Here is a simple intraday trading setup based on resistance-support and candlestick confirmation technique. The chart timeframe for this intraday strategy is 5 minutes.
Interestingly, you can use this setup to trade stocks, equity indices, commodities and or even currencies. Further, you can use any instrument to trade it, i.e. cash (equity shares), futures or options. Also, with this strategy, you can trade in a bullish as well as a bearish market.
We will use the resistance-support technique to identify a trade setup and a candlestick pattern to confirm the trade setup. Hence, this strategy is going to be a combination of both resistance-support and a candlestick pattern.
We need to first identify a resistance and then wait for the same resistance to act as a support followed by a bullish candlestick pattern at the support to enter into a bullish trade.
Resistance is a point where the price makes a high, takes a pause and reverses down from the high. The high point from where the price reversed is called the resistance zone.
Support is a point where the price makes a low, takes a pause and gives a bounce from the low. The low point from where the price bounced is called the support zone.
Let’s understand the step-by-step process to analyze and trade using this strategy. At the moment, let's look at a bullish or long-only setup.
Steps of the setup
To understand this strategy better, let’s analyse the Nifty spot chart in the example below.
Step 1: We are looking for a resistance to turn into a support. We will be using a horizontal ray to mark our resistance. Let’s understand this with the help of an example. We will look at a price chart on the Upstox Pro Web platform.
We can see from the chart above that Nifty took good resistance at 17,854 level (purple line) not once but thrice indicating that 17,854 is a strong resistance for Nifty. The next day, Nifty opened with a big gap above our resistance zone and retested our 17,854 level (resistance zone) before starting its journey upwards.
It is important to see here that our resistance of 17,854 is now acting as a support. This is how we identify a trade setup, which is the first part of our strategy.
Step 2: We have now identified our trade setup. In order to confirm our analysis, we will have to look for a bullish candlestick pattern at the support. We can’t just trade when resistance becomes our support. The trade setup needs to be supported by a price action confirmation--in our case, a bullish candlestick pattern at the support.
In the above chart, you could see a bullish engulfing pattern marked in a black box. It’s a two candle pattern where the second candle green body completely covers the first candle red body. Only after getting a bullish candlestick pattern (bullish engulfing in our case) at support is when we can say that our trade setup is confirmed and we can now look to initiate a trade.
Now that the analysis and confirmation is done, let us see how we can trade the setup with a defined entry, exit and stop loss.
Step 3: Let's understand with the help of a chart as to what price we enter, where do we keep our stop loss and when do we exit (target).
You can see the GREEN line (17870.62) that's where we got the confirmation after the bullish engulfing pattern was formed. That is our entry point. We will enter at around those levels at 17870. Since Nifty spot can’t be traded, you can look to trade Nifty futures or options. If you choose to trade options, one way to go about it is that you can buy an ATM (at the money) strike price call option to trade. The market price is 17870 in our example and the nearest strike price seems to be 17900 call option. Since it’s an intraday trade, you choose weekly expiry rather than a monthly expiry contract.
Now, let us consider stop loss. You can see the RED line (17847.88) which is the low of the two candle bullish engulfing pattern. That's 23 points below the entry point of 17870. If the Nifty doesn’t go up and with reversal hits 17847 (our stop loss), then we will take a small loss and exit our position.
Since it’s an intraday and a quick trade, the timeframe being 5 minutes, we will aim for a risk to reward of 1:1. In our example, the risk being 23 points, we will aim for a target of 23 points too from our entry price which comes to 17893 (17870+ 23)
You can see the PURPLE line (17893). Once our price hits 17893, we will exit our 17900 call option position.
We hope this Resistance-Support intraday strategy was simple and easy to understand. You can try spotting it on charts and see if you are able to identify such setups.
We’ll come up with an article on how to use the same strategy to identify a Support-Resistance Intraday strategy.
Until then, happy trading!