Support/Resistance

One of the most basic and most powerful concepts of Technical analysis is the art of recognizing Support and Resistance, which is explained in detail on the BabyPips website.

Some other basics before explaining fow I trade this:

• The higher the timeframe on which a point of Support and Resistance is visible, the more important it is. As an example: a previous top visible on the weekly timeframe will be far tougher resistance then a point where price stalled a few times on an hourly chart.
• Support and Resistance will sometimes be found at an exact price, but will more often manifest itself as a zone.

Trading S/R through multiple timeframes

This is an intraday example of the EuroStoxx50 futures on Monday August 17th 2009.

Let's start with the hourly timeframe. On Friday the 14th, the low of the day was 2656 (horizontal arrow). At that time, this area was clearly an area of support. Price did not go any lower past that area later that day.

On Monday the 17th, the future opens with a gap down. On the hourly timeframe, it looks as if price just falls through previous support of 2656.

But looking at a smaller timeframe (5 minute) you can see that after breaking support during the opening, price goes slightly up again. After around 50 minutes (inside the circle), price bounces against the 2656 area and goes further down again. We had a retest of this area and it now became resistance.

If we look at an even smaller timeframe (1 minute), the opportunity to enter into a trade becomes clear. In the circled area we see around 6 continuous bars where price seems to stall and does not go higher than 2655. Exactly under the arrow, a futile attempt is made to go higher and break the resistance area. This fails and price goes further down again, continuing its hourly downtrend.

So the best thing to do is to try and fade support and resistance after a retest. Try to enter (short in this case) inside the blue circle as close as possible to the blue support line. This allows for a small stop order, just above the S/R area, while at the same time giving a good reward possibility.

Trading breakouts

Although I rarely trade breakouts, people who do might be interested in this excellent article explaining how to spot them early.

However, just looking at the first chart in that article, fading the resistance above would have gotten you in the trade a lot earlier, and with a very small SL. Below the same chart, where I would have entered at the blue circle.