Role of Support Resistance in Breakout tradingWhat is Breakout Trading ?
A breakout is a potential trading opportunity that occurs when a share price moves above a resistance zone or moves below a support zone on increasing volume .
For trading breakouts one should be aware of support and resistance . It acts as the backbone of Price Action trading.
What is Support & Resistance ?
Support is a place where a stock price stop moving downwards. It is a horizontal area on a chart, where price experience buying pressure and tends to move up.
Resistance is a place where a stock price stop moving upwards. It is a horizontal area on a chart, where price experience selling pressure and tends to move down
Why are these support and resistance formed?
Support and resistance are formed only due to our own emotions at points around high supply or demand zone . For instance, if a price falls from high 100 to 50 then in and around that price (50) there will be lots of buyers ready to buy assuming it to be very cheap price and same goes for resistance where lot of traders would like to offload their positions considering that price to be too high for the stock and good time to book profit.
Why do we need Support and Resistance?
Support and Resistance often helps to set
1)Target,
2)Entry and
3)Stop loss.
Guidelines for Drawing Support and Resistance:
For the same chart if we ask 10 traders to draw support and resistance area, we will get 10 different result. So, what are the important things to consider ?
I always prefer drawing rectangular zone instead of drawing single line to make chart look clean and easy to understand the area of supply and demand .
*Always Use Higher Time frame to draw Support and resistance area.
* Draw a zone using rectangle which shows multiple touches. While, this zone act as great support and resistance area compare to few touches which was due to volatility .
* While drawing zone make sure to cover shadows in all previous touches
Things to know:
* The more times the S&R zones are tested in a short period of time, the weaker they become &
the greater the likelihood it will break.
Rules for Positional breakout :
1)Candle closing is mandatory to trade breakouts.
2)Wait for the retest, if the price closes too far from the breakout level.
3)There should not be HTF support/resistance near the breakout level.
Types of breakout Patterns :
1)Rising & Falling Trendline
2)Rising & Falling Channel
3)Rectangular Channel
4)Ascending , Descending & Symmetrical Triangle
5)Head & Shoulder
6)Support & Resistance Breakout
Hope it was helpful to you,
Happy Learning & Profit making :)
Thanks & Regards
Divyaapugal
