How to Use Support and Resistance Levels
Support and resistance are phrases used to differentiate price levels on a price chart. These price levels act as some type of gauge that limits the movement of price within a range. So many traders find it difficult to understand this aspect of forex trading. The price chart can get complex and confusing sometimes making it difficult for traders to illustrate the movement of price. With the use of support and resistance, traders can know when a price is about to have a possible reversal. This article will be focused on what to know about support and resistance.
What are Support and Resistance Levels?
Support and resistance are referred to price levels that appear on a price chart. These price levels are used to limit the movement of the market within a range. That is, these levels stop a price from moving below the expected price of a trade, or from moving above the expected price of a trade. To explain in detail-
A support level is said to be the point at which the price stops declining and then bounces back up. That is, in a bearish trend, the support level is the level at which prices retrace, or reverses to the opposite direction (becomes bullish).
The resistance level is contrary to the support level. This level is the point at which a price stops plunging upward and starts to decline. That means, in a bullish trend, a resistance level is formed at the point when the price of trade begins to retrace and reverses in the opposite direction (becomes bearish).
The support and resistance indicator is influenced by the product of supply and demand. When demand is higher than supply, it only means that buyers are in control of the market, meaning that the price of the trade will increase or be bullish. Similarly, when supply is higher than demand, that simply means that sellers are in control of the market, thereby making the market bearish.
A support and resistance level is confirmed when the price hits the level more than once. If the price retraces more than once at a particular support or resistance level the points are said to be more reliable.
If the price surpasses a level of support and resistance for a short while, or if the price hits the levels it means that the levels are being tested. But in a case where the price breaks through the levels and keeps going, it means the support or resistance level has been broken and the price will continue to move until another support or resistance level is formed.
Pros and Cons of Support and Resistance
Based on a personal approach and experience gathered from trading using the support and resistance indicator. Listed below are some of the benefits of trading using support and resistance levels.
- Traders can comprehend the ventral condition of the market.
- Support and resistance levels are great trading tools for trend analysis
- Support and resistance levels are used by traders to indicate trend reversals and price retracements.
- The effect of prices on the major points enables traders to specify the sentiment of the financial market’s players.
- These key levels are used by traders to structure a good trading strategy by putting out guidelines for price limits, exit points, entry points, and stop loss.
- They help traders pick out the best signals by confirming the signal generated from other technical indicators.
- These major key levels provide end-to-end market signals if numerous time frames are used.
The Major drawback of this technical tool is that the readings are not 100% guaranteed. The price might decide to break out beyond support and resistance levels thereby rendering the level insignificant.
What to Know About Support and Resistance
Many traders do not understand how support and resistance work in a trade, this is why most traders result in use easy methods such as trading with the use of robots or using copy trading software. Support and resistance levels are the major backbones behind any technical analysis. When a trader fully understands how this trading tool works incorporating other technical tools into a price chart will be very easy. Let’s start by explaining how to identify support and resistance levels.
Identifying Support and Resistance Levels
Several methods can be used to specify support and resistance levels. Unlike popular opinion, spotting these price levels is easy. These price levels are very important because they help a trader pick the best time to open or exit a trade. They also help a trader to properly set a stop loss or a take profit. For traders to identify support and resistance levels, here are some things traders should look out for.
Historical Price Data
This is the most credible basis for the specification of support and resistance levels. The best way to use this tool is to acquaint yourself with the past price charts, preferably the most recent price actions, this will help you easily pinpoint the occurrence again. However, it is crucial to note that historical patterns are not 100% reliable. This is because price patterns are formed under different conditions, therefore it might give off the same result.
Prior Support and Resistance Points
Most traders make use of the previous support and resistance levels. They use these points to pinpoint a probable entry and exit point of a trade. They also use it as an indicator for future price actions. However, it is crucial to note that significant support and resistance levels don’t always repeat. It is almost impossible for a price to hit the same spot before it reverses, this is because the market conditions are always changing. This is why it is advised to see these support and resistance levels as support and resistance zones.
There are technical indicators that can provide a clear reading to identify the support and resistance of a price chart. However, using technical indicators to identify support and resistance can take a longer period. This is because the market is constantly changing, and applying these factors to a technical tool can take a lot of time. This is why traders are advised to use the historical data of a price chart in identifying support and resistance.
Support and Resistance Trading Strategy
How to structure the support and resistance lines.
Drawing the lines of support and resistance depends on the following methods:
Peaks and troughs
Support and resistance points from a prior time frame
For the strength of the support and resistance lines to be established, traders need to combine these methods.
Peaks and Troughs
To illustrate your support and resistance lines through troughs, first, if all a timeframe needs to be selected, then specify the highest peak on the price chart, and also identify the lowest point on the chart. In a bearish trend, the support level will be the lower-low peak and the resistance point will be the lower-high peak. Similarly, during a bullish trend, the resistance point will be the higher-high peak, and the support level will be the higher-low peak.
For instance, traders using support and resistance points from an older timeframe, pick a short timeframe, 15 minutes. The support and resistance levels are illustrated from one-hour and four-hour time frames with respect to the 15-minute timeframe. If the support and resistance levels from the shorter time frames are similar to the levels at the longer time frame, it is identified as a strong level of support and resistance.
This is another method used by traders in identifying support and resistance levels. Using the indicator, traders illustrate a diagonal line from the highest peak to the lowest peak to pinpoint the exact trend of the trade. If the trendline plunges up, the moving average line will represent the level of support, and if the trendline plunges down the moving average line will act as a level of resistance. The Levels are constantly changing, therefore they are referred to as dynamic support and resistance.
A trader trading with trendlines must ensure to have three troughs or three peaks before illustrating lines, this is to ensure a significant line. Once the trend lines have been drawn in a price chart, the bullish trend line will act as the support level, while the bearish trend line will act as the resistance level. Just like the moving average support and resistance levels, these levels are also dynamic because they are constantly changing.
How to Use Support and Resistance Levels to Manage Risks
Most traders use support and resistance and a trading strategy. This is one of the basic trading methods used by traders globally. It can be used to limit risks, set limit orders such as stop loss, and specify the present condition of the market. The most common support and resistance trading strategies are opening a long position when the price of a trade closes in on the support level. A short position is opened when the price of trade moves closer to the resistance level. However, traders must wait for trend confirmation before opening a position.
Another support and resistance trading strategy used is setting the Stop-loss below support and setting the profit target above resistance. This trading strategy enables traders to close quickly if the price moves past support and resistance levels. However, before opening a trade consider the risk required and also your profit target. All these factors should be the basis for setting your entry and exit points.
Breakout Trading Strategy
This strategy entails the use of support and resistance and breakout indicators. Traders watch out for the price to break from with support or resistance. This breakout is not just a slight movement away from the support and resistance levels. Rather, it is an abrupt movement of price away from the support and resistance zone with increased momentum, thus giving rise to potential profits.
Support and Resistance Trading Strategy Using Price Action
Support and resistance points are very good trading strategies that occur well with price action. When a price action entry indicator forms a major point of support and resistance it can result in a highly profitable trade. The Major level gives traders the ability to place stop loss beyond.
A price action signal like a pin bar signal provides traders with confirmation that the price will break out from the major level of support or resistance.
Tips on Support and Resistance
Before trading using the support and resistance indicator, there are some tips that you should consider.
- Do not get carried away with illustrating every level on your charts. The main goal is to locate the major daily chart levels. The Major daily Chart levels are the most significant ones.
- Every horizontal support line and resistance line must not always touch the precise high or low of the bars attached to it. In some cases, the lines connect with the bars a little lower from the high or higher than the low. The most significant thing to note is that this is not a precise technical tool. It is a trading strategy that can be learned over time, and there is always room for improvement.
- It is important to note that a price trading strategy such as a pin bar, an inside bar strategy, or a fake breakout, has a better opportunity of being profitable if it originates from a point of confluence between support and resistance in a trade.
Support and resistance are technical Indicators used by professional traders to determine the best exit and entry point in a trade. This Technical tool is reliable and credible. However, traders are advised to wait for a trend confirmation before trading based on the signals provided by the technical tool. Support and Resistance trading strategies also come in handy for traders whose trading plan fits into the strategy. The trading strategies are easy to use and they have also proven to be highly profitable.