How to trade using levels of Support/Resistance

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  1. How to profitably trade by using trendlines

This is one of the most important things to use when trading so today I’ll show you how you can find these levels and how you can trade profitably by adding them to your toolbox.

What is it?

In financial markets, buying and selling orders aren’t evenly distributed in price. Instead most of the volume comes together and creates ‘zones’ where there is a high amount of selling and buying happening.

These zones are called support (high buying volume) and resistance (high selling volume).

It’s important to know that a zone of support often gets turned into a zone of resistance afterwards. It’s important to not think of these as zones of exclusively support or exclusively resistance but rather of “high volume areas”.

Another thing to note of these “high volume areas” is that the more they get tested, the weaker they become. This is the same case for both support and resistance.

In this example here, the Price Action needed 3 tries to break through 41K when it was acting as resistance. A month after breakout however, it retested this level 4 times in a very short timeframe which usually means that there’s an increased risk of a breakdown.

This time fortunately, it kept strong and helped recontinue the uptrend.

But in January of 2022, the same thing happened. Price was back at 41K and this specific level got tested 4 times in just two weeks time and price thus broke down.

How to find & draw these “High Volume Areas”

First thing, you want to select the 4 hour chart. This strategy doesn’t really work that well for smaller time frames so if you’re a daytrader, then this might not be that helpful to you. 4 hour charts is the perfect mix between the amount of information you’re getting while still going big enough to not have too much candles to look at.

After you did that, zoom out until you see the next very big move, can be in either direction. Get the full chart in place and follow this list:

What you’ll be looking for (in order):

  1. Look for the upper limit of the range = resistance of the current range
  2. Look for the lower limit of the range = support of the current range
  3. Look for other “high volume areas” which have been acting as both support and resistance.

Look at this chart, and think of which zones you would select, based on this checklist (7 in total)

Answer

How to trade using Support/Resistance

Now that our lines are drawn, we’ll look at how you can actually make money using this, which is kind of the whole point of learning this.

Basically you want to always be betting that the range stays intact. This means that when the price hits the very upper target (here at 24.3K) that you’ll short the price instead of longing and hoping that it breaks out of the range. Opposite is true for the bottom of the range, long at the lower limit (here 18.8K).

One of the most important things in trading is Risk Management, here we’ll be setting stop losses in case the range gets invalidated. Selecting how tight to set these stop losses can be a bit tricky however, as intraday wicks can easily trigger stop losses and then just return into their range which is known as a “fakeout” (Fake breakout).

For example anybody who shorted the second top after a first test made clear that 24.3K was resistance, made the right call. But a stop loss which was too tight could have invalidated their trade while doing the right thing.

The easiest way to trade using Support/Resistance levels is by simply longing the very lower limit of the range and shorting the very upper limit of the range. Most people however, want to be able to trade more often than that and will want to trade based on the levels in between.

While this will lead in more opportunities, it’s also quite a bit harder as you now don’t really have that much clearance over where to put your stop loss or where to take profits.

And the truth is, you really can’t trade on just these intra-range levels alone. You’ll need another strategy and other indicators such as Fibonacci levels, nPoc levels or a Volume Profiler, using trendlines is also a big recommendation of mine.

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