based strategy
Conditions
- Step one - Identify the trend
- Step two - Identify trend continuation and counter trend levels
- Step three - Identify if the level is strong (caused a major move / tested multiple times)
Entry - candlestick patterns, like bearish shooting star which is followed by red candle, or bullish hammer followed by green candle. Or close above/below followed by green or red candles respectively.
Stop Loss - below the area or below the wick of 38.2 candlestick or other candlestick pattern like engulfing, or close above/below pattern, whichever is lower/higher.
Take Profit - R/R - 1.4/1, you can also go higher 2 to 1 reward risk ratio.
Now that you have a better understanding of the support and resistance structure and have learned the trading strategy based on it, we suggest you start practicing; identify trends, find support and resistance levels for trend continuation and countertrend, look for candlestick patterns to enter, and practice placing stop loss and take profit limits correctly on your demo account. Good luck!
