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In today’s episode, you’ll discover when you should NOT buy into support.
So tune in right now…
Resources
Support and Resistance Trading Strategy — The Advanced Guide
The Complete Guide to Risk Reward Ratio
Forex Risk Management and Position Sizing (The Complete Guide)
Transcript
Hey, hey, what’s up, my friend? In today’s episode, I’ll be discussing when you should not buy into support.
Here’s the thing, when traders trade the markets, they look for support and resistance, to buy at support or to sell at resistance. I get it, support and resistance are areas of value on your chart.
But at the same time, there are plenty of times when you shouldn’t be buying into support because it would be a low probability trade. What are these scenarios that you should avoid buying into support? Let’s break them down.
Scenario #1: When there’s a series of lower highs into support
That’s kind of like a red flag, a signal that you should not be buying at that level of support. Why is that? And the reason is simple.
When you notice a series of lower highs, otherwise known as a descending triangle, it’s telling you that the sellers are in control, they’re able to push the price consistently lower. Whereas the buyers would feel very depressed as they can’t seem to push the price up higher.
Because if you think about this, when a descending triangle is formed or when lower highs are formed, the buyers have difficulty breaking above the previous high. That’s why you get a series of lower highs and the sellers are taking charge.
When you see a series of lower highs into support, that’s a sign of weakness. And you want to think twice about buying into support. If you asked me, more than 50% of the time price is likely to break down below support in this scenario.
Scenario #2: When the higher timeframe is in a downtrend
In the previous episode, I’ve talked about multiple timeframes analysis. Let’s say you are entering on the daily timeframe and you want to buy at support. But on the weekly timeframe, that market is in a downtrend.
Well, it’s not that you can’t buy at support. But bear in mind that you’re trading against the higher timeframe trend and the higher timeframe trend carry more weight compared to a lower timeframe trend because those trends last longer.
If you asked me, if I had to buy into support which is against the higher timeframe downtrend, I would bear in mind that that area of support is likely to break in the longer term as the downtrend is likely to continue.
Of course, it’s not always, but more than 50% of the time, the higher timeframe trend will carry more weight, and that trend is likely to resume compared to a lower timeframe trend that reverses the higher timeframe trend. Does it make sense?
Bear in mind where you’re in the grand scheme of things. When you’re looking to buy into support, look at the higher timeframe trend and see if you’re trading in the direction of it or against it. As much as possible, you want to be trading in the direction of the higher timeframe trend.
Scenario #3: When the price has tested support many times within a short period
Why is that? And the reason is simple. The more times the price has tested support within a short period, the weaker it becomes. It’s kind of like a variation of the descending triangle example I showed earlier. But this one is slightly different.
Imagine there’s a wooden door in front of you and you take a sledgehammer to smash the door many times within a minute. What’s going to happen? Well, the door is probably going to break, and collapse.
It’s the same for support that’s being tested multiple times within a short period. Because the more times it’s being tested the weaker it becomes as the buy orders at support get filled up, then there will come a point when there are no more buy orders left.
With no buyers left, chances are, support will break. So pay attention when support is being tested way too many times, especially within a short period.
And finally…
Scenario #4: When your risk-to-reward doesn’t make sense
I get that you want to buy at support and sell at resistance. But you should always measure how much are you risking compared to your potential profit.
Let’s say the market rallies high above support and you get an entry trigger to go long and your stop loss is about 200 pips but you realized that the price is hitting resistance soon which is about 100 pips away.
If you do the math, you’re risking 200 pips, but shortly after 100 pips, the price will come into resistance which has a good chance of the market reversing from there. So your target profit just before resistance at about 100 pips, but you’re risking 200 pips.
From a risk-reward standpoint, is it justified? Of course, this is something that depends from trader to trader. Some of them are comfortable risking $1 to make $0.50. But for me, it’s not quite my style.
When you buy at support, ask yourself if the risk-to-reward is justified. Consider how much you are risking against how much you can potentially make. Or consider, how far away is your target profit before the first obstacle comes in your way.
These are all for you to consider.
With that said let’s do a quick recap as to when you shouldn’t buy into support.
Recap
- When you see a series of lower highs into support
- When the higher timeframe is in a downtrend
- When support is tested too many times within a short period
- When your risk-to-reward isn’t justified
With that said, I wish you good luck and good trading. I will talk to you soon.