The support and resistance strategy is one of my favorites.
Maybe being a FOREX trader explains why is this one of the strategies that I use most often. I especially use it if the market is in a neutral trend and during the off-hours when important news that can create volatility and sudden changes in the direction of the market will not be emerging.
The support and resistance strategy is very used in the Forex and Stock markets with very interesting results. There are several automated trading systems (algorithmic trading) that are developed using the support and resistance strategy as their trading basis.
The support and resistance strategy should be used with the following criteria:
1 – Neutral Trend – When the market is in a neutral trend, typically, it is because it is not moving much and the lowest point is bounded by a support or resistance and the highest point is bounded by another support or resistance. Usually a neutral trend occurs during the hours when there isn’t important breaking news and during low volatility hours. Or simply when the market volatility is decreasing or the market is awaiting important news. In the image below you can see a neutral trend.
2 – Platform –In order to use the support and resistance strategy you must have a platform installed on your computer. I use the MT4 platform that is widely used in Forex by most Brokers. Simply open a Forex demo account at a Forex Broker and then download the platform software. It is completely free.
3 – Time Bars – The frequency that I use for the support and resistance strategy is 15 minutes. Each candle/bar lasts 15 minutes. You can even try the 5 minute candle or some of the longer ones like the 30 minutes and one hour candles. You should match the bar/candle time period on the platform to the trade’s time period. Thus, if you use a 15 minute bar/candle, open a 15 minute trade. It is important to do several experiments because the effectiveness of this strategy varies from asset to asset. Some work best with smaller time intervals, while others work best with larger intervals. Some of the assets that work well with this system are: USD/CHF, EUR/USD, EUR/CHF, USD/CAD.
4 – Support and Resistance – The support and resistance are the prices of an asset where there is a resistance to surpass that value. There are indicators that calculate the daily support and resistance for each asset type. The distance between the support and resistance varies from day to day and is related to the existing variations on each active on the previous day. Normally the pivots, the daily support and resistance are calculated at midnight, local time for the Broker. When the market is in a neutral trend, normally the support and resistance prevent the price from surpassing the values; the price reaches the value, and then drops or rises back. This situation sometimes lasts the better part of a day, which allows for a lot of trades with a high percentage of profitable trades.
5 – Indicators – I use a paid indicator that calculates the pivot, the support, and resistance using the Fibonacci system. For those who want to try this strategy and open an account with one of the Brokers that I recommend on this site, I will send the Indicator free of charge. Then you just have to add it to the platform.
How to use the Support and Resistance Strategy:
Once you have the MT4 platform installed on your computer and the indicator that I offer, you only have to identify whether the given asset is in a neutral trend (see image at the beginning of the article). Use the 15 minute bars/candles (or another of your choosing).
When the price of the asset is hitting a resistance you should trade a PUT or Low. Because that price “prevents” the value from continuing to rise and it is likely that on the next bar/candle the value will fall.
When the price of the asset is hitting a support you should trade a CALL or High. Because that price “prevents” the value from continuing to fall and it is likely that on the next bar/candle the value will rise.
Please note that this strategy works during hours that important news is not breaking. To keep abreast of breaking news use this site. Adapt the site’s time to your computer’s time so that when high-impact news breaks (with the red icon) you are not using this strategy. In this situation you can use this strategy.
So that the entry (opening of the trade) is the most perfect possible, in addition to the support and resistance indicator, you can use the Stochastic Oscillator to assist you on the points of entry. When you see that the price is close to reaching a resistance or support, look at the Stochastic indicator and check if it is being overbought or oversold (above 80 or below 20). If this happens, the likelihood of success increases even more.
Below is an image that shows a little of what was explained about the support and resistance strategy.
If you have any questions or suggestions about the support and resistance strategy do not hesitate to contact me or leave your comment below.