Trading by levels or trend, How To Trade Based on Support and Resistance Levels

Support and Resistance

The Bottom Line Financial markets are enormously complex, but most trading strategies tend to fall into one of two categories: trend following or swing trading.

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Each strategy has its advantages and disadvantages, as well as specific requirements that investors must follow consistently in order to avoid errors. However, many investors randomly apply these contrary strategies without understanding how that can undermine profitability.

Identify whether you are a trend trader or a swing trader in order to hone your strategy correctly.

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Key Takeaways Trend traders generally trade up- or downtrends, with trades lasting upwards of months. Swing traders generally trade within ranges, buying at support levels and selling at resistance levels.

How To Find Strong Price Levels: 7 Tips, Tools and Tricks

Their trades usually last for the short-term. Trend traders tend to focus on broader economic news, while swing traders focus on short-term price changes.

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Relative to trend traders, swing traders trade more frequently and for a shorter time period, while also taking larger positions and being more precise with their position timing.

Trends and Swings In theory, the trend trader takes a risk in an uptrend or downtrendstaying positioned until the trend changes.

He has provided education to individual traders and investors for over 20 years. Article Reviewed on July 21, Gordon Scott Updated July 21, Simply put, an area of support is where the price of an asset tends to stop falling, and an area of resistance is where the price tends to stop rising.

In contrast, the swing trader works within the boundaries of range-bound marketsbuying at support and selling at resistance. Swing trading tends to work best for shorter time frames, while trend-following strategies can be applied for months. However, the lines have blurred in recent decades due to the availability of real-time charting for all time intervals.

  • Instead of taking signals and trades all over the place, the better trades usually happen at key price levels.
  • Markets trend in three directions, up, down and sideways.
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  • Pattern Study of Trends, Support and Resistance Advertisements Next Page In technical analysis, support and resistance represent the critical point where the forces of supply and demand meet.

Which One Fits Your Style New and intermediate traders should choose one of these disciplines early in their market educations and stick with it until mastered or until they find out they're better suited how to make money on a truck the other approach.

Experienced traders can mix and match these strategies at will, often building highly effective hybrids that require strong discipline but produce excellent bottom-line results.

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This dual effort works best for those with strong multi-tasking skills who can contain each strategy within its proper boundaries while adjusting risk management to address the unique characteristics of hybrid strategies. For example, typical long-side swing trades require fast exits at resistance such as old highs, while trend-followers sit on their hands and allow securities to test and break those levels.

Commodity Trend Analysis - Support & Resistance

A hybrid approach might be to sell half the position at resistance, keeping the other half in hope of a trading by levels or trend. Trend Trader vs. Swing Trader Still confused about key differences between swing traders and trend traders?

These trading characteristics below will help you identify your current approach. Price rate of change rises in trends, attracting the trend trader and falls in trading ranges, attracting the swing trader.

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The Big Picture Trend traders watch broad economic, political and environmental issues that might affect position selection or risk management. Swing traders safely ignore these macro influencesfocusing squarely on short-term price action.

Trade Frequency Swing traders execute more positions but hold them for shorter time frames, while trend traders execute fewer positions but hold them for longer time frames.

Significance of Zones The concepts of trading level support and resistance are undoubtedly two of the most highly discussed attributes of technical analysis. Part of analyzing chart patterns, these terms are used by traders to refer to price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction. At first, the explanation and idea behind identifying these levels seem easy, but as you'll find out, support and resistance can come in various forms, and the concept is more difficult to master than it first appears. Key Takeaways Technical analysts use support and resistance levels to identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trend. Support occurs where a downtrend is expected to pause due to a concentration of demand.

Position Selection Trend traders own or short sell securities with the strongest uptrends and downtrends, while swing traders own or short sell securities sitting at support or resistance levels.

Position Size Swing traders hold larger positions for shorter time frames, while trend traders hold smaller positions for longer time frames.

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Swing traders apply leverage more often than trend traders. Position Timing Swing traders seek perfect timing because the average win or loss will be smaller than for trend traders, who can miss the beginning or end of a trend and still book substantial profits.

Entry Strategy Trend traders enter positions while momentum is strong or wait for a counter-trend to lower risk.

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Swing traders take risk at support or resistance, fading the barrier by positioning in the opposite direction and placing stops where they're proven wrong. Trading by levels or trend Strategy Swing traders exit positions when stops are hit or profit targets are reached.

Trend traders hold positions until the trend changes, regardless of the time frame.

Find Support and Resistance Levels

They place stops at the price level that signals the trend change. The Bottom Line Swing traders and trend traders execute market timing strategies that require different skill sets.

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While experienced players can successfully mix and match these strategies, new and intermediate traders should focus on one approach and stick with it until fully mastered. Whether you're a trend trader or a swing trader, your profitability will depend on your ability to apply an array of technical tools to your analysis of a particular market or security.

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To learn more, check out the Technical Analysis course on the Investopedia Academywhich includes educational videos and interactive content to help you boost your trading skills. Compare Accounts.

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