It's not unusual to see traders using support and resistance to set up potential trades. The most common trade I see among novice investors is a set up that envisions the price action "bouncing" off an existing support or resistance lines. There are many versions of this particular trade, and it is not unusual to see small investors implement this trade over and over. To be sure, using support and resistance lines as potential setups is very common.
Unlike the trade I described above, where the small traders are looking for a bounce off a support or resistance line, I am looking for a continuation through a support/resistance line. This makes sense at several levels. First and foremost, I'm a trend oriented trader and dislike trading against the trend. By definition, any bounce off a support or resistance line would entail a move against an existing trend, which is something I avoid, especially in a strong trend. Secondly, in order for the price action to move through a support or resistance line it takes a medium, at the least, and usually a strong push to pierce the line. Inevitably, this strong push creates excess momentum which is carried through for 10 or 15 additional ticks, and those additional ticks are the prize I am seeking to capture. This set up usually results in a very violent and short trade, as the momentum pushes the price upward or downward at a high rate of speed. It is an exciting trade to watch and even more exciting to initiate.
When setting this particular trade up, I generally look for a strong support/resistance line that will intersect an established trend line. As an aside, I tend to prefer to take this trade to the short side as the market tends to move faster when heading downward. This can be attributed to panic selling, or long traders bailing out of short positions as the price action moves against them. In any event, I position my entry three or four points below the support/resistance line and wait for the price to come to me. Needless to say, it is never a good idea to chase the price action and it is rare for me to initiate a market order. I want to enter a trade at a point of my own choosing where I think I have the best chance of profiting.
Once you become accustomed to spotting the set up, you'll find it occurs two to three times daily. The trade is relatively reliable if it occurs in a trending market, and the trend does not necessarily have to be a strong one. On the other hand, I would avoid taking this trade when the market is in a well defined channel. Breakouts or breakdowns out of channel formations are generally unreliable and typically fail. False breakouts from a channel formation look very enticing from the onset, but after moving three or four ticks in your favor they tend to retreat back into the channel. Once in the channel, it is anyone's guess where the price action may go as movement inside the channel is random, at best.
In summary, we have looked at a trade using support/resistance lines. Instead of looking for a bounce off these lines, we have outlined a straight that entails a continuation of a trend through known support/resistance. We have noted that this trade is reliable when used in conjunction with a trending market, further we have cautioned against taking a straight out of very well-established channel.
