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Support And Resistance Trading Methods Work In Range Bound Markets
One of the best ways for beginners to get their feet wet is to learn simple support and resistance trading strategies.
Often times beginners who know very little about financial markets begin with advanced techniques that can land them in hot water very quickly if they are not careful.
I wrote an article about Market Cycles and how financial markets alternate between trending cycles and range bound cycles.
If you did not read this article I suggest you do so because it will help you match the correct trading cycle to your strategy and increase your odds of success tremendously.
Wait Till Trend Ends
The first thing you want to do is identify the correct market conditions that lend themselves to range bound trading.
The biggest mistake beginners make is trading range bound techniques when markets are trending. The key is to monitor the markets that are trending and wait till the trend ends.
Once the trending cycle ends, markets usually enter a prolonged stage of consolidation or range bound activity.
So make sure you start out monitoring markets that are trending but don’t enter markets that are trending. In this example I’m monitoring and waiting for the trend cycle to end.
If you continue to monitor specific stocks or other markets such as futures or commodities you will begin to notice how the trend becomes weaker and eventually the market enters a different type of trading cycle.
This is the correct time to initiate support and resistance trading tactics. The longer the market stayed in one cycle the longer it will stay in the other cycle.
In this example you can see how Devon Energy Corporation slowly transitioned from trending cycle to range bound cycle.
When you isolate the range bound cycle you want to make sure to give it a week or two to develop so that you can see if there is any directional bias.
In simple terms you want to see if the range bound cycle has a directional slope.
Even when markets are range bound and trend-less there is often times some degree of directional movement that the market has bias towards.
This bias is usually a sign that the consolidation is a reversal and more often than not the range bound price action leans in the opposite direction from the previous trending cycle.
You can see in this example how the stock favors the upside and leans upwards. The previous trending cycle was downtrend so it’s not surprising for the range bound cycle to lean in the opposite direction.
After you isolate the range bound cycle and determine in which direction the market is leaning, you can begin planning your entry and exit levels strategically.
Your best opportunities will occur if you only take trades in the direction of the slope that the market is leaning towards. This tip will increase your profit to loss ratio as well as increase the size of the winners.
I want to provide you with another example so you can get a good idea of how to isolate support and resistance areas as well as know which direction to take your entry and exit signals.
Notice in this example Goldman Sacks is trending strongly upwards for extended period of time.
A good way to begin your analysis is to start monitoring stocks or other markets you trade that are trending strongly in one direction.
Usually cycles alternate so you can anticipate with a high degree of certainty that a trending phase will end and consolidation cycle will begin.
Once you find the right market and notice that the trend is coming to an end you can begin looking for range bound trading to begin.
The next step is to isolate the range bound trading action and see which way it slopes.
You only want to take trades in the direction the market is sloping so give the market some time to show you which way to position yourself.
Once you isolate the range bound cycle and determine which direction it favors you can begin to plan your entry and exits around that information.
In this example you can see how the slope is trending down and my entries are always in the direction of the trend or slope in this case.
Range bound cycles work well with support and resistance trading patterns.
Make sure you pick markets that exhibit substantial volatility and trading range and don’t forget to trade in the direction of the slope only.
This will prevent many false signals and will increase your profit factor as well.
Lastly, let the channel develop before you enter so that you can get a good idea of where the support and resistance lines will line up.
For more on this topic, please go to: Technical Trading Strategies – The Tail Gap Strategy Revisited
All the best,
By Roger Scott