* A very basic example of “buying low” and using an established support zone*
Happy Halloween! Here is a scary thought for you all… trading is simply the art of buying low and selling high like any business. So why do we all make it so complicated?
It sounds so simple in reality but even I am guilty of getting caught up in the market noise, going too aggressive with risk and sometimes just being wrong. I suppose that is the game we play and why this is one of the hardest jobs in the industry. Anyway, let’s get back to todays blog posts.
I am going to use this blog post to revise a topic I have covered many times before and use a current trade as an example of how effective this method can be. I am talking about the simple support and resistance zone trade!
If you haven’t read my previous blog posts on the topic of trading support and resistance zones then you can find them via the links below. I highly recommend you read them.
What are support and resistance zones?
I won’t go in to a lot of detail now because I have answered this question multiple times in the blog posts linked above. Support and resistance zones are areas where buyers and sellers congregate and come to an overall directional bias and price reverses. A support zone is where buy orders are placed and price is supported up and stopped from going lower. A resistance zone is the opposite.
The chart above shows a basic line chart drawing of what support and resistance zones can look like in the real world.
Trading support and resistance zones can be extremely simple if you are able to spot where the best zones exist with the highest probability of them staying strong and holding price.
They are therefore the best example of buying low and selling high.
Let’s look at an example of this exact theory coming in to play on the Spot Gold chart this week. I am currently long spot gold from this support zone with the hopes of pricing break out towards its yearly upper resistance at $1550.
The chart above shows one of these support zones. The $1482 level on spot gold price has produce multiple rejections over the past few weeks, supporting price and showing many buyers are willing to buy the metal at this level.
You will notice I call them support and resistance zones and that is because they are just that. You will rarely get exact pip level rejections in the markets because it is very hard for that to occur with the sheer volume moving in the markets everyday. Instead, it is better to think of support and resistance as zones of anything from 20 to 50 pips wide and these zones are where the price reversals occur.
This is shown by the multiple candle wicks that form in the shaded region on the chart above. This is a sign of the sellers and buyers battling for direction at this zone and the buyers winning.
A long position placed at the $1482 zone with a conservative stop loss below the previous wick rejections can be very effective. Using a whole number like $1482 can also have the added benefit of being noticeable to other traders and other buyers using this as a target buying price.
I went long at $1482 with a buy order placed there. As you can see, within the space of one 4 hour candle, price tapped the support zone and then shot up creating one huge bullish wick candle. Once again, the support zone held strong.
As you can see on the chart above which was taken as at the time of writing, price continued to rise from the rejection of the support zone and I believe it is on its way to making new higher highs at $1530 and beyond.
Top Tip: Practice finding the best support and resistance zones. Sometimes they aren’t as good as they may first appear so play around with the different timeframe charts to find what works for you.
So there we have it, another good example of how simple trading technical analysis can be and it can still produce good reward:risk positions. It just takes practice and patience to wait for these set ups to appear.
All my technical analysis is done using the TradingView platform. You can get access via the link below.
My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.
DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.