Support Level Confluence
In this type of setup, you are basically speculating on a breakout. Please bear in mind that you need to spot at least three hits in order to determine your support level. Additionally, the price action may reflect a resistance level, or perhaps not. It is not necessary to establish both a support and resistance level. The only requisite here is to establish a clear support level. In fact, if you see significant spikes, then you might be setting yourself up for a big gain.
Now, here is the most important part: the trendline needs to be located below the support level you have indicated. If the trend line is above the support level, you are too late. While you may still be able to ride the wave to the top, you can’t expect to maximize your trade as you have gotten in after confluence, that is, the point in which the trendline officially intersects the support level. If you happen to get in right after confluence, you might be in for a big win. However, the later you get in, the greater your chances of missing out on the breakout.
To set up the trade, here’s what you need:
First, clearly identify at least three points that indicate the support level. If there are more, then you are sure that’s the bottom limit. This is the mark that you have a clear support level for the price action you are following.
Then, ensure that you have a rising trendline. This is important as a flat or falling trendline does not work for this case. If you identify the trendline emerging from a point in which there was a breakthrough, then you are poised for a significant increase.
Next, set your entry point at the expected support level point. This is the point in which you estimate the trendline will intersect with the support level. To simplify things, you can set this entry point automatically in your trade parameters. That way, the trade will only execute when the point is hit.
Lastly, set your stop-loss point at no more than 20 pips. This is important should the price plummet below the support level for whatever reason. Also, set your take-profit point depending on the risk to reward ratio you are using. For instance, if you perceive the gain to be massive, you can set up your risk to reward ratio at 1:3. So, if you set your stop-loss at 20 pips, you can set up your take-profit at 60 pips. This will lead you to a highly successful trade.
Note: if you exit the trade, but the price keeps rising, do not enter another trade. There is no telling the exact point in which the price will fall back down. So, it’s best to sit out and what for the price to revert to mean. If you find that it doesn’t touch the previous support level, then you might be seeing a new support level. Wait for a double bottom to confirm the possibility of a new support level and then repeat the same procedure.
Resistance Level Confluence
This type of trade is essentially the opposite of the support level confluence trade. The point of this trade is to avoid getting sucked into a falling price. This would not only zap your profits but may also leave you with a massive loss. So, it’s best to make sure you have a good idea of what may happen.
In short, resistance level confluence is when you anticipate that a resistance level becomes a new support level. This is possible when the price plummets. While there is any number of reasons for this, you can use this type of trend to gain on the upswing. However, you are not anticipating that the price will go past the support level.
This is where you not only make money but also avoid getting hammered.
Here’s how to set up this trade:
First, spot the support level of the price action you have been tracking. If there are multiple hits, then you can be relatively sure of this level. If there is a breakthrough with a reversion back to mean, then keep an eye on this as it could indicate a new support level.
Next, keep an eye on the original support level as this would be expected to become the new resistance level. This is due to the fact that the price will not necessarily revert to mean right away. Rather, it will hit the support level and then dip back down. This is the indication that the new resistance level has been hit.
Then, take a look at the trendline. Chances are the trendline will either be trading sideways (showing a horizontal move), or there will be a very slight upward or downward trend. If there is a clear upward or downward trend, then you are getting a false signal, as this could simply be an indication of volatility.
Lastly, follow the candlesticks. Check out the low point the price action hits before bouncing back up. When the price action hits the new resistance level and pops back down, you can set up your trade at the bottom and wait to cash in on the rebound.
With this trade, it’s important to take care as you might enter the trade at what you observed to be the support level only to find that the price action broke through the floor. As such, you stand to get hammered. Please bear in mind that a sideways trendline is almost always a sure sign of this type of trade. Any other type of trendline will just be a false signal.