Supports & Resistances Trading Setups
In this type of trading we use the supports & resistances to trade, also called demand/supply zones in VSA. These zones are important because there will always be locked-in traders at these price levels.
For example, if EURUSD has a resistance at 1.35, there will be traders who went long at that price, and are now looking for breaking-even. When the price arrives at 1.35 again, these traders will exert selling pressure on the market, causing excessive supply. Smart institutional traders know this, and those who have level 3 access of the market can even see the stop-losses set, in the trading pool. If the ‘consensus of opinion’ of professional traders is bullish on the market, they will usually first test the supply: price breaks the resistance, and they check the amount of selling. If it’s too much selling, they won’t support the prices and let the market go down again, and a fake break-out happened. Meanwhile they will accumulate more at lower prices. When the next break-out happens, and if the selling isn’t so overwhelming anymore, they’ll support the prices and buy more on the breakout, which makes the prices go higher, and fast. Sometimes it may have a successful breakout at first, and in this case the breakout bar will usually close near its highs, with volume above average, showing true demand.
Another way to approach it is that a support is usually started by significant professional buying. If their view on the market hasn’t changed since then, once the prices get near the support again, where smart money started accumulating, they will accumulate more at the same price as before, and many times will let the prices fake a break-out, so they can absorb the supply of stop-losses and breakout traders shorting the market, therefore buying without making the price go against them.
This is the rationale behind trading these levels, and we categorize them as a ‘Setup on a Break-out’ and a ‘Setup near the Support/Resistance’.