New traders usually sit down at the chart, look at which way the price is moving and open a position in that direction. Unfortunately for them, a rebound pattern can appear at this point and effectively thwart their plans. Knowing this pattern will not only help you avoid unpleasant situations but will also indicate potentially good places to take a position.
What is rebound pattern strategy?
Horizontal support and resistance lines
If you look at a bare price chart it often looks quite random at first glance. Try adding a horizontal line then. Try it on different peaks, and see if you can hook it somewhere so that it has at least two points of contact with the price chart. Add another line, this time to the bottom of the chart. See if you can position it so that the horizontal level has at least two points of contact with the price chart. Got it? First, you set a horizontal resistance level and then a horizontal support level.
Line rebounding is a graphical pattern which seeks to catch a moment when the price cannot break support or resistance levels.
When the price reaches the level of resistance and the first candlestick closes below this level many traders believe that the price upward dynamic has stopped. And trade for a fall.
Rebound line strategy and a trend
Just as you drew support and resistance lines as horizontal lines, you can also draw dynamic sloping lines to limit the range of price movement.
The rebound line strategy is relevant for a neutral trend just as for the upward and the downward trend. When the price reaches the support line and the first candlestick closes above this level some market participants believe that the price decrease dynamic has stopped and trade for a rise.
The support line rebound is relevant for the neutral trend just as for the upward and downward trend.
What the rebound pattern works best with
It is worth adding here that the rebound pattern works best in combination with other methods of technical analysis.
The first ones I would mention here are oscillators such as RSI, CCI or Stochastic Oscillator. They all have the property that they show well when the market is overbought or oversold. This alone can provide confirmation of a possible rebound.
As a second great tool here I would mention candlestick formations. The occurrence of a reversal candlestick pattern where we have a rebound line is a very valuable confirmation of a possible trend change.
A pair of moving averages, for example, can also be used to confirm an entry based on a rebound pattern. One popular pair is the EMA9 and EMA13. If the price reaches the resistance and then EMA9 crosses EMA13 downwards, we have a sell signal. The opposite is true for price support. If the price reaches support and then the EMA9 crosses the EMA13 upwards, then we have a buy signal with additional confirmation from the moving averages.
Do you already use rebound lines on your price charts? Maybe you have some interesting comments? Be sure to share them in the comments section.
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