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Support and resistance trading looks so simple and easy. Just draw a horizontal line where price has turned before in the past and wait until price comes back to it. In reality, the majority of traders fail using the support and resistance trading technique.The good news is, the reasons why support and resistance trading is not that easy are obvious when you are aware of them. We introduce you to a better way of using support and resistance levels in your own trading.
#1 What traders means when they talk about support and resistance levels
When you hear traders talk about support and resistance, you will usually see a chart like the one below. Traders then state that making money off the support and resistance line is very easy, but is it true? If we take a closer look, we will discover the weak spots of support and resistance trading and why making money is not as simple as it seems.
#2 The reality of support and resistance trading
Traders who draw thin horizontal lines on their charts in order to make trades off them, usually find themselves in one of the following two scenarios:
- Price turns ahead of their line and they miss the trade
Very frustrating and traders tend to be more aggressive on their next trades which results in a downward spiral.
- Price spikes through the support and resistance levels
When this happens, traders tend to become too scared taking to take a new trade or they set their stop loss orders further away which results in a decreased risk reward ratio.
The chart below shows the same instrument as the one from above, but this time we marked the spots that cause S&R traders to lose money. Although the support and resistance levels looked good at first glance, when we take a closer look, we can see where traders would find themselves in an unprofitable spot.
#3 How to use support and resistance zones
Professional traders understand that support and resistance trading is not done by using a single, thin line that markets magically follow and respect, but they found out that by using support and resistance zones, they can capture and understand price movements much better.
The screenshot below shows the same chart again, but this time, using a support and resistance zone. As you can see, the zone now includes all major turning points. But as usual, it is not as easy as it looks and there are a few things to keep in mind when using support and resistance zones:
- Instead of using multiple support and resistance levels, you can use one upper and one lower level, creating a zone that includes the most important swing points
- Draw support and resistance zones connecting the major swing points
- The broader your support and resistance zone, the more you will be able to explain price swings. BUT, at the same time, the more you will sacrifice your risk reward ratio on your trades
You have to understand that using support and resistance zones will not suddenly avoid all your losing trades. As we have said, this concept also has its weak spots, but by using zones for your support and resistance trading, you will be able to understand support and resistance and swing trading on a whole new level.
#4 Using zones as noise-filters
There is one more way where the use of support and resistance zones comes in really handy. The zone we have seen on the charts above has been drawn on the hourly (H1) timeframe. The chart below shows the same support and resistance zone, but now we have moved to the higher H4 timeframe.
You can see that the support and resistance zone includes a lot of noise and tedious back and forth that often creates uncertainty and impulsive trading by amateur traders. Therefore, using zones instead of thin lines can keep you out of trouble and increase the ability how you interpret price movements.
Support and resistance trading like a pro with zones
Traders don’t make money using support and resistance because of the following three points:
- Drawing thin lines on your charts to pin-point your trades underestimates the importance of volatility and natural price behavior
- This results in missing out on trades when price turns ahead of your line
- Or by getting stopped out when price spikes through your line
By using zones to capture and to identify support, resistance and price swings, you get a much clearer picture of price and you are able to filter out noise more effectively.
Especially when you start using support and resistance zones on the lower time frames, to time your entries on higher time frames, this concept will be very valuable.