Twists on support and resistance trading

Twists on support and resistance trading

Twists on support and resistance trading

The theory of support and resistance is one of the first things that those new to trading learn. So, it is quite remarkable that most courses on forex, in fact most courses on any form of trading, miss out on two twists on support and resistance trading. However, using support and resistance to the full extent can give up to 50% more profit than the methods taught on most trading courses.

What is support and resistance

Quite a number of my blog readers have not been through any training in trading. For their benefit I will firstly review the theory of support and resistance. If you are already familiar with these concepts by all means scroll down and check out my new twists on using them.

Support and resistance are price levels on charts that are revisited several times and seem to form invisible “barriers” to the movement of price in a particular direction. Support is a lower barrier (floor) and resistance is an upper barrier (ceiling).

twists on Support and resistance trading - support and resistance

Support & Resistance

 

Support and resistance are useful because they help us to predict the direction and extent of price movements. Old levels of support often become new levels of resistance and vice versa. The longer the period intervals on the chart, the stronger support and resistance are. You will become very familiar with support and resistance and should quickly “get your eye in” to seeing them. Draw them on your charts if it helps.

The support and resistance lines shown above move diagonally upwards in parallel lines as time moves forward. Of course, support and resistance does not have to move diagonally upwards. The move could equally be trending in a downward direction. The move could also be in a horizontal direction.

Note that as with many aspects of technical analysis things don’t always work out perfectly in line with the theories. Firstly, the number of cycles in a move can vary from one to many. It is only “typical” for them to be 3 to 5 in number. Secondly, the price may not always change direction exactly at the support or resistance line. Sometimes it may fall slightly short of or slightly overshoot the line.

Some traders draw support and resistance lines very precisely. They then take any, even the smallest of breaches of the lines as a signal that the trend is over and a new direction is to hand. Others wait for a candlestick, on their chosen time scale of chart, to close outside of the lines. Usually, this would involve a minimum of a 5 minute chart and often an hourly chart. However, in theory any, even weekly or monthly, lines of support and resistance could be used. The choice is yours.

Twists on support and resistance – No1

When trading support and resistance the usual method involves recognising that the price is at either support or resistance and entering / remaining in a trade until the full move is complete and the direction of the trend changes.

In the example shown below a buy trade may have been entered at 1.5670 and exited at the end of the trends run at say 1.5741 with a resulting profit of 71 Pips.

However, even a mere glance at any real price chart tells us that price movements do not tend to occur in straight lines. The norm is for them to move in a zig zag fashion “bouncing” off the invisible support and resistance lines as they go. Thereafter, usually after between 3 and 5 such “cycles,” the price changes direction forming a new trend.

What if we were to take advantage of the zigging and zagging?

Because price moves do usually not change in a straight line there may be far more of a gain to be had from this move:-

Twists on support and resistance trading - Zig zag trading on support and resistance

Zig Zag trading

 

Twists on support and resistance – No 2

Twist number two can probably be seen as a bit of a variation on twist number one.

During an upward or downward price move I like to take advantage of the zigging and zagging movements discussed above. I therefore “overlap” my trades.

For example, if the price is moving in an upward trend I try to take advantage of small reversals to exit with profit and to then re-enter below the previous exit price ready for the next leg of the upward movement. By doing this I extract extra profit from the overall price move by benefitting from parts of the move twice. However, we need to make sure that any additional costs involved arising from the spreads are covered. Done properly this little move can more than cover the costs of spreads making trade costs effectively nil.

I sometimes liken this to a pay and display car park! Nearly everyone pays for more time than they actually use. When we leave the space is sold to the next user and the car park owner has effectively rented out the same space to two people until the overlap has finished.

Here is a pictorial representation of the concept:

Twists on support and resistance trading - Overlapping forex trades

Overlapping Trades to Increase Profit

About The Author

Jeff Fitzpatrick

Probably the UK's most successful home Forex trader