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Support and Resistance Trading

Posted on 25 October 2009 by Perry

Support and Resistance  is a very effective tool for finding and locating turning points in the market.  New highs and lows are points where all traders should be extremely cautious and observe how price reacts to these areas. They are excellent places for traders to both enter or exit a market depending on the individual situation.

The example above  shows just how effective this  is.  Lets walk through this chart and identify opportunities to (a) enter trades and (b) exit trades.   Starting from the far left of the chart you can see that the USD/JPY is in a solid down trend,  you can see that when it reaches the point I have marked First Test. that price forms a bullish reversal pattern.   This alone is not a big deal, but when price retests the same level and forms a large pin bar rejection candle,  as it did at the point I have marked Second Test,  it is time to take notice.

Price,  if observed closely can reveal small clues like these leading to its future direction.  In the above example the pin bar for me would be a solid confirmation that this area is now support and a good time to (a) exit any short positions we are currently holding and (b) seriously consider taking up a  long position.  These Support areas also supply us with key information as to a great place to position our stops, directly below the support line.

Top and bottom picking can be a very tough game, but when we capture one of these moves the rewards can be phenomenal.  These types of trades are not for everyone and would be considered by some as a fairly aggressive entry.  The more conservative trader can still use support and resistance in there trading, the next example on the chart is just one of these examples.

Resistance when broken  becomes support and vice versa.  In the above example you can see where price didnt even hesitate as it just punched clean past the previous high,  which we would be watching closely to see how price reacts. This swing  high is considered to be previous resistance and when price doesnt hesitate at this area and keeps going,  this is an another good spot to consider entering the market.

The only problem with this type of entry is that a stop point is not as obvious.  It could be placed safely under the old support under the pin bar that we previously identified.  The problem with this is that we have a huge stop and our position size is dramatically reduced.  Our second choice is somewhere below the resistance that was broken at the previous high.

Now if for example we are an extremely conservative trader and we didnt like either of the two entries that have already been identified,  then we can just wait for something that meets our criteria.  If we follow price some more, an example of just such an opportunity presents itself.   Price after punching through the previous high runs up some more and then starts to retrace.  when price forms a bullish reversal pattern like the one I have marked Change of Polarity it is time for the conservative trader to take action.  It is at this point that there is enough information that the scales  have been tipped for even the most conservative traders to take up a position.  Now lets just identify exactly what that evidence is that has tipped these scales.

• Price formed initial support at the point marked test 1.
• Support formed and confirmed by the double bottom pattern formation at Test 2.
• Strong candlestick reversal patterns formed at these support points.
• Price thrusting through previous highs with good momentum.
• Price forming a strong candlestick reversal pattern at previous resistance levels confirming a change of polarity.

This  change of polarity pattern appears in the charts time and time again.  It is an excellent place to enter the market that stacks the odds in your favor and also identifies an ideal spot to position your stop order.

Support and Resistance should have a place in every technical traders tool box, these are just some of the ways that you could take advantage of the opportunities that support and resistance trading can present to you.

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