Support and Resistance Advanced Trading Strategy Analysing Reliability and Optimisation

 Reliability of S&R

The support and resistance lines serve to indicate a reversal of prices but should not be taken as absolute. As with all aspects of technical analysis, the probability of a given signal occurring needs to be considered.

The graph for Zensar Technologies can provide insight. It contains a wealth of data that can be used to evaluate the company’s performance.

Current Market Price = 204

The amount of resistance is 214. 

It is likely that Zensar Technologies would run into resistance at 214 if it starts to climb. This could lead to sellers appearing who could drag the prices down. What is the assurance that this threshold will be met? To put it another way, what level of reliance can we have on the resistance line? Unfortunately, there is no definitive answer.

Looking back, Zensar Technologies has a tendency to act differently when it reaches 214. The good news is this price action zone is always consistent over time. As far as technical analysis goes, it goes without saying that support and resistance levels will almost certainly be observed. After all, history has a habit of repeating itself!

From my experience as a trader, I have found that S&R points that are well-developed tend to be respected.

 Optimisation and checklist

We have reached a critical moment in this module; now is the time to begin uncovering various optimisation strategies that aid in selecting lucrative trades. The aim is to identify advantageous trading signals rather than to detect numerous unbeneficial ones.

Optimisation is a process of refining an activity to achieve the greatest possible outcome. In this case, it is about locating trades that are advantageous.

Let us take a look at the bullish marubuzo, one of the earliest candlestick patterns we learnt. It suggests a long trade close to the end of the formation, with the low point serving as our stoploss.

Let us assume that the bullish marubuzo has the following credentials:

The trading day began with an opening of 432, and the high was 449. The low for the day was 430, and it ended with a closing of 448.

Hence, the entry point for taking a long trade is around 448, with 430 set as the stop loss.

What happens when the marubuzo’s low and a long-standing support line come together? This is an impressive combination of two technical principles.

We have two reasons to invest in this venture. Consider the implications of this decision carefully.

1. The bullish marubuzo pattern is a well-known signal to enter a long position in the market.

2. Support near the stop loss level indicates strong buying activity at the lower price point.

When trading in a market that is unpredictable, what every trader needs is a carefully planned trade setup. The presence of both a marubuzo and support near the low suggest that going long is the preferred course of action.

This gives rise to an essential concept. Suppose we created a checklist (or, if you prefer, a framework) for each trade we contemplate. 

This checklist would act like a set of guidelines we have to abide by before entering the market. If these conditions are in place, then we can commit to the trade; otherwise, we should find another trade opportunity that meets the prerequisites.

Some say that much of a trader’s success lies in discipline. From my point of view, a checklist can be an effective means of promoting self-discipline and thereby prevent impetuous, ill-considered trading choices.

To start, we have two essential elements of the checklist:

1. It is essential that the stock form a distinct candlestick pattern.

1. We have discovered some of the common patterns in this module. Utilize these patterns to satisfy the requirements of the checklist as a starting point.

2. S&R should be adhered to, and the stop loss price should be close to it.

1. For a long trade to be successful, the lows of the pattern should lie close to the support levels.

2. When making a short-term transaction, an appropriate peak of the pattern should be close to the point of resistance.

As we keep learning about TA concepts in this module, we’ll create a checklist that will comprise 6 points. We’ll then assign values to each one of them – e.g. the fourth point may not be as significant as the first, but more critical than a hundred other factors that could divert the trader.