This Support and Resistance Zones Strategy will enable you to take trades exactly at the area price will reverse. Trading support and resistance lines are critical for every trader to implement into their system. In this article, you will learn how to calculate support and resistance, identify support and resistance trading zones, stock support and resistance approach to trading, along with forex trading support and resistance.
I am going to guide you every step of the way. Follow along as we cover support and resistance in forex, how to trade support and resistance in stocks, and how to trade support and resistance in options. This is a simple, easy to learn and easy to understand trading strategy. After you read this strategy, you will be able to identify these sweet spots where marvelous price action happens. So, keep reading and you won’t regret it. Also, read trading discipline which is an important skill for successful trading.
What indicator are we using for this strategy?
Indicators Used in the Support and Resistance Zone Strategy
Our indicators for this strategy will be price action and its relationship to Support and Resistance. to be honest, this is, in our opinion, the best way to trade support and resistance. So what exactly are these key areas? How to trade support and resistance levels? Before we explain the strategy we are going to define support and resistance. Here is another strategy called The PPG Forex Trading Strategy.
What is Support?
We have a specific article on this very topic so go ahead and read that here if you do not know what support or resistance is. Support is the level where price finds it difficult to fall below until eventually it fails to do so and bounces back up. It's simply many traders making trading decisions at that level.
What is Resistance?
Resistance is the level where price finds it hard to break through to rise above it until it fails to and is pushed back down.
You should always suspect a reversal at Support and Resistance as there is a high probability that price action will reverse at those key levels. That's because it already did that before in the past and it will continue to do so in the future as traders will always take caution on these levels. Some who had open trades will exit at those price levels and others will initiate new trades at these levels. That’s why it is crucial to learn to draw these Zones using technical analysis.
Steps for Trading Support and Resistance Zones Strategy
Now that we know the role of S&R Lines, which from now on we will call Zones. That’s because support and resistance are not a given line. If so, it would super easy for traders to know and every trader on the planet would have an entry order at that price.
They are more like zones that can be breached and pushed into. The trend may pull the price action back out of it, or maybe price action will succeed in breaking it for good. This is why you want to think of these points as zones.
Our main purpose in this Trading Strategy is to identify those Zones and use them for our favor and make great trade entries and exit points.
The First Step of the Support and Resistance Zone Strategy.
The first step of this strategy is drawing those Zones on our charts. This allows us to easily spot where the price would probably reverse. After you do this, it will resemble a support and resistance indicator only you now have zones to take advantage of. Drawing Zones on the chart is better done on a higher time frame so that we can examine the main reversal levels and the more critical points on the chart as a higher time frame shows us the bigger picture. It's almost like what we talked about in our article about the importance of multiple time frame analysis.
We begin by drawing horizontal lines on recent Peaks and Bottoms like you see below in our chart example: Examine this chart as it is critical for you to understand these zones.
When you are doing support and resistance trading, a line with multiple touches is far better off as it is clear that it stood against the price and passed the test many times and it will continue to do so. WHY?
Because History always repeats itself and this continues to happen time and time again on every chart that you will ever look at. (Stocks, Options, Forex)
Note** Make sure to leave spaces between zones as drawing many lines will confuse you and worsen your trading decision. This strategy could easily be compared to our Red zone strategy that shows you how to draw zones on your chart.
When you take a look back after drawing Zones will find that those lines withheld the price numerous times before and will continue to do that numerous times more.
The Second Step to Identifying Support and Resistance Zones:
The second step is waiting for the price action to touch the Zone. What you can do is set your charts on 2 to 4 currencies and wait for your chance, as it may take some time for the price to reach the support resistance levels. The reason we say 2 to 4 currencies is because this is a good number of pairs to be looking at and will not overwhelm you. This allows you to have a good judge on your trade opportunity.
Basically, the higher time frame takes less time and attention than the smaller time frame. Alternatively, the smaller time frame has more signals as the zones may get hit more frequently. You have to be more focused if you’re trading small time frames.
In this chart we see the price action approaching support and actually almost touched the support so we wait to see the form and shape of the next candle.
If the price reverses that will be good, as it is what we are expecting. We will need a strong reversal candle though to assure that price will reverse and that it will not collapse back again.
On the other hand, if it breaks that level, it may be real breaking or a fake breaking. We also should see a strong piercing candle that effortlessly breaks that level to assure it will continue in the same way.
The Third Step for the Strategy Is:
The third step of this trading strategy is to wait for the candle which hits the zone to close. This will indicate the signal candle we are waiting for. Take a look at the candlestick pattern and ask yourself:
- Is it a bullish or bearish candle?
- Is it strong or weak?
- Big or small?
- Does it have long wicks or small wicks or no wicks at all?
When you can identify the kind of candle then you will be able to decide whether to sell short or buy long.
Knowing the type of candle is crucial to identify whether the entry is valid or not.
In the chart example above we see how Support rejected the price and pushed back up. We also see the candle that formed afterward to signal the end of the down movement and the beginning of and upward movement.
So how did we know it is strong, what it's secret?
Before we go any further, here are some important factors in determining a strong candle. Because spotting that specific candle on zones makes the difference between winning trades and losing trades.
The Qualities of a strong candle are:
- Long body
- Formed after the previous touched the level but could not break it.
- Entirely taken the two previous candles.
This example shows us how a strong candle should look. As you can see, the strong candle overpowers the one before.
Here, you can see that those weak candles were not able to breach the Resistance line and had long wicks and could not break that level. So, we wait to see what will happen with the next candle. Will the price action break that level? Or will the resistance win and the price reverse?
On the first case ( the candle on the left that we marked for you): clearly, the price fell on the next candle which made it a valid reversal.
While in the second case ( the candle on the right that we marked): we had a very small candle which did not mean anything except that the resistance stalled the price for a while.
The Fourth Step to This Support and Resistance Strategy After You Analyze Your Zones:
The fourth step is to identify where you will enter the trade. You want this to happen at the pivot point or turning point. Here are the entry criteria.
Entry/Exit Criteria for This Support and Resistance Trading Strategy:
Your entry should be slightly above or below the signal candle which is the strong candle. This way you are adding more confirmation to your trade to make sure that the price will move towards the direction you expected it to move to.
Our stop loss should be placed on the other side of the zone and not too close to the level to give it some space. As we said, it is a Zone. Putting the Stop loss there makes sense because this is the end of the trade. The price is unlikely will reverse after that point.
So according to the rules of this strategy, below is an example trade:
We used a 3 to 1 RR but you can adjust according to your rules.
Now we have learned from this Support and Resistance strategy how to draw Zones and how to trade them successfully. We also learned how to determine the direction that the price will probably move to, so we could have a better edge in our trading.
If you liked this strategy or still need more information please leave a comment below and we will answer your questions!
Trading support and resistance, and discovering support and resistance zones are pivotal to your trading success.
Our Fibonacci channel strategy, and the Red zone strategy are very similar and will help you in understanding exactly what these so-called "zones" are as well so you can check them out also if you wish!
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