Drawing Support and Resistance lines correctly – Setting correct targets and stop-loss

Often at times after taking up a trade, you would have experienced a huge profit at first (while the price action is yet to hit your target), but then suddenly the price action reverses and hits your stop-loss. Sad right?

So what went wrong? Why was there an instant reversal and why did the price action did not hit your target?

There are high chances that the resistance/support level that you drew on the chart as your potential target/stop-loss was wrong. And you can’t blame anyone for that, as knowledge is vastly available on the internet and sometimes it is confusion that plays a part in your analysis being wrong and the rest of the time its incorrect knowledge fed to you.

Before moving forward, let’s clear out one Myth:

If the price action breaks down and reaches the support level, then it is sure to bounce back.

This is a huge misconception when taking up the trade and there is no guarantee that the trend will reverse from the support level or bounce back for that matter.

Same is the case with resistance level. If the price is moving up and is at the resistance level then it is not guaranteed that it will come down.

Support

An area where the price increases due to lower supply or higher demand. What this essentially means in simple terms is that this is an area where the buyers see that the price is at a very attractive level and so they enter into the trade. Thus when they enter, the price shoots up creating green bull candles.

While many of experts call this area – a line, for you to take up this trade successfully, you should take up this trade only if the bounce back crosses the area of the rectangle or if there is a breakdown and the price breaks the area of the rectangle and continuing its downfall.

Resistance

An area where the price reduces due to higher supply or lower demand.

The meaning of this in simple terms is that this is an area where the sellers see that the price is at a very attractive level and so they enter into the trade. Another reason for the formation of a resistance area is that often the buying volume decreases, as a result the sellers overpower the buyers and the price hits that resistance area.

Drawing Support and Resistance levels

Drawing support and resistance levels is fairly simple. All you need to do is

  • switch to your convenient time frame
  • Zoom out the chart 5 times
  • Draw the obvious support/resistance levels that you can see with the naked eye (Notice that when the price action breaks out, the resistance level will act now as support level and vice versa)
  • Adjust the areas so that the area captures maximum wicks/candles and where you could see an immediate bounce back.
Support and Resistance levels

Strategy to prevent trading at false breakouts/breakdowns

A common strategy that almost every trader follows to prevent trading at false breakouts/breakdowns is to wait for the second candle to break the breakout’s/breakdown’s high or low respectively.

This strategy will not only confirm that it is a pure breakout/breakdown, but it will also allow you to book handsome profits if you’re trading with large quantities.

The stop loss should be the breakout candle’s low (if it breaks the resistance) or the breakdown candle’s high (if it breaks the support level). And yes always remember that breakout is when the resistance is broken whereas breakdown happens when the support level is broken.

How can I obtain 90% accuracy in taking up a trade based on this strategy?

To obtain 90% accuracy, you’d have to use another tool or an indicator for confirmation of a breakout/breakdown. We prefer using an MACD indicator in our trades as it is widely used and a highly reliable indicator.

Combine MACD with the concepts above and you get a powerful and a 90% accurate trading strategy.

We’ve expalined this strategy in our previous post.


We hope you like this strategy and try to implement it the next time you take up a trade.

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