Trading Strategies: Support and Resistance

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Questions and Answers

What does a stop loss of $2 from the entry price and a profit target of $6 indicate?

Full size position

No position

Half size position (correct)

⅔ size position

How is R calculated in the context of position sizing?

The total amount invested

The difference between entry price and profit target

The average of profit and loss across trades

The difference between entry price and stop loss (correct)

What should be done when the first scale-out point is reached at 1R?

Close ¼ of the position (correct)

Hold the entire position

Increase the position size

Close ¾ of the position

Which of the following is a sign of indecision in price action?

Mixed signals with only 1/3 elements indicating a bullish story Signup and view all the answers

When should one avoid front-running bearish reversals?

In low VIX environments Signup and view all the answers

Before scaling out, which factor is essential to ensure?

High trading volume Signup and view all the answers

In the context of trading, what does 'scaling out' mean?

Closing part of the position to lock in profits Signup and view all the answers

What signifies a 'level breakout higher' setup?

A breakout above a significant price level after a pullback Signup and view all the answers

What does 1R represent in the position sizing guide?

The difference between the entry price and the stop loss Signup and view all the answers

When should you first scale out of a position according to the scaling out strategy?

At 1R Signup and view all the answers

What should be done when the price reaches 2R?

Move the stop loss to the entry price Signup and view all the answers

What does it mean if the market shows a larger gap up?

Waiting for a pullback could be more rewarding Signup and view all the answers

What type of data should be monitored around 10 am according to the guide?

General market confirmation Signup and view all the answers

How many elements of price action should be aligned for a strong bullish setup as per the strategy?

At least 2 out of 3 elements Signup and view all the answers

In what scenario is a dip buy more likely than a breakout trade?

When two out of three indicators suggest a bullish trend Signup and view all the answers

What type of trade setups should be observed for bullish price action?

Level breakout trades Signup and view all the answers

What is the primary expectation when a previous area of resistance turns into support?

Bulls are strong and will maintain upward momentum Signup and view all the answers

What is a key criterion for the confirmation candle in a dip buy setup?

It must close as a full body bullish Signup and view all the answers

What does a higher high followed by a pull back suggest about the bulls' performance?

The bulls failed to meet unforeseen resistance Signup and view all the answers

Which fib level is used to identify a 1:3 risk reward entry?

.236 fib level Signup and view all the answers

What is the maximum percentage of an account one should risk after setting a stop loss?

1% Signup and view all the answers

What is the primary purpose of identifying areas of support in trading setups?

To establish likely bounce points for entry into trades Signup and view all the answers

What characteristics should the volume of the confirmation candle exhibit?

Greater than the previous bar's volume and ideally larger than the 20-period average Signup and view all the answers

Where should the stop loss be placed in relation to the confirmation candle?

Under the low of the confirmation candle Signup and view all the answers

What is the primary setup for a level breakout trade?

A pierce through horizontal resistance Signup and view all the answers

What volume condition is necessary for a bullish confirmation in trend reversal lower setups?

Volume larger than any bullish volume from the previous day Signup and view all the answers

Which type of candle is required for confirmation in a trend reversal lower?

Full body bearish candle Signup and view all the answers

What is a key difference between trend reversal and level breakout trades?

Only trend reversals require evidence of increasing momentum Signup and view all the answers

What must happen for bulls or bears to imply a trend reversal?

High volume conditions must be present Signup and view all the answers

Where should profit targets be set according to the trend reversal strategy?

At the next point of contact on the trend line Signup and view all the answers

What indicates that the bulls failed in a trend reversal lower situation?

A failed breakout and bullish pressure loss Signup and view all the answers

Which candle closing condition is notable for confirming a trend reversal lower?

A candle that closes as a normal body bearish Signup and view all the answers

What is the main thesis behind dip buy strategies?

Bulls are strong, making previous areas of resistance act as support. Signup and view all the answers

Which of the following is NOT a valid setup for dip buy trades?

Breakout above monthly high Signup and view all the answers

What defines the confirmation standard for dip buy setups?

A full body bullish candle closing on increasing outlier volume. Signup and view all the answers

Under what condition should a stricter volume standard for reversals be applied?

If selling pressure exceeds the previous day's volume aggressively. Signup and view all the answers

What is the purpose of the Fibonacci tool in entry techniques?

To find the entry price based on profit targets and stop loss. Signup and view all the answers

What is the maximum risk allowed when considering position sizing?

1% of the account after placing a stop loss. Signup and view all the answers

Where should the stop loss be placed in a dip buy trade?

Under the low of the confirmation candle. Signup and view all the answers

Which position size corresponds to a stop loss of $1 from the entry price?

Full size Signup and view all the answers

Study Notes

Trade Thesis Overview

Strong bullish momentum leads to previous resistance areas becoming support during pullbacks.
Dip buying off identified support levels is a key strategy.

Setups for Trades

Bouce off VWAP, previous daily highs, fakeouts followed by reversals, BB reversals, and moving average (MA) bounces are effective setups.
The strategy aims to identify and enter trades as price approaches perceived areas of support.

Confirmation Standard

Confirmation occurs when the first 5, 10, 15, or 30-minute candle closes fully bullish with increasing outlier volume.
For dip buys, the confirming candle closes to established support.
Daily volume support should be present, with confirmation volume exceeding previous bars and preferably larger than a 20-volume period average.

Profit Target and Stop Loss

Profit targets are set at the next daily, weekly, or monthly highs, or at trendline contact points.
Stop loss is placed beneath the low of the confirmation candle.

Entry Technique

Enter after a pullback into the predefined entry zone, ensuring price does not fail before establishing a higher high.
Use Fibonacci tool to determine entry prices, from profit targets to stop loss locations, employing the 0.236 Fibonacci level for a 1:3 risk-reward entry.

Position Sizing

Risk management restricts losses to 1% of the account post-stop loss.
Position sizing zones include:
- Half size: $2 stop loss for $6 profit target.
- Two-thirds size: $1.50 stop loss for $4.50 profit target.
- Full size: $1 stop loss for $3 profit target.

Scaling Out Strategy

Scaling out utilizes the R system, incrementally trimming positions as profit and loss (PnL) increases.
The first scale-out occurs at 1R profit, securing a break-even stop loss.
Subsequent scale-out at 2R profit, adjusting stop loss to entry price.

Key Considerations

Avoid trading gaps; a larger gap suggests waiting for a pullback rather than engaging in breakout setups.
If moves seem extended, increase the volume confirmation standard.
Consider general market conditions and avoid trading during potential early morning fakeouts.

Price Action Observations

Strong price action is identified by:
- Green candle with increasing volume.
- Monitoring for gaps down that may reverse trends.
Transitioning from weak to bullish price action necessitates a third confirming factor in price movement.

Additional Trade Setups

Level breakout trades based on daily, weekly, or monthly patterns with the thesis that bullish momentum transforms resistance to support.
Trend reversal strategies that incorporate various indicators, signaling potential bearish trends after failed movements.

Volume and Momentum Thresholds

High volume is critical for both breakout and bearish reversal setups to signify strong control by bulls or bears.
Monitoring for momentum signs helps in confirming trades; lack thereof may indicate continued consolidation rather than entries.

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Description

This quiz covers key trading strategies related to support and resistance in the financial markets. It focuses on methods like dip buying off support and how previous resistance areas can turn into support during market pullbacks. Test your knowledge on setups like bounces off VWAP and moving averages.