Price to choose path of least resistance
Trading is more about managing support and resistance than anything else. There are 2 steps to successful trading.
- Discover support and resistance levels
- Identifying the path of least resistance (or support) i.e. which one will hold and which one to give way
How to manage support resistance levels: USDSGD illustration
Step 1 – Look for support resistance levels at turning points
Support and resistance levels are ‘hard’ levels where price reverses. Therefore the way to look for support resistance levels is to inspect turning points. Turning points can be described as ‘V’, ‘U’, ‘inverted V’ and ‘inverted U’ shapes.
If unclear, overlaying a line chart with bars is a good way to visualise those Vs and Us. I wrote about this before at this post ‘Marrying the best of line chart and candlesticks; quick tip for MT4‘ but replacing those candlesticks with bar charts provide an even better visual outcome.
Step 2a – Mark support resistance levels with horizontal lines at turning points
One can arrive at good support resistance levels by following some rules:
- Place horizontal lines at the turning points of Vs and Us.
- Horizontal lines show levels that are support resistance levels.
- Turning points must be very obvious. If they are not, it is probably not very significant.
- The more times a level was touched or had near-touch, the stronger it is.
- When two or more lines come very close to each other, they enclose a zone.
Drawing support resistance levels are not an exact science so individuals can arrive at different lines even when following the same rules. When multiple levels enclose a zone, the zone is probably stronger as a support resistance than a single line.
USDSGD is now trading below the orange zone so that makes the zone a resistance. Question: where is support?
Step 2b – Turning to lower time frame
Lesser support resistance levels in lower time frames can be troublesome. Their existence makes prices go zigzag. Undiscovered levels can derail a trade plan and make a position go from profit to loss.
The charts above are at daily time frame so we can go one level down to inspect a 4-hourly chart. For example, someone trading the hourly chart can go similarly to the 15-minute chart. Two charts are about right. Looking at too many can make one confused with overload of input. The steps to identify support resistance levels are the same as 2a above.
Putting it together
Coming back to the higher time frame chart, we can see now the levels come together. In the chart below showing both resistance zone above and support level below, we can also understand why USDSGD has been moving sideways for the past few days.
How to trade then?
How to trade now that we know these information?
- Decide whether price is likely to break. As a guide, traders want to trade with the trend. Bearing in mind that USDSGD is printing a lower high and lower low, the dominant trend is down. Shorting this pair at resistance is a better proposition than going long in a counter-trend move.
- Wait for chart patterns to print inside the 4-hourly chart. A continuation or reversal pattern at this point can be very revealing. A bearish reversal pattern will reinforce a big picture short. A continuation pattern suggests that short term retracement since April low may continue higher.
- Lastly wait for a trading signal. A trade signal should consist of 4 elements.
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.