We have a question from a new subscriber saying that he often hears us refer to technical bounces from key support and resistance areas, and says that very often when we mention in our videos that price might bounce from key areas they very often do and ask why we can’t trade those bounces.
For example, today we highlighted the S&P500 level at 3200 and said that it’s an important level to watch as we might see a bounce from this important zone, could we have traded that to the upside?
Thanks for the question, so let’s quickly walk through this and share some thoughts on this.
You are right that we often mention key areas where we could see price reacting from at key levels of support and resistance or key psychological price levels, and you are also right that often times we see price bounce as expected from these levels, but we’ve never mentioned that you can’t trade those bounces.
Trading small technical bounces from key resistance or support areas is something that many scalp traders specialize in and it is possible to profit from these bounces, but there are a couple of caveats to keep in mind.
The idea around these types of trades are the expectation that key levels or support and resistance will be key areas where limit orders might be resting or key levels where traders would want to step in or where we often see profit taking occur, and as such we often see small technical bounces from key levels.
When you time these correctly, they can be a very simple strategy to bank daily pips if and when we reach key zones where we think a lot of interest will be, now again these can be key support and resistance areas, key psychological price levels, sometimes even daily pivots.
Now, as with all things trading there is a catch, and that of course is that these bounces are not going to work all the time, your win ratio is probably going to be much lower than you think, and for that reason you are only going to want to look at trading these key bounces when you can get at least a 1:2 or 1:3 in terms of risk to reward.
So that means, if you see a potential opportunity for a technical bounce trade, make sure that you have at least room to have a 2 or 3 to 1 with your reward to risk because your win rate on these are going to be low.
When trading technical bounces can be more profitable is when we have a session where the market doesn’t really have any major drivers or key catalysts moving prices, then looking at purely technical bounces can be considered, but there is also the risk that when the market doesn’t have a specific driver that it just trades rangebound, and even though a rangebound move from level to level can be traded profitably, you might see continues breaks above and below the same technical level which can really hurt your account if you try and trade all of them.
So, in that sense, trading technical bounces in line with the bigger picture fundamentals can be a way of minimizing risk because you would expect price to have more conviction in line with the bigger picture or macro fundamentals in those situations, but of course on quiet days the market can also ignore the fundamentals and just chop around.
There was a time when I trade technical bounces a lot as a scalper but just found it very exhausting and time-consuming and stressful because you need to watch those positions like a hawk every single second because there isn’t a lot of conviction, it’s not a trade where you have a conviction it will go in a certain direction, you are basically playing off the fact that a particular level should see some price reaction, which is why these type of trades have lower win ratios.
So, hope that helps with the question. Any others please don’t hesitate to let us know.