A lot of traders trying to build their strategy based on indicators such as moving average, MACD, RSI or mix of all of them. They forgot that when they are trading they are betting on the price which is the only right indicator. They are not betting on moving average being crossed or not, or if the MACD crossed the signal line or even if the RSI cross the 50 level or not. All these indicators are fine if they are used probably and as a confirmation for your trading the price action, but if they are becoming the main indicators they will end trade up with massive loss.
The only thing that can e consider as main tools that can be used in trading is the support and resistance and the trendline. The reason is not because these tools are help you to indicate the price movement, but because these tools are very good help for trades to tell her that in these are of trend lines and support and resistance the price always work in different way as expected like if it was going up then it might move to sideway or go down immediately, or if it goes down then it might shift its direction to move to the other way sharply.
These tools (trendline, support and resistance) should be drawn carefully on the chart. For the armature trades these will be just consider a punch of lines which will be placed on the chart whenever a level of retracement happen. But that is not the case. They are like a history for the previous price action against these levels and how it acts according to these level. So these level should be placed carefully and with concertation. Here is so tips that will help to how draw ( Support and resistance, as well as Trendlines).
- You should consider bigger time frame when you draw these lines. Not below Monthly timeframe even if you are trading in hourly based. Because Major support and resistance or trend line of monthly time frame will never be broken because trader juts think that she bought an engulf bullish candle above strong support in ( 1 hour, 4 hour or even daily time-frame). Below is an example of good entering in EURUSD in 4h time frame.
The above chart shows how the support created first with large engulf bullish candle and how the price traveled higher and then return to the same level and it also when it reached to that level another engulf bullish candle has been created which increase the odd successful swing trade to 1.1990 level. But the truth was not like that and here what happen
As you can see in the above chart the trade that its idea created based on 4h timeframe, could not break the monthly down trend which is more stronger, and the price not reached to its previous support and resume its strength , instead of that it broke it and went low than that which resume the main down trend for the EURUSD. Check this article that I wrote about how to spot markets next move.
2. Traders should always consider volume when they draw supports and resistances specially for those who trade stocks. Because when price hit support or resistance with high volume that does not mean that the price will move to opposite direction immediately. It means that there is more liquidity at that level and there is high probability price will return back to that level and break it. It depends on the second hit for that level and the volume assigned with the price to decide if it was strong support that will make price go in opposite direction or if this level will be broke.
See in the above chart how does price make a resistance in Apple stock at 81.89 level when it hit it for the first time. Then price went down and then come back to the same level and almost hit it many times but with low volume. Once the price break it with high volume than previous days, it was valid breakout that lead the price to go up from this level which was 81.89 until it reached 140 or near to it.
3. Third approach that can be used in drawing support and resistance is when price moves in sideways. These sideways are consider the most liquidity place where volume is either accumulated or distributed and the next move will be decided inside these places. You only need to draw a rectangle surrounding these side ways and wait for price to break this rectangle and pullback to it and once its resume moving in the same direction with break out then engage.
Mastering Support and resistance as well as trendline is not an easy job. Traders need to do it and practice it all the time in order to develop their price action based edge that will help them understand the market as well as making money out of it.