Trading by levels is one of the main principles of traders’ work. It involves trading on a breakout and a rebound (bounce). The topic of today’s article will be the second method of trading. We will tell you how to distinguish the right signal for opening a position from a false one, how to set Stop Loss, and consider other features of this type of trading.
Rebound trading on the stock market: what is it all about?
The Bounce Back strategy is similar to other trading systems, but there are some differences. It is based on such basic concepts as support, resistance, and median lines. This type of activity involves the use of the simplest graphical representations.
A rebound in trading is a pattern of technical analysis when a price reversal and its upward movement from the support level is observed. The value of an asset first falls to the Support Line, then a reversal and growth of quotes occurs. In other words, the term means a recovery from the previous negative movement. The opposite meaning is a breakdown.
Previously, bounces implied buying from the support line. Currently, the strategy also implies selling from the resistance level. Let’s look at the first trading method. It is important to understand that you can also trade on the sell side, but only in a mirror image.
In strong markets, retracements form quite quickly. There is only a small window to enter them at the best quotes.
What are the types of bounces?
Bounces are classified according to various criteria. According to the type of support line, the following bounces are distinguished:
- from the Support Line, which is built from the previous minimum value;
- from the round level;
- from the trend line;
- from 50% of the Fibonacci level;
- from the Support Line of another type.
Depending on the relationship with the support line, the following rebounds are distinguished:
- underbounce
- exact touch;
- false breakout.
The bounce can be V- or W-shaped. Sometimes, it forms a consolidation area – complex formations (for example, the inverted head and shoulders pattern). According to the results, there are successful and unsuccessful bounces. In the first case, the price moves up after the bounce, and in the second case, it moves up slightly, after which a bearish breakdown of support can be seen.
Pros and cons of bounces
Trading on bounces has a number of advantages:
- It allows you to reduce risks. Such trading is closely intertwined with support levels. This makes it possible to plan risks when choosing levels for using stop losses.
- It can be used in various markets: currency, cryptocurrency, stock, and others. Bounces are observed on different timeframes.
- Allows you to find a local entry point in global market operations, in particular, you can join the trend on the higher timeframe.
As for the disadvantages, it is worth highlighting such a factor as the subjectivity of the Support Line. In addition, it is impossible to be completely sure of the stability of the support level and the formation of a significant rebound from it.
How a trader can work with rebounds
There are two approaches to trading on bounces:
- A reversal from the Support Line is predicted. The trader expects that when the quotes approach the level, there will be a rebound. Accordingly, when the price approaches the support line, he will open a trade that is opposite to the market movement. In this case, the trader takes a risk, as the price may continue to decline immediately or after a short-term consolidation near the Support Line.
- The reversal is confirmed. This approach is standard. When the signals provide confidence in the quotes’ reversal and bounce, buyers take the initiative. A trader enters the market by opening a long position. In this case, the price rises significantly compared to the support level. The risk is determined by the fact that a “wide stop” can be observed when setting Stop Loss below the minimum values of the rebound.
The best entries between these two trading methods are difficult to determine. It is not easy to predict the lower boundary of the bounce, so it is recommended to use one of the above strategies for trading. Which one to choose? Each case is individual. You need to take into account the trader’s qualities, how he sees the market, and his attitude to risk. For example, you can try both approaches on a demo account (if the broker has one) and choose the best option for yourself.
They work on rebounds and with the stock index futures market. For example, you can analyze the intraday situation. If there is support in the market (and the price is moving towards it), you need to find evidence to enter a long position on the rebound.
Conclusion
A level breakout is one of the methods of trading by the rules. Theoretically, everything seems simple: a trader expects a rebound, i.e. a reversal of quotes, when the price approaches the level. But in practice, everything is much more complicated. You should take into account the strength of the line and the breakout probability. It is also necessary to distinguish between a classic bounce from support and retest of the level after a breakout, if, for example, Support becomes Resistance.
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Following the rules of the of the strategy, you can make a good profit. You need to understand that trading from levels requires some experience to make decisions depending on the situation.
