Certainly, I can rewrite this content for Seben Capital clearly and concisely:
"The strength of Support and Resistance grows with each test they endure. These are the essential lines on your trading chart."
Strategically positioning your stop loss levels at Support and Resistance is crucial for trading forex.
However, adhering unquestioningly to the above "theories" can lead to long-term financial losses. These misconceptions about the Support and Resistance trading strategy are widespread, often perpetuated by trading books and courses.
But there's no need to worry.
After reading this trading guide, you'll be well-equipped to avoid these common pitfalls.
Here's a sneak peek of what you'll discover:
Are you ready to enhance your trading skills?
Let's dive in.
Certainly, I can rewrite this content for Seben Capital:
Let's start by clarifying the concepts of Support and Resistance:
Support – This is an area on your chart where buying interest is anticipated to be strong.
Resistance – Conversely, this is an area on your chart where selling pressure is expected to be significant.
Now, let's illustrate these concepts with some examples of forex Support and Resistance:
Certainly, I can rephrase this content clearly and straightforwardly:
You may have encountered trading books claiming, "The more times Support or Resistance is tested, the stronger it becomes." But in reality...
Support levels trigger market reversals because they indicate a surge in buying pressure, typically from entities like institutions, banks, or experienced traders executing substantial orders.
Now, picture this scenario:
If the market repeatedly challenges the Support level, it eventually exhausts these buying orders. Once all the orders are filled, no more buyers are left in the market.
In simpler terms...
When you notice higher lows approaching Resistance, it often leads to a breakout (forming an ascending triangle). Conversely, lower highs nearing Support usually lead to a breakdown (creating a descending triangle).
I admit I also made this mistake by – treating Support and Resistance (SR) as rigid lines on my chart.
Why is this problematic?
Because it can lead to two key issues:
Allow me to elaborate...
This happens when the market gets close to your SR line but doesn't quite touch it. Instead, it reverses in the opposite direction. As a result, you missed the trade because you were waiting for the market to test your SR level precisely.
Here are some forex examples illustrating both over and undershooting of Support and Resistance:
This occurs when the market breaks through your SR level, and you conclude it's definitively broken.
As a result, you decide to trade the apparent breakout, only to later discover that it was, in fact, a false breakout.
So, how do you address these two issues?
It's quite simple – consider Support and Resistance as regions on your chart rather than mere lines.
This distinction arises because of two types of traders:
Let me clarify:
Traders with FOMO tendencies tend to enter their trades as soon as the price approaches Support. If there's substantial buying pressure, the market often reverses at that point.
On the other hand, traders seeking the best price often place orders at the lower end of Support. If sufficient traders adopt this strategy, the market reverses near the Support lows.
But here's the catch:
You can't predict which group of traders will dominate – the FOMO or Cheapo traders. Hence, Support and Resistance are viewed as areas on your chart, not just lines.
If you're interested in discovering my secret technique for drawing Support and Resistance, check out this video:
Does this make sense?
What you've previously learned about are the traditional, horizontal SR levels (where these areas remain fixed).
However, it's essential to understand that Support and Resistance can evolve, known as Dynamic Support and Resistance.
Now, there are two methods for recognizing Dynamic SR:
Let me break it down for you...
I rely on the 20 & 50 Moving Averages (MA) to spot Dynamic Support and Resistance.
Here's an example illustrating Dynamic Support and Resistance in the forex market:
However, it's important to note that this isn't the only approach. You can opt for the 100 or 200 Moving Averages, which also work effectively.
Ultimately, the key is discovering what suits you best rather than unthinkingly following another trader's method.
Trendlines are diagonal lines on your chart that pinpoint Dynamic Support and Resistance.
Let me illustrate what I mean:
Consider Support and Resistance as regions on your chart, whether horizontal or dynamic SR.
You don't need to be an Einstein to guess where many traders place their stop-loss orders – typically below Support and above Resistance, correct?
Let me provide an example:
And why is this the least favorable spot to set your stop losses?
Because they tend to get "hunted."
So, how can you mitigate this issue?
Well, you can't eliminate it, but there are two strategies to help manage it:
Place your stop loss at a distance from SR.
You can utilize the Average True Range (ATR) indicator to achieve this. Here's how:
a. Identify the Support level's low. b. Determine the ATR value. c. Calculate the stop loss by subtracting the ATR value from the low of Support.
If you're eager to delve deeper into this technique
Here's how this strategy operates:
You'll only exit your trade when the price finishes a candle close below the low of Support or above the high of Resistance.
Let me illustrate this concept:
And here's an intriguing fact: did you know that the "real move" often occurs after traders have been stopped from their trades? You can leverage this situation by employing a trading strategy I'll reveal later. But before we get to that, let's explore...
The common mistake made by many traders is this:
They enter trades when the price is significantly distant from SR. This requires a substantial stock loss and results in an unfavorable risk-to-reward ratio.
Let's look at an example:
Certainly, here's a revised version:
However, if you allow the price to come to you, you can set a tighter stop loss, which enhances your risk-to-reward ratio.
Let me illustrate this concept:
Always keep in mind...
In trading, patience pays off. Avoid chasing the markets and allow the price to come to you instead.
Predefine your Support and Resistance areas ahead of time. Then, seek trading opportunities when the price aligns with your designated levels. If the price is elsewhere, exercise discipline and stay out of the trade.
If you're eager to learn more
Here's the key takeaway:
Let's delve into why this happens...
Here's an essential fact:
To sustain an uptrend, it needs to achieve new highs consistently. As a result, shorting at Resistance becomes a low-probability trade.
Instead, opting for a long position at Support tends to be a more favorable trade.
For a downtrend to persist, it must continually establish new lows. Consequently, going long at Support isn't a wise move.
Conversely, shorting at Resistance in a downtrend is a sound strategy.
Consider this scenario:
Support represents an area with the potential for buying pressure, so prices should ascend quickly.
But what if the price doesn't rise and instead consolidates at Support? What does this signify?
Recall the concept from Truth #1:
The more times Support or Resistance (SR) is tested, the weaker it becomes.
Hence, consolidating prices at Support indicates weakness because the bulls couldn't propel the price upward. This might suggest a lack of buying pressure or strong selling pressure. Either way, it doesn't bode well for the Bulls, and Support is likely to break.
Let's illustrate this with an example:
And the opposite for Resistance:
A Trading Strategy for Support and Resistance: Capitalizing on Losing Traders
Here's an important observation:
Some are looking to trade the reversal, while others seek opportunities in the breakout.
Since trading is a zero-sum game, breakout traders must incur losses for reversal traders to profit, and vice versa.
Do you follow so far?
Let's explore a Support and Resistance trading strategy designed to profit from breakout traders. Here's what you should do:
1. Identify and mark your Support and resistance (SR) areas.
2. Wait for a directional move into SR
3. Wait for price rejection at SR
4. Enter on the next candle with stop loss beyond the swing high/low
5. Take profits at the swing high/low
Support and Resistance trading strategy examples
Losing set-up at (GBP/NZD):
Winning set-up at (SOYBNUSD):
Winning set-up at (WTICOUSD):
It's crucial to understand that this trading strategy is not a "holy grail." There will be occasions when you lose to breakout traders, just as there will be times when breakout traders lose to you.
The key to long-term survival lies in proper risk management. Hence, I strongly recommend risking no more than 1% of your trading account on each trade.
An objective method references the Average True Range (ATR). Here's how:
1. Determine the current ATR value.
2. Add 1.5 to 2 times that ATR value to your Support level.
3. This establishes a Support area (similarly for Resistance). You can use this approach to gauge the width of Support and Resistance.
A more discretionary approach is to observe how the price behaves within the Support and Resistance region. For example, whether the price briefly touches Support and is rejected or if it penetrates deeply into Support before being rejected. I use these observations to define the width of the Support and Resistance
Based on my research, the volume doesn't play a significant role in determining the authenticity of a breakout. Therefore, high volume is not decisive in confirming whether a breakout is real.
No, a buildup refers to a tight consolidation phase where candles overlap. Identifying clear Support and Resistance levels or swing highs/lows is challenging during a buildup.
In contrast, accumulation represents a ranging market where the highs and lows are easily identifiable and fluctuate within a defined range.
Here's a summary of what you've learned today:
Now, here's a question for you:
How do you approach a Support and Resistance trading strategy? Share your thoughts in the comments below.