Buying at support and selling at resistance is the oldest trading strategy in existence. How come the majority of traders lose with this time tested “buy low, sell high” strategy?
The explanation for this paradox is simple, although most traders may correctly identify the support and resistance levels, they fail to use indicators to corroborate that these levels are sustainable.
You need to get the odds in your favor. When prices rush towards the support or resistance levels, they break as often they hold. You must be aware of changes in price momentum by using indicators to assist you. Identifying the right support and resistance levels and corroborating them with some of the indicators that follow will greatly increase your chances for a successful trade.
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Stochastic is the best timing indicator. This momentum indicator shows the high-low range over a number of periods as it relates to the location of the close. Because Stochastic is range bound, you can use it to determine overbought and oversold price levels.
The Relative Strength Index (RSI) is another great timing indicator. The RSI measures the speed and change of price movements. The RSI ranges between zero and 100. When the RSI is above 70 the currency is considered overbought and, when the RSI is below 30, then, it is considered oversold.
Combine these two momentum oscillators and wait for confirmation on both. This combination will greatly increase your odds of success by giving you advance warning of a shift in price momentum at support and resistance levels.
By following this strategy, you are not trying to predict the market, you are acting on confirmation, thus increasing your overall profitability.
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