Support and Resistance: How to Find Trade Setups

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Video Transcript:

Hello, traders. Welcome to the formal review of the Advanced Technical Analysis Course: Chart Analysis. And on this lesson, we’re going to teach you how to use support and resistance levels for entries and for excellent risk to reward setups. And of course, when we are looking at support and resistance entries, we are looking to get high probability trades, and this is what we will teach you in this lesson. But, first of all, let’s start with going through what support and resistance are.

Remember that support and resistance are areas where we will find an opposite pressure of the current trend. This means that if we are in an uptrend, for example, and we hit a very big area of resistance, we will find bearish pressure that will want to take the price down. And in the opposite case, if we are in a downtrend and we hit a massive area of support, we will find enormous bullish pressure that will want to take the price up. This is what we are going to try to profit from. These areas are good places to take profit if you are already in. This is because you don’t know if these areas are going to be rejected or if the price is going to break through them.

Trading using support and resistance

So, if you are already in that trade, it’s a good time to take at least partial profit at these areas to see if you get a pull back and then a break through. But if you don’t, you might want to leave some money on the table, and that’s something you don’t want to do. But if you are not in a trade already, these areas are good places to look for good entries. And, this is what we are going to teach you on this lesson.

So, let’s see what we look for when the price hits these areas. First of all, we look for rejections. Trend exhaustion and big support zones are great opportunities to counter trend trade. And of course, trend exhaustion and big resistance areas are also great opportunities to counter trend trade. But, we need confirmation that the zone has been rejected, not only because we already know that this zone is a big zone of support or resistance and that the price hits it. It’s going to reject it and we are going to have a great opportunity to counter trend trade. We need a confirmation that this area, in fact, has been rejected. So, in order to get confirmation that these zones have been, in fact, rejected, we are going to use candlestick formations and chart patterns for reversals. OK?

Now, the second thing we are going to look for are breakouts. Breakouts, or big support, or resistance areas are great opportunities to profit from a momentum. Remember that where the price breaks through a big level, you will have momentum and the rationality, and you will actually have a great opportunity to profit from it. But, we must be careful not to get trapped in a fake-out or a fake breakout. And, this happens more often than we want. For instance, if price is in a big downtrend and we hit a massive area of support, price might get through those levels only to see it come back and reject the levels, and reverse to the other side.

So, what we need to do is, also, we need confirmation that the pressure of these zones has been cleared, and that price will continue with the overall direction. And, there’s two ways to trade breakouts: aggressive entries and conservative entries. Let’s start with rejections which are easier to trade than breakouts. As you can see here, we are in a clear uptrend. Then, price hits an area of resistance, right here. And, we have a rejection candle which is this dodgy, and then a continuation to a downslide. So, we have a rejection of the entire area of resistance, right here. And as you can see here, price continues to the opposite side, and this rejection gave us a great risk to reward ratio on a short trade of this asset.

Now, how do we trade this? We got a rejection candle at resistance which is this red dodgy right here. Then, the next candle is a red candle that completes our reversal pattern, and this is reversal pattern is called an ending. The short entry is after the completion of the pattern at resistance. So, we are in an uptrend, and then we have an ending star pattern which is a reversal pattern right at resistance. When this candle closes, it completes the pattern. So here, when this candle closes, we have a short entry and the stop loss will go above the high of the pattern. And as you can see here, our risk is a few pips versus the reward which is, in this case, at least 1 to 2.5 risk to reward ratio.

Now, this is how you trade rejections. At resistance, and of course, at support you need to go through all your chart patterns and candlestick formations so you can actually know what you are looking at and what you are looking for in these zones. Now, let’s go to breakouts. This is how we trade an aggressive entry on a breakout. Here, we are in a down roll, and we hit a support zone that got quickly rejected. And, when you are in downtrend and you hit that very big area, you will want to see some kind of reaction because you will find opposite pressure there. But, as you can see here on this example, the bullish pressure pushed the price up just a few peeps before it broke through the support zone. And here, we have the breakout.

Trading breakouts at support level

Now how do we trade an aggressive entry? Pressure is down to a support zone, as we’ve already told you. Some reaction was expected but it broke rapidly with the zone. The short entry is after the candle that broke support closes. OK? And this candle must be big enough to take out the lows that were made at the area of support to take out the previous lows. And, this candle must be strong enough to actually mean that we have broken through and that this is not just a fake-out. And, the stock price should go above the last high, or if you want to trade with less of a risk, you should put your stocks above the last candle’s high. And, this is how you trade aggressive entries. But, you have to time them correctly because if you are not quick enough, and you take your short entry right here, for example, the risk to reward behind the trade is no longer good enough for you to actually take the trade. So, you need to take the trade right when the support or the resistance zone clears or breaks.

Now, this is the conservative way to trade breakouts. As you can see here, we are in an up-move and we have hit an area of resistance that was broken. OK? Now, the aggressive way to trade this breakout would be to go long after the close of this candle, and it’s fine to go long [inaudible 00:07:58] this candle. But more often than you will want, the price will break through a resistance zone and tested back a support, as well as breaking out of a support zone just to come back and test it at resistance. The conservative entry is to wait for the price to test back this resistance area at support like in this case, and then go long after we get confirmation that support has held.

Now, how do we trade this? When the breakout happens, we wait for the retest of the area; in this case, the retest of the resistance area at support. When the price comes back and we test the zone, we are looking for a rejection and a continuation, just like in this case. The long entry is after the bullish engulfing candle at the test of support, and this is where chart patterns and candlestick formations come very handy because when we are looking for confirmation, we are looking for actual price that gives us the confirmation that this area of support held. In this case, we have a bullish engulfing candle right at support. This gives us a long entry with our stop losses below support or below these engulfing candles.

Now, this is how you trade at support and resistance, and this is what you need to be looking for in order for you to get great risk to reward entries and set-ups. Now, if you missed a trade, don’t go chasing it because if you chase the trade, the risk to reward would not be the same, and actually, it would not be profitable in the long run for you to be taking those trades. So, you need to be very careful and be very patient, and of course, you need to be very disciplined in order to take these setups.


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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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