When it comes to trading strategies, you will never be short of choosing one or even developing one based on back-testing. However, to become a successful trader and increase the probability of winning trades, it is imperative that you have a solid understanding of how some basic strategies work for you to plan and extract bits of information to piece together a better one. Believe it or not, this is how some of the best strategies were designed and are relatively prosperous.
Increase Probability Success of Trade
As I mentioned before, to piece together a successful strategy, you need to understand some of the more essential strategies that traders use today. One such strategy is the support & resistance strategy and even though it is a pretty basic strategy on its own, it can be beneficial and can even be built upon.
Support and Resistance are without a doubt two of the most talked-about features of any technical analysis, as they paint a marvelous picture of how markets generally move and how we can predict future market movements. But do not be fooled, at first glance, the explanation behind identifying these levels on a chart seems somewhat oversimplified, but down the line, you will notice that support and resistance can take on various forms, which makes the concept a lot harder to master.
What is Support?
The area of support is a level where what is known as a downtrend can be expected to slow and maybe stop altogether because of much buying power in the market. As the price of oil, for example, drops, subsequently, the demand for oil increases, which then forms the area of support, making it harder for sellers to take control.
What is Resistance?
Likewise, the area of resistance is the opposite of support and is where you can expect an uptrend to halt. This is because there is more selling power than buying power in the market. As the demand for an asset like gold slows down and stops, the sellers are swooping in to take back control.
Trade the ‘Zones’ not the lines
Way too many people fall for this misconception that support and resistance are lines on a chart and follow the same pattern. This could not be further from the truth, and because of this falsehood, many professional traders like to take advantage of your naivety. Support and Resistance are not lines, but zones! Let me say that again just so you understand. “Support and resistance areas are zones, not lines.”
You should NEVER think of support and resistance as lines, but more like zones. The sooner you master this methodology, the sooner you can start becoming profitable. This is because the area in which buyers and sellers are battling it out can be within a broad range. You should think of these zones as supply & demand zones rather than support & resistance, as these zones are where buyers and sellers congregate to take control of the market in either direction.
Look back at previous areas of supply and demand (support & resistance) and see where buyers and sellers are likely to be waiting and then strike when the iron is hot and go with the flow.