Knowing if the Level Will Hold: When to Fade, When Not to Fade

Confidence in any endeavor is usually just a function of experience. Trading is no different, and successful traders are rarely born overnight. From our own experience, we have developed a basic checklist in regards to when a safe trade setup stares us down. For newer traders, confidence in these levels will grow over time as you will probably see levels you have clearly identified act as a major market turning point. We encourage taking only the safest trades in the beginning, and later becoming more flexible on an intraday basis as your experience grows and you know what to look for.

Once we define a support or resistance level, we look at the following when deciding if we want to trade off of it or not:

Its historical significance. Has the price level proved to be strong over time? There must be at least two or three clear instances in which the level has acted as strong support/resistance.

If the level has acted as both support AND resistance. Levels that have historically held significance as both support and resistance tend to hold much better than those that have only acted as only as one or the other.

The time between now and the last time it was hit. If a level was just used, and then price makes a run right back to it, be hesitant about putting on a new trade. When a significant support/resistance level “sits” for a longer period of time, it has a much better likelihood of holding than those hit more recently. Look for major corrections/time passing between levels to enhance probability. This is one of the biggest things we look at.

If the level has not been "used and abused". Levels that have seen such a significant amount of price action will eventually bust. Breakouts are inevitable on any chart. Be sure that the level has not been used too many times to the point where it becomes insignificant and/or unnoticeable by the majority.

If price has already undergone a significant retracement not too far away (20 or less pips appx.) from the level we want to trade. For instance, EUR/USD is in an uptrend. You mark a level at 1.5715. It hits 1.5700 and then retraces down to 1.5670, and then starts coming up again, taking out 1.5700. Your chances of price then making another retracement from 1.5715 have now declined. Look for good spacing between pullbacks, usually anywhere from 40-60 pips on majors.

If there is a significant Fibonacci extension coinciding with the level. The top three Fibonacci levels, .50, .618, and .764 hold a lot of weight. Pay attention to them, especially if they coincide with significant support/resistance level. Commonly, price will either barely hit or surpass these Fibonacci extensions before retracing. This is usually because market movers are looking for the support/resistance level in the area. Plan to take the trade at the support/resistance level, and not the exact Fibonacci extension.

If there is a clear and unmistakable diagonal trendline coinciding with the level. Diagonal trendlines that have been used and abused, just like horizontal support/resistance will eventually break. Be aware of this.

Be aware that neither a Fibonacci extension or diagonal trendline have to be in place in conjunction with horizontal support/resistance in order for us to take a trade. They are used only as guides, with Fibonacci levels holding much more significant weight.

With all of these factors taken into account, trade setups offer a very high probability. In conjunction with our rules on when not to trade, your account should be growing in no time. Again, experience pays off; the more you begin to take notice of price reacting off of these levels, the more you begin to realize their potential.