Support and resistance is a powerful tool in Fixed Time Trade and Forex trading. Most strategies use support/resistance to analyze more or less. In this article, I will introduce you to 4 classic Support and Resistance trading strategies that professional traders use to make profits in Olymp Trade.
4 Trading strategies with Support and Resistance
Support and resistance is one of the most widely used schools of technical analysis in the financial markets. It’s a simple method to quickly analyze charts to identify three important factors.
- The trend of the market
- Order entry time
- Time to close the order regardless of whether the order is in profit or loss
If a trader can find the three factors above, then he basically has a trading idea. Identifying support and resistance levels on a price chart can help him realize that idea.
Here are 4 classic trading strategies using support and resistance
Trade within a certain range in the sideways market
These are trades inside the price zone between support and resistance where the trader places an UP order at the support level and a DOWN order at the resistance level. For simplicity, you see the range between support and resistance as a room. Then support is the floor and resistance is the ceiling. “Range” occurs when the market moves sideways, with no clear indication of a trend.
Note: Support and resistance are not always perfect price levels. Sometimes the price will bounce back from a “price zone” rather than a specific price level.
Traders need to locate a trading range inside an important support/resistance zone.
When the market moves within a defined range, the trader has two options.
– Place an Up order when the price approaches the support zone
– Place a Down order when the price approaches the resistance zone
Remember price does not always respect support and resistance zones. That is why you need to have a good risk management strategy to avoid situations when the market is not going the way you want.
Breakout trading strategy
Usually, after a period of sideways movement, the price will break through an important resistance zone to start forming a trend. Traders often look for such breakouts below support or above resistance to capitalize on further bullish/bearish momentum. If this momentum is strong enough, it will have the potential to become a new trend.
However, to avoid falling into the fake “breakout” trap, top traders often wait for a pullback towards support or resistance before entering a position.
For example, the chart below shows a strong support level before bears pushed the price below that zone. Many traders can get caught up and rush into chasing DOWN orders. Instead, traders should wait for the market’s reaction to retest the broken resistance zone and then open a DOWN order to be safe.
On the contrary, after the price breaks the resistance zone and then retests it, we can enter an UP order.
Trendline trading strategies use trendlines as support or resistance. It’s very simple. Just draw a line connecting two (or more) lows in an uptrend. So you have potential support zones.
Or two (or more) highs in a downtrend to find potential resistance as shown below.
In a strong trend, the price will bounce back from the trendline and continue moving in the direction of the main trend. Therefore, traders should only look for entry opportunities in the main trend for a higher probability of winning.
Using Moving Averages as support and resistance
Moving Averages (MAs) can be used as dynamic support and resistance levels. Popular moving averages are 21 and 51 according to the Fibonacci numbers. Many traders also often combine MA100 and MA200 for long positions. You will have to find yourself a setup that you are most comfortable with.
Observing the chart below, it is clear that MA51 acts as a dynamic resistance.
The market appears in an uptrend when the following low is higher than the previous low and the following high is higher than the previous high. From there, you can see MA51 as the prestigious dynamic support.
Traders can use these moving averages to make decisions about whether the market is likely to continue trending or to reverse.
Things to remember when using support and resistance trading strategies
Support and resistance will be strong if the price fluctuates in these zones frequently but couldn’t break them after many approaches.
When the price breaks out of support, that support will become resistance in the future. If the price breaks through a resistance, then that resistance level converts to the support.
Let the price form a clear trend before deciding to enter the trade. Because sometimes the market gives false breakout moves, causing investors to misjudge the situation.
If you are is a day trader, focus on today and don’t get too bogged down in figuring out where support and resistance were in previous days. Do not try to see too much information that can lead to interference. Focus on what’s happening right now and mark today’s support and resistance levels as they form.
Trading at support and resistance levels takes a lot of practice to get the hang of. Identify the support and resistance levels you observe and implement in the demo account. Only if you win and make profits for several months in the demo account, should you consider trading real money.
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