This is an alternate trading strategy that you use when a market is not trending clearly, but moving sideways. It is short-term, with the price going between the support and resistance, and you need a sufficient difference between these two to make it worth trading. However, it has the advantage that your target price is clear, which allows you to make the appropriate calculations of profitability.
- Check the overall market is going sideways
- ensure the sector is going sideways
- confirm the security is going sideways
- look for definite support and resistance levels
- wait for the price to approach support or resistance
- determine protective stop level
- calculate position size
- go long at support or short at resistance
- use a trailing stop to follow the trade within the range
The question with this strategy is how to define going sideways. This is probably easiest by visual inspection, particularly as you’ll need to examine the charts closely to determine the support and resistance levels.
The protective stop will be placed underneath the support level when buying long at support, or over the top of the resistance level when selling resistance. To exit the trade in profit you can trail a stop below the previous couple of sessions for a long trade, or above the previous for a short trade. If the price is reaching the other side of the range, you can tighten the trailing stop to below or above the last session only, and this will allow you to retain the best profits.
At the end of each module there is a quiz. You can take a quiz at any point, but we suggest you view each module before taking the quiz. When you’re ready to start the quiz, click the take quiz ‘Start’ button below -:
The Masters Certificate in Technical Analysis - Module 17
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