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Trading Strategy on tests of Resistance
(Same logic inverted applies to tests of Support).

The correct trading strategy therefore includes alternatives based on what happens next:

Sell-Stop (1) First, place a sell-stop below the next low which, if hit, will exit any existing long position and enter a small short position (small because the initial stop on the new position would be above the recent high - ie a significant distance away from the entry price). This initial stop protects against serious loss in the event that the market continues straight down, and turns a profit if it goes far enough.

Then watch which of the following occurs and act accordingly:


Stopped (1) If the market takes-out your stop, you will have a (small) short position. Place an initial stop above the recent high and await developments: If the market turns back up towards the high (a) you will be glad that the short position is only small and (b) you will watch the market action carefully in accordance with the notes below the next horizontal line to determine whether to add to the short position as the market approaches the high. On the other hand . . . .

Stopped (2) . . . .If the market the market carries-on down (making you money on your new short position (a) lower the buy-stop to just above the second minor-resistance level (the two levels of resistance are indicated here by jagged horizontal lines) and (b) - optionally - plan to increase the short position on any rally towards the first resistance.


If not stopped-out as described above:

Sell-Stop (2) If the market moves straight back up "impulsively" to re-test the high without forming a clearly identifiable intermediate high: stay long and raise the sell-stop to just below the most recent low.

Buy-Stop (1) If the market moves back up towards the high, but in a "drifting pattern": reverse to short and place a buy-stop to cancel the new short position and reverse to long above the high.

Buy-Stop (2) Similarly, if the move back towards the top is interrupted by a correction as shown here, reverse to short and place a buy-stop to cancel the new short position and reverse to long above the high.
NB: all of the above applies in reverse to tests of Support.

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