Trying to understand when, or if, price action will finally reject off support and resistance levels is something that creates enormous problems for many traders and even often leads to uncertainty, thus causing bad entries and unnecessary losses in trades.
In this article, we’ll use TradingView as we outline an astoundingly powerful strategy based on how you, as a trader, can identify the loss of momentum around the levels of support and resistance using price action. This process is applicable to most markets, including cryptocurrencies, indices, and forex.
Traders are well positioned to make good decisions that guarantee successful trades if they have grasped the concept of loss of momentum and used the same in various support and resistance levels. This strategy places an emphasis on the important observation of candle sizes to know when strong rejection signals are being formed before taking a trade.
Understanding Price Action and Momentum
What Price Action?
Price action refers to change in price of an asset plotted against time. Technically, this is the foundation of technical analysis, which studies past price actions in making decisions in trading.
The interpretation of this movement in price is done through price action trading, with little reliance on indicators, such that it gives the traders a clean view of the market.
Explanation of the Importance of Support and Resistance
It is considered that price action trading supports and resistance levels. Support is a price level at which a downtrend can be assumed to pause by a concentration of demand and resistance means a price level at which a rising price tends to pause, due to a concentration of supply.
These two levels help in predicting the future price movements after they are identified.
What is Momentum?
Momentum is the amount at which the price of a security changes for a given time span. In trading, momentum delineates the rising or falling of the price of security.
A loss of momentum occurs when the force pushing or pulling continues to wane, which usually gives a warning of a possible discontinuation or reversal.
Setting Up Your Charts
Using TradingView
Setting up Charts on TradingView— This price action strategy can be effectively applied by setting up your charts on TradingView as follows:
- Sign up for TradingView, and load the chart of your favorite underperforming asset.
- Choose the sufficient time frame according to the trading style. Yield this strategy from the 15 minutes to the 1-hour time frame.
- Draw levels of support and resistance by marking levels at which, previously, the price was turned—either by Reversal or Pauses.
Identifying Loss of Momentum
Rejections Identification
Rejections at major levels of support and resistance are strong indications. A rejection happens when the price comes to a level but can’t quite break past it. Rather, it does a 180.
This usually happens together with a loss of momentum, manifesting as a row of increasingly smaller candles moving towards the level.
Example:
- Find Support/Resistance: Look for areas where the price has reversed or paused historically. Draw horizontal lines to grab these levels.
- Watch Momentum: With the approach of price to a support and resistance level observe the size of the candles. Large momentum candles show good movement, while small body candlesticks would signal a weakening in momentum.
- Watch Out for Rejection: Wait for a strong rejection candle, something like a huge wick or an engulfing pattern, off the support or resistance level.
Put the Strategy
- Identify the Setup: Look for a support level or resistance level with past rejections.
- Watch for Candle Sizes: As price moves towards this level, keep an open eye on the size of the candles. A succession of declining candle sizes is an indication of a dissipating force.
- Wait for Rejection: Enter a trade only if the support or resistance level shows a clear rejection candle.
- Stop Loss and Take Profit Set: Once you place stops at a point where you will be rejected, make your stop just that bit past the level where you were rejected. Set a take profit at the old high/low or at a level with significant price action.
Practical Application
Examples of Trades
Taking Long at Support
- Identify Support: Draw a line where you have bounced before.
- Watch for Big Momentum: Big momentum candle coming up as resistance approaches the price, with lots of little ones thereafter.
- Expect Rejection: Go long after the strong rejection candle formed at the support level.
- Setting the Levels of Stop-loss and Take Profit: Stop-loss is placed slightly above the level of support/resistance. Take profit is set at the level of the following key resistance/support.
Short At Resistance
- Identify Resistance: At this current stage, now the line of resistance will be chosen by drawing a line where price.
- Watch for Momentum: Watch the size of the candles as price nears an established level of resistance. Large momentum candles are followed by small ones.
- Wait for Rejection: A short trade should be entered only at or after a strong rejection candle.
- Parameters: Setting of a stop-loss just slightly above the resistance. A take-profit order is put at the subsequent significant level of support.
Case Study: AUD/USD
- Support Level: Find a good support level of the AUD/USD.
- Loss in Momentum: See several candles with decreasing size as the security approaches the support.
- Rejection Candle: A very strong, bullish rejection candle forms at support.
- Enter Trade: Buy on the close of the rejection candle.
- Stop Loss and Take Profit: The stop loss has to be placed beneath the point of reference, while the Take Profit is at the nearest level of support. The risk-to-reward ratio of this trade could be 1:2.
Benefits of This Strategy
- More Likely Trades: This makes the strategy customizable to when momentum ends—paired with clear rejection signals thereafter—giving a better chance for successful deals. This makes it easy for traders to avoid false breakouts and step into breakouts armed with increased confidence.
- Risk Management: Placing stop losses just outside of the support or resistance level keeps risks at a minimum. Setting a clear take profit level, perhaps from previous price action, helps to lock in gains.
- Versatility: One may apply this particular price action strategy to numerous markets, such as Foreign Exchange, Cryptocurrencies, and indices. It is a strategy based on universal principles of support, resistance, and momentum, so it works well in various trading environments.
Conclusion
The price action trading strategy focuses a lot on the loss of momentum in the regions of support and resistance levels. Therefore, through an understanding and application of this approach, one is able to enhance recognition of high-probability trade entries, effective risk management, and realization of constant profitability.
Remember, continuous study and practice form the foundation of success in trading. Add this to your plan of trade and see how the price behaves in moving around the zones of support resistance. With time, increase your skill in this and in case you are very patient and very disciplined, come out more self-assured and better in trading.