In this post, I will explain how you can use the Support and Resistance Trading Strategy. I will explain the meaning of Support and Resistance in trading. Besides, I will explain the various scenarios when you can implement this strategy.
What is Support?
Support is a price level where a good number of buyers have created positions and it will stop the price from falling further. However, a Support level can be weak or strong. While a weak support level will hold the price temporarily for some time, a strong support level will eventually lead to a trend reversal. One confirmation for a trend reversal is a breakout of the last swing high.
What is Resistance?
Resistance is a price level where a good number of sellers have created positions, and it should stop the price from going higher. Just like a Support level, a Resistance level can be weak or strong. A weak Resistance level will prevent the price from going up for some time while a strong Resistance will lead to a trend reversal. One way to confirm a trend reversal is to wait for the price to break the last swing low.
Support and Resistance Trading Strategy: Time-frame
It's normal to have confusion regarding time-frames if you are a beginner. If you are a day trader, you can plot the important levels based on a 15m time-frame and monitor the price in 5m or 1m. I find 1m the best for timing your entries. Besides, 30m and 1H time-frames are also very popular among day traders. Further, you can use the 1D time-frame to mark the day high and low for the next trading session.
Support And Resistance Trading Strategy: Reversals (Range Bound Market)
A range-bound market is when the price is stuck within a range, and if the range is not narrow, you can capitalize on reversals. However, before that, you must plot your Support and Resistance lines properly. You can plot a Resistance level by joining all the swing highs, and plot a Support by joining all the swing lows.
To trade using this setup, you must wait for the price to touch one of these levels. When the price tests the Resistance level and a red candle closes, you can enter a trade just when another red candle breaks the low of the previous red candle. Regarding the target, you can exit your position right when the price touches the Support level.
Whenever the price tests the Support level and a green candle closes, you can enter a trade just as another green candle breaks the high of the previous green candle. You must exit your position right when the price touches the Resistance level.
Support And Resistance Trading Strategy: Range Breakout/Breakdown
While you can capitalize on reversals in a range-bound market, you must avoid trading if the price is stuck within a narrow range. Instead, you can wait for a Range Breakout or Breakdown. A Range Breakout happens when the price breaks the Resistance.
A Range Breakdown happens when the price breaks a Support. However, you must not enter a trade right when the price breaks a Support or a Resistance. Instead, you must wait for the price to take a pullback to the Breakout or Breakdown level to enter a trade. Sometimes, the may not turn back without touching the Breakout or Breakdown level. However, what you must strive for is a to enter a position after a good pullback. It will ensure that the price doesn't hit your Stop Loss.
Support And Resistance Trading Strategy: Trendline Reversals
You can use the Support and Resistance Trading Strategy in a trending market to trade Trendline Reversals. To trade Trendline Reversals, you must first determine the 15m Trend and plot a Trendline. Once you plot a Trendline, you can execute your trades every time the price tests the Trendline. You can plot an upward trendline by joining the swing lows and a downward trendline by joining the swing highs.
If you are trading in an Up trend, you must enter a position when the price tests the Down Trendline, and exit while the price is about to touch the Upper Trendline. For trading in a Downtrend, you must enter a position right when the price touches the Upper Trendline, and exit when the price is about to touch the Lower Trendline.
Support And Resistance Trading Strategy: Trendline Retests
You can use the Support and Resistance Trading Strategy to trade Trendline Breakout/Breakdown Restests. A Breakout happens when the price breaks a Down Trendline, while a Breakdown happens when the price breaks an Up Trendline.
However, you must never enter a position right when a breakout or breakdown happens. Instead, you must wait for a retest of the Trendline. Once you enter a position at a Trendline Retest, you can target the next strong support or resistance depending on your direction of trade.
I have walked you through the Support and Resistance Trading Strategy and the scenarios in which you can implement this strategy. The strategy is extremely popular in the Indian market and can help you with winning trades if executed properly.
Support And Resistance Trading Strategy: FAQs
What exactly is Support and Resistance in trading?
Support represents a price level where buyers have positioned themselves to halt further price decline, while Resistance is a level where sellers aim to prevent the price from rising. These levels can be strong or weak, impacting temporary pauses or even signaling potential trend reversals.
How can one differentiate between weak and strong Support or Resistance levels?
Weak levels tend to temporarily restrain price movement, while strong levels often lead to significant trend reversals. Confirmation of a trend reversal might include a breakout of the last swing high for strong Support or a breakout of the last swing low for strong Resistance.
What timeframes are suitable for implementing Support and Resistance strategies?
For day traders, plotting levels based on 15-minute timeframes and monitoring price action within 5-minute or 1-minute intervals can be effective. The 1-minute timeframe particularly aids in timing entry points accurately.
How can one utilize Support and Resistance in a range-bound market for trading reversals?
In a range-bound market, where the price moves within a set range, traders can capitalize on reversals by identifying Support and Resistance lines accurately. Entering trades upon candlestick confirmation (red for Resistance and green for Support) can be effective, exiting positions as the price reaches the opposite level.
What's the approach for trading during Range Breakouts or Breakdowns using Support and Resistance?
During Range Breakouts or Breakdowns, wait for the price to break either the Resistance or Support levels, but refrain from immediate trading. Instead, wait for a pullback to the Breakout/Breakdown level before entering a trade.
How can Support and Resistance strategies be applied for Trendline Reversals?
In a trending market, plotting Trendlines based on the 15-minute trend can guide trades. For Up Trends, entering a position at the Down Trendline and exiting near the Upper Trendline is effective. In Down Trends, entering at the Upper Trendline and exiting near the Lower Trendline works well.
How does one trade Trendline Retest using Support and Resistance principles?
For Trendline Breakout/Breakdown Retests, after a Breakout/Breakdown of a Trendline, avoid immediate trades. Wait for a retest of the Trendline before entering a position, targeting the subsequent strong Support or Resistance based on trade direction.
Why is it essential to avoid immediate trades after a Breakout or Breakdown?
Immediate trades after a Breakout/Breakdown can lead to false signals or premature entries. Waiting for a retest ensures a confirmation of the new trend direction before entering a position.
Is the Support and Resistance strategy universally effective across all markets?
While the strategy is popular, its effectiveness may vary across different markets. Factors like volatility, liquidity, and market sentiment can influence the strategy's success.
Can Support and Resistance strategies guarantee winning trades?
No strategy guarantees success. The Support and Resistance strategy, when applied skillfully with analysis and risk management, can improve trade decisions but does not assure winning trades. Execution and market conditions play vital roles in outcomes.