Finding and Trading Rejection Zones


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Video Transcript:

.Welcome to the 24th lesson of the Advanced Technical Analysis Course, Chart Analysis. In this lesson, we’re going to teach you how to find and trade rejection zones.

What are rejection zones?

Rejection zones are areas where there is no equilibrium in price. The asset is either over or under valuating, meaning that the market might be oversold or overbought. It’s important to spot these rejection zones to know when to avoid a trade and where the key pullbacks are.

For example, if a market is trending and you want to get in on the direction of the market or get in on the move, you might not want to trade these rejection zones, because these rejection zones is where a possible pullback might occur. By knowing this, you will not be chasing the market and you will always be looking for high-probability setups on rate risk to reward situations. Remember that as traders, we always are looking for the least scenarios, the great risk to reward in high-probability setups.

Let’s talk about rejection zones. In order to spot them, you will always use important support and resistance zones and candlestick formations. Why is that? Because normally when price is trending, it would always find the previous zone support or resistance and you will always find there is some kind of opposite pressure to the direction of the trend, which means that price will react to these zones. By using candlestick formations, you will know if price has in fact rejected these zones or not.

Remember, to know if price has rejected the zone, we are going to use the wicks of the candles because let’s take the example of an uptrend. If price is uptrending and it gets to a strong area of resistance and then you get a candle with a small body and a long wick to the upside, it means that even though price moved all the way up to and above resistance, it closed below and rejected the area. This is what we’re talking about.

When the market is trending, it will most likely find strong areas that it needs to clear in order to continue with the move either up or down. These zones are most likely zones of short-term rejection that will give us a correction.

Trading Rejecton zones

Let’s talk about key pullbacks. When price rejects these zones, you must avoid trading them in the direction of the trend. Why is that? Because even though it might actually just be a pullback and price will continue to the upside and a break of [inaudible 00:02:59], if you trade these rejection zones, you will be in a losing trade for a while until the market turns to the direction of the trend. Even if it turns to the direction of the trend, which is not 100% sure, spotting these rejection zones, you are avoiding losing money in the long-term.

If the trend is strong, avoid counter-trend trading, too, because these areas will give you signals to countertrend trade and it’s fine if you want to scalp the rejection zones. But if the trend is strong, you might just want to wait for the pullback to get in the trade in the direction of the trend. When you are countertrend trading, you are actually trading an overall overbought, or oversold scenario and you are looking for a strong reversal on the overall structure of price. You are not looking just to get a few bps out of the move. The previous area of rejection will give you an excellent opportunity to get in on the move once it is tested.

Let’s go to an example so you can better see what we’re talking about here.You will see that it’s actually not that difficult to find these rejection zones and all you need is patience and practice. Let’s go through the example. As you can see, we are in a very strong up move in this example and we have already cleared one area of rejection right here. So if you open your charts and this is what you see, the first thing you want to do is draw a horizontal line on the previous high or the previous area of resistance that was rejected. Now, you can see that we have found a second area of resistance and the price is testing it right now. We just wait to see if this area is in fact being rejected or if the price is going to break through, because as you can see, we are in a very strong up move.

But in this case, price actually rejects this zone of resistance so right now, we are thinking to get in on the main move. Some traders and most of the beginner traders will want to short this zone right here. It’s not a bad idea if you want to wait for a reversal signal and then just get 20 bps out of the 40 or 50-bp move to the downside. Sometimes, it will be very choppy and very difficult to hold because the trend is very strong and bulls are going to keep on coming.

The best thing you can do here is just wait for a nice, long pullback to the previous rejection zone. When price actually rejects or tests the previous rejection zone, in this case, previous resistance now being tested and support and being rejected, you get a nice, long entry on a high-probability setup for a breakout or a break above the previous high or the previous rejection zone at resistance. As you can see here, candlesticks are a very important clue on how to know if this zone is in fact being rejected or not.

This is basically how you trade rejection zones and how you find them and how you avoid losing money trading with a trend.
Let’s go to how to trade it. After the first pullback, we get a rejection zone, which is this one right here. Price then breaks with it and finds a second rejection zone at resistance which is this one right here. After the second pullback, we get a re-test of the previous rejection zone and support which gives us a long entry. The stop list who go below support or the rejection zone because if price breaks below this low, we are in fact in a trend change and we should not be looking to trade it long. We should be looking to find short setups. In this case we are studying, we get a very nice 1:3 risk to reward ratio setup on a high-probability entry. Of course, if price is trading to the downside, it’s the same. You have to look rejection zones at support and then, trade to the downside when they are tested as resistance. It’s as simple as that. It’s very effective and you only have to be patient and look and only trade the better setups that occur.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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