Support and Resistance Breakout – Stop Loss and Take Profit Settings (Video)

This is our 9th video published on YouTube. Please make sure to watch the previous videos before watching this one.

https://www.youtube.com/watch?feature=player_embedded&v=ZQA268iM0b8

In this video we have explained about a trading system which is based on the support and resistance lines breakout:

Locating the support and resistance lines are the most important part oftechnical analysis. Support and resistance lines are the foundation of technical analysis. To trade based on the support and resistance breakout, first we have to locate the correct support and resistance lines, wait for the price to breakout out of them, and then take the proper position. We buy after a resistance breakout. We sell after a support breakout.

If you connect the most visible highs to each other, you will have a resistance line.

If you connect the most visible lows to each other, you will have a support line.

Most traders prefer to use the close price or line chart to plots the support and resistance lines. The reason is that the lines that are plotted based on the close price are more stable and valid and markets react to these lines more accurately. Therefore, to plot the lines based on the close price, you have to switch to line chart.

A resistance line will be known as a broken resistance line when the price goes above it. If a candle closes above the resistance line, then the resistance breakout will be stronger and more reliable. To be at the safe side, you can wait for a candle to close above the resistance line. Then you can go long with more peace of mind.

In this example (watch the video), first we plot the resistance line based on the high price.

As you see, the price has broken above the resistance line here, but it did not keep on going up, and it went down.

It went up strongly only when this candle closed above the resistance line. That’s why we recommended to wait for a candle to close above the resistance line to take a long position.

Now we try plotting the resistance line using the close price or line chart. We connect the most visible highs here. The difference is that using the close price to plot the lines will save us from losing money on false breakouts. You can use both methods at the same time and compare the result.

As you see, the price has broken above the resistance line here, but it did not keep on going up, and it went down.

After plotting a resistance line, we wait for a candle to close above it. We will buy when the candle is closed and the next candle is opened.

We set the stop loss several pips below the resistance line.

The target can be at least 2 or 3 times bigger than the stop loss size.

In the example, we have a 55 pips stop loss. And as you see the price goes up after the resistance breakout for over 220 pips. Therefore, our target could be easily triggered.

This is how we buy, after a resistance breakout.

It is the same with the support lines. First we plot the support line and wait for the breakout.

This support line is plotted based on the close price. This one is plotted based on the low price.

Then we wait for the support breakout. Here, this candle has closed below the support line. We could sell at the close of this candle, set the stop loss several pips above the high price of that candle, and set the target at least 2 to 3 times of the stop loss size.

You could use one of the support lines, either the one that was plotted based on the close price, or the one that was plotted based on the low price. Having both of them on the chart, helps you be more confident about the position you take.

This is another example of a support line, plotted based on the close price. This candle has closed below the support line, so that a support breakout formed.

We could take a short position at the close of this candle, and set the stop loss several pips above its open price.

A broken support line will work as a resistance line after the breakout. It means the line that was working as a support line, will work as a resistance line after the breakout. Therefore, sometimes after the breakout the price goes up to retest the broken support line as a resistance. As you see in this example, the next 2 candles that formed after the breakout candle, went up and retested the broken support line. However, the broken support line worked as a strong resistance and did not allow the price to break above it. So the next 2 candles closed below the broken support.

It is the same with the broken resistance lines too. A broken resistance line will work as a support. It means after the resistance breakout, the broken resistance works as a support.

After the resistance breakout, sometimes the price goes down to retest the broken resistance line. If the broken resistance line works as a strong support, it does not allow the price to go down and break below.

Therefore, the price will close above the broken resistance line and will go up after that.

Sometimes the price retests the broken line for a few times.

Some traders wait for the price to retest the broken line, before they take any position. The reason is that, retesting tells you if the broken line is a valid line, and the breakout is a reliable breakout. If the price can NOT break the broken line during the retesting, like what you see here in this example, it means the line and the breakout is valid, and we can take the position.

And, sometimes the price succeeds to break the broken line during the retesting. It means either the line is not a valid line, or the market condition is changed and the breakout is not valid anymore. In this case, we’d better not to enter the market, and wait for the next trade setup (of course if we have not entered already).