The more times Support is tested, the stronger it becomes.
Support and Resistance are lines on your chart.
You should place your stop loss at Support and Resistance.
If you follow the “theories” above, it would cost you money in the long run. Because these are the biggest lies about Support and Resistance trading strategy.
And it’s not your fault because these are stuff that’s being taught in trading books and courses.
But don’t worry.
After reading this trading guide, you’ll never make these mistakes again.
Then let’s get started.
Truth #1: The more times Support or Resistance (SR) is tested, the weaker it becomes
First, let’s define Support and Resistance:
Support – Area on your chart with potential buying pressure
Resistance – Area on your chart with potential selling pressure
You’ve probably read trading books that say… the more times Support or Resistance is tested, the stronger it becomes.
But the truth is…
The more times Support or Resistance is tested, the weaker it becomes.
The market reverses at Support because there is buying pressure to push the price higher. The buying pressure could be from Institutions, banks, or smart money that trades in large orders.
If the market keeps re-testing Support, these orders will eventually be filled. And when all the orders are filled, who’s left to buy?
Here’s what I mean…
Truth #2: Support and Resistance are areas on your chart (and not lines)
This is a mistake I’m guilty of. Treating Support and Resistance (SR) as lines on my chart.
Because you’ll face these two problems:
- Price “undershoot” and you miss the trade
- Price “overshoot” and you assume SR is broken
Let me explain…
Price “undershoot” and you missed the trade
This occurs when the market comes close to your SR line, but not close enough.
Then, it reverses back into the opposite direction. And you miss the trade because you were waiting for the market to test your exact SR level.
Price “overshoot” and you assume SR is broken
This happens when the market breaks your SR level and you assume it’s broken.
Thus, you trade the breakout… but only to realize it’s a false breakout.
So, how do you solve these two problems?
Treat Support and Resistance as areas on your chart, not lines.
Why SR are areas on your chart
Because of these two group of traders…
- Traders with the fear of missing out (FOMO)
- Traders who want to get the best possible price (Cheapo)
Let me explain:
Traders with the fear of missing out would enter their trades the moment price comes close to Support.
And if there’s enough buying pressure, the market would reverse at that location.
On the other hand, there are traders who want to get the best possible price, so they place orders at the low of Support. And if enough traders do it, the market will reverse near the lows of Support.
But here’s the thing:
You’ve no idea which group of traders will be in control. Whether it’s FOMO or Cheapo traders.
Thus, Support and Resistance are areas on your chart, not lines.
If you want to know my secret technique to drawing Support and Resistance, then check out this video:
Truth #3: Support and Resistance can be dynamic
What you’ve learned earlier is horizontal SR (where the areas are fixed).
But it can also change over time, otherwise known as, Dynamic Support and Resistance.
There are two ways to identify Dynamic SR.
You can use:
- Moving average
Let me explain…
How to use the moving average to identify dynamic SR
I use the 20 & 50 MA to identify my Dynamic SR.
Here’s an example:
However, it’s not the only way. You can use 100 or 200 MA, and it works fine.
Ultimately, you must find something that suits you (and not blindly follow another trader).
These are diagonal lines on your chart to identify dynamic SR.
Here’s what I mean:
Truth #4: Support and Resistance are the worst places to put your stop loss
I need not be an Einstein to guess where you’ll put your stops.
Below Support and above Resistance, right?
And why is this worst place to put your stops?
It gets hunted.
So… how do you avoid it?
Well, you can’t avoid it entirely.
But here are two things you can do…
- Set your stop loss a distance from SR
- Wait for the candle to close beyond SR
Truth #5: Trading at Support or Resistance gives you favorable risk to reward
Big mistake traders make is this:
Entering trades when the price is far away from SR. This requires a large stop loss and offers you a poor risk to reward.
But if you let price come to you, then you’ll have a tighter stop loss, and this improves your risk to reward.
Patience pays in trading. Stop chasing the markets and let price come to you.
TRADING WITH TARUN