This article on Trading Key Support and Resistance Levels is the opinion of Optimus Futures.
Technical traders use horizontal support and resistance levels to identify areas of interest on the chart and potential trading opportunities. These side-to-side levels that mark out prior (and often repetitive) instances where price found notable support and / or resistance can be key pieces of information towards an effective analysis of the ongoing trading environment.
While trading price action signals in the form of candlestick patterns like pin bars and engulfing bars off horizontal support and resistance levels is a fairly common practice among popular trading styles, below we take an alternative approach to highlight the possibility of trading these levels ‘blindly’ – that is, without any price action confirmation signals.
These blind or ‘touch’ trades allow the benefit of an entry often much closer to the source itself compared to conventional price action signal trades where waiting for the close of a large-ranged pin bar or an engulfing candlestick often results in an entry farther away from the source support or resistance.
As much as this style may attract your attention we would like to make it very clear that trading horizontal support and resistance levels without awaiting actual price action confirmations in the form of obvious candlestick patterns is certainly a more aggressive trading style. This style may require extensive understanding and knowledge of price action dynamics and market behavior in general and is more suitable for traders with higher degrees of trading expertise and technical analysis experience. Newer traders are encouraged to extensively test this style first before employing it in real-time trading environments.
Now that we have identified our interest groups, let’s get to the meat of the content.
Identify your Battle Zone
The first step for this strategy connects back to the foundational aspects of support and resistance levels, mainly their need as specific checkpoints or markers on your chart that define your (and other traders’) interest.
It is vitally important for you to select only the horizontal price levels that have very obviously and precisely acted as support and / or resistance in the recent past. At this point it is perhaps important for us to differentiate between the two different kinds of side-to-side support and resistance levels and why it is important to prioritize one over the other.
Below is a chart highlighting a horizontal support and resistance area that can best be described as vague. Notice how price reacts at several levels within a ‘zone’ rather than at a precise price level or a close group of price levels.
Compare the chart above with the chart below which highlights the same chart with a relatively more well-defined and precise resistance level.
If you were to choose between the above two horizontal support and resistance levels to trade blindly off of, which one would you go for?
Given that the strategy yields the benefit of allowing you an entry closer to the source with the trade-off coming from the relatively higher risk trade (you are no longer awaiting a price action signal confirmation as an added assurance), it is naturally more sensible to be utilizing support and resistance levels like in the chart above versus the thicker more vaguely defined zones as shown earlier in the article.
The last touch point of the resistance level marked by the asterisk would have made for a potentially safe entry short, given the market had precisely reacted at the level three times in the recent past.
You can also conclude that choosing proven support and resistance levels is vital as well. By proven we of course mean price levels that the market has reacted at multiple times in the recent past. The resistance level shown above is a perfect example of such an area of support and resistance.
Lookout for Supporting Price Action
We started off by saying that the greatest benefit to taking touch trades is the ability to be proactive and get an entry closer to the source without having to wait for a price action confirmation. In that context, the title to this section may appear confusing.
Actually, what we mean by supporting price action is not necessarily particular candlestick formations, but rather general price action and rhythm as the market moves towards your area of interest.
Generally speaking, we want price to be accelerating towards our area of interest and NOT trend smoothly towards it. The sudden movement towards the key area of support and resistance can often indicate a temporary dearth of opposing order flow that can then be expected to be piling up at the actual support and resistance level. We will not go in too much depth explaining this fairly common market phenomena as that would be a digression from the main strategy topic, but if you are still puzzled or need more explanation you can refer to our dedicated article on the topic HERE.
Referring to the chart above, observe the price action rhythm at point 1. Notice how the market moves rapidly into the resistance level, actually resulting in a move just about as hard back down as the market rebounded off the clearly defined and major swing high. You should notice that the lack of highs being created by the sudden sharp move up, allows for a path of least resistance for price as it backs down from the resistance level.
As a sharp contrast, refer to Point 2 on the chart. On this occasion we again have price rapidly moving into the resistance level but not before it created a minor swing high as part of the uptrend. You will notice that on its way down price actually finds support at the former minor swing high, allowing for an entry point for buyers that bid price higher again for a third test of the resistance level. This should help clear up why we don’t want price trending towards the area of interest, but rather accelerating towards it.
Finally, point 3 on the chart shows a situation we are looking to avoid at all costs. The bearish pin bar followed with a holdup at the resistance level is often a dangerous proposition for a trader expecting a bounce off the resistance level.
The whole point behind aggressive touch trading and getting closer to the source of support or resistance is to be able to get in timelier into the market resulting in very low drawdowns. If the market seems to hesitate to reverse sharply off your presumed area of support and resistance it may be time to react briskly to prevent losses. This brings us to the final aspect of touch trading.
As is usually the case with any strategy, much of your success as a touch trader will involve a trade management strategy tailored to suit your trading personality and mindset. But there may be some general guidelines that could be applicable to any robust trade management style by simply drawing from the aggressive nature of the method itself.
No matter how well you do your homework in identifying the absolute highest priority support and resistance levels to take your reversal touch trades off of, you will never be able to beat the added confirmation of a price action signal confirmation from a candlestick pattern that makes this strategy a high risk – high reward trade off. Getting at the source allows for a greater profit potential and the trader must therefore use this advantage to reduce the risk per trade for such aggressive blind trades.
Traders will also perhaps need to be very vigilant and likely ‘baby-sit’ the trade past the initial phase when the market is at and around the actual support and resistance level. Unlike some other conventional and conservative set-and-forget methods, this style requires your undivided attention at least in the initial phase.
You may have noticed from the examples above that price does not always behave exactly as you expect it to, leading to and away from your area of interest and so adjusting your risk appetite and / or trade management elements can easily mean the difference between a successful and an unsuccessful trade.
As long as you adjust your risk appetite to reflect the aggressive nature of the trading method and have a sound understanding of your market’s dynamics and usual behavior, particularly at key support and resistance levels (which of course requires time and experience hence our disclaimer in the beginning), you may potentially benefit from having to incorporate some touch trading into your trading arsenal, being one of the most popular high risk – high reward methods out there.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.