We all know that support and resistance is a key element in any form of technical analysis but very few traders know how to use it correctly.
Here we are going to show you how to use support and resistance in two ways to make huge gains.
Validity of support and resistance
The way to trade support and resistance is to first only use valid support and resistance.
Many traders see a double top or bottom and consider this valid – its not.
You need to look at the price history.
See if this level has been tested in the past and twice is the minimum you are looking for.
As a general rule the more times it’s been tested the better and the bigger the gaps between the tests the more valid it is.
Support and resistance should have been tested several times over weeks or months for it to be valid.
You can’t use support and resistance in daily or hourly time frames it’s meaningless.
No one really looks at these levels as valid except of course day traders and day traders don’t make money – period.
Volatility in a day is random and this means using support and resistance is pointless.
Line up weekly and daily resistance
Its good if you can see daily and weekly resistance points line up.
Always use the weekly chart before switching to the daily when looking at support and resistance level.
Trading valid resistance and support
You have two scenarios
1. It holds and you can make a trade thinking support or resistance will hold
2. You can trade a break of resistance.
In either scenario timing your entry is crucial.
If you think resistance or support will hold WAIT for price momentum to weaken into resistance and act on confirmation
You can so this by using the stochastic momentum indicator (we have written frequently on this and it’s the best indicator to time any trade and if you are not farmiliar with it learn about it now) watch for the stochastic lines to turn down and cross with bearish divergence and go short.
On the other hand.
If prices go through and break support or resistance only trade if stochastic lines cross and turn up with bullish divergence.
This confirms the breakout is strong and likely to continue.
By WAITING for the stochastic to confirm price momentum either price strength or weakness and have confirmation that the odds are on your side.
Stops are obvious on both trades as you simply use the level that has broken or held and tuck your stop in behind it.
Validity is critical when trading in this way look for several tests over various time spans and if possible line up identical levels on the weekly and the daily chart.
There is no simpler, easier way to make big profits with low risk than this method.
Any trader with a little practice will be spotting some great low risk – high reward trades