Reader Questions Answered

How Do I Know When to Enter a Trade?

The following question came in yesterday concerning support & resistance and trade entries.

I am fairly new to trading, I’ve been trying to trade the dow e-mini on a 5 minute chart. I seem to fairly accurate support & resistance lines (not made by me) but how do I know exactly when to enter the trade? when the time comes say when it is approaching  support, when do  I enter a long position or know that it may keep going thru support  and be a breakdown? Is it something to do with where the bar closes and the next opens?

This is, of course, the major question for those using support and resistance based strategies. The general idea is to fade moves to those critical levels, but sometimes the market just goes blowing through with hardly a pause. When it’s in our favor it’s fantastic, but when it’s against us it’s extremely frustrating.

I myself use a strategy based heavily on support and resistance, so I can appreciate this question. There are a couple of things that can help this be the most successful.

First, trade only with the dominant market direction. That means if the market is showing strength, take the long trades, but avoid the short ones. That puts the power of the market in your favor. Going against it not only increases the chances for taking a loss, but also probably reduces the gains you would make when trades were profitable.

Secondly, look for fading momentum as your indication that a support or resistance level will hold. I work in the stock market, so I watch to see if the internals are getting better in the direction of the move, or starting to slack off. That can be a great indication whether the market is going to punch through expected support or resistance, or whether it’s going to check up. Using the action in a shorter-term timeframe can help indentifying fading momentum too.

Those are the two things I do to improve my chances for success trading support & resistance levels. I’m sure others have thoughts of their own.

By John

Author of The Essentials of Trading