Support and Resistance Key Point

Support and Resistance

Support and Resistance has always been the biggest attribute of technical analysis. It is used by a huge majority of traders in the markets, from the big banks, large trading companies, right down to the small retail traders. It is also the most basic technical analysis pattern where you can find where supply and demand meet.

Basically, it is used to refer to price levels on a chart, preventing the price from getting pushed in a certain direction. As we discuss in our guide to using price action and technical analysis, knowledge about the use of support and resistance plays a big role in identifying potential long and short trading opportunities. 

What is Support and Resistance? 

Support is a level at which demand is thought to be strong enough to pause the price from declining. As the price of a security drops and gets cheaper, buyers will tend to buy more and sellers will be less inclined to sell, thus forming a support line.  

Support levels are usually below the price, but it can still trade at or near support. 

On the other hand, resistance provides potential trade entry or exit points. It is a level in which it is thought to be strong enough to pause the price from rising. As the price of a security towards resistance, sellers will tend to sell more and buyers will be less inclined to buy. 

Resistance levels are usually above the price, but it can still trade at or near resistance.  

A trader will trade on a price and determines if it is correct. As the price moves in the right direction, the position may gain you profit. As the price moves in the wrong path, a small loss is expected and the position can be closed. 
 

Trend lines

Understanding the trending and trend lines is very important when learning about support and resistance.

Resistance levels are formed as the price action begins to slow down and starts to pull back towards the trend line. Traders will pay close attention to the price of a security if it falls toward support of the trend line for the reason that it has prevented the price of the asset from moving lower. 
 

Support and Resistance Zone

Support zones refer to a price zone in which a security's price has fallen to a predicted low. The support zone typically occurs around trend lines. On the other hand, the resistance zone is where a stock finds resistance and begins a downward trade. The zone of resistance will more likely occur if the higher volume of trading in the zone of resistance.
 

Identifying Support and Resistance 

As mentioned above, when a market moves up and makes a pullback, the highest point of the pullback is called a resistance. If the market continues upward, its lowest point reached before it started is now what you call support. But how can you actually identify them? There are three ways to identify Support and Resistance. 

'Psych' Levels 

Psychological levels occur when the price ends with multiple 0's. For example, when traders think about what the price will be worth in the future. If the given price is 1.2250, then a trader will more likely round off the price to something simpler, like 1.2300 or 1.2200. The most common psych levels involve price having two zeros at its end (1/10th of a pip is not included), such as 2.2100 or 127.00. The more powerful psych levels end with three 0's, like 3.4000 or 340.00. 

Swing Highs and Lows 

Another way of finding support and resistance levels is to find past levels and mark each where price had difficulty breaking through. Each level that price has bounced off could be a level in the future that tends to bounce off again. This method takes time as it requires you to mark levels on all of your currency pairs. In the long run, it can make you great profits. 
 

Pivot Points 

The use of pivot points is to determine directional movement and potential support and resistance levels. It uses the period's high, low, and close to determine future support and resistance levels. Without a doubt, this is one of the easiest support and resistance levels to use. 

How to Use Support and Resistance? 

Here is an example of support switching roles with resistance.

The idea here is if price is moving between support and resistance levels, then the best thing to do is to buy at support and sell at resistance. 

If you are a day trader and use support and resistance to help find entries and exits, then the price interval period should be short-term, such as 1 minute time frame.

If you are a long-term trader, then use price charts based on hourly, daily, weekly, or monthly interval periods.  It is important to remember that you choose a chart based on price intervals that align with your trading strategy. 

How to Trade Support and Resistance? 

Support and Resistance can be traded using the following techniques: 
 

Support and Resistance Bounce 

As its name suggests, the goal of this technique is to capture the rebound. What this strategy does is tell you if the price does not break the support or resistance.

Many traders make errors on setting their orders directly on support and resistance levels. When you are using the bounce, you probably want to make the odds come in your favor and find some confirmation of a hold of support or resistance. 

Example: instead of buying immediately, you might want to wait for bounce first before you enter. 

 

If you are going to go short, wait for it to bounce off a resistance level before you enter. 

 

With the help of this technique, greater profitability awaits. The bounce helps you avoid moments where price moves fast and breaks support and resistance levels. 

Support and Resistance Break 

You can play support and resistance breaks in two ways. Either the easy way, or the hard way.  
 

The Easy Way 

Instead of entering on the break, wait for a price pullback to the support and resistance level and enter after the price bounces.

The Hard Way 

The best way to play breakouts is to buy or sell whenever the price passes through the zone. What you want to do is enter when price passes through a support or resistance level. 

Recap 

Support and Resistance levels are one of the key attributes of technical analysis. Many traders from all walks of trading use it as part of their trading handbook.

A lot of traders also use the major Japanese candlestick patterns to let them know when price is going to break or hold, and if, or when they should enter a trade.

There are different methods of choosing when to look for support and resistance levels, but its interpretation is still the same. It is an advantage for you as a trader to become an expert at marking them.