Support and resistance is a popular trading strategy used by many traders in the financial markets. The strategy involves identifying levels of support and resistance in the price of a security and then using those levels to make trading decisions. Support is a price level where buying pressure is strong enough to prevent the price from falling further. Resistance is a price level where selling pressure is strong enough to prevent the price from rising further.
Traders use support and resistance levels to identify potential entry and exit points for their trades. They may also use these levels to set stop-loss and take-profit orders. This trading strategy can be used in any market, including stocks, commodities, currencies, and cryptocurrencies.
Contents
How to trade with support and resistance trading strategy.
- Identify Support and Resistance Levels: The first step in trading with support and resistance levels is to identify where these levels are. This can be done by looking at the price action on a chart and identifying areas where the price has previously found support or resistance.
- Wait for Price to Reach Support or Resistance: Once you have identified the support and resistance levels, you should wait for the price to reach these levels before entering a trade.
- Enter a Trade: Once the price has reached a support or resistance level, you can enter a trade. If the price is at a support level, you can enter a long trade. If the price is at a resistance level, you can enter a short trade.
- Place a Stop Loss: It is important to place a stop loss order when trading with support and resistance levels. This will help to protect your capital if the price moves against you.
- Take Profit: Once the price has moved in your favor, you should take your profits. This will help to ensure that you maximize your profits from the trade.
How to identify support and Resistance levels.
Support and resistance levels are key levels where the price of a security has a difficult time breaking through.
- Look for previous highs and lows: The most basic way to identify support and resistance levels is to look for previous highs and lows in the price of a security. These levels can act as support or resistance, depending on the direction of the trend.
- Use trend lines: Trend lines are another way to identify support and resistance levels. A trend line is a line drawn on a chart that connects two or more price points. When the price of a security is trending up, the trend line acts as a support level. When the price is trending down, the trend line acts as a resistance level.
- Use Fibonacci retracements: Fibonacci retracements are a technical analysis tool that can be used to identify potential support and resistance levels. Fibonacci’s retracements are based on the Fibonacci sequence, which is a series of numbers that can be used to identify potential support and resistance levels.
- Use moving averages: Moving averages are another technical analysis tool that can be used to identify potential support and resistance levels. Moving averages are lines plotted on a chart that show the average price of a security over a certain period of time. When the price of a security is above its moving average, it can act as a resistance level. When the price is below its moving average, it can act as a support level.
Top Four Support and Resistance Trading Strategy
1. Range Trading
Trading in the range occurs when traders attempt to buy at the support level and sell at the resistance level. Consider the space as a room that lies between support and resistance. Resistance is the ceiling, while support is the floor. When markets are trading sideways and there is no obvious evidence of a trend, ranges can develop.
Pro tip: Support and resistance levels aren’t necessarily straight lines. Occasionally, rather than moving in a perfectly straight line, prices will bob off a specific spot. In order to determine a trading range, traders must also determine locations of support and resistance. The graphic below illustrates where support and resistance are located.
Trading tends to look for long entries when price bounces off support and short entries when price bounces off resistance when the market is range-bound.Price has clearly shown a tendency to deviate from the boundaries of support and resistance, therefore traders may want to think about placing stops below support when going long and above resistance when going short.When price does leave the specified range, this can either be a true breakout or a fake-out, or a false breakout. When markets break out of their trading range, it is crucial to practice solid risk management to reduce downside risk.
2. Breakout Strategy (Pullback)
It frequently happens that price will breakout and start trending after a period of directional ambiguity. Traders frequently search for these breakouts below support or over resistance in order to profit from the momentum that is already building in one direction.
This momentum may be the beginning of a new trend if it is strong enough. Top traders, on the other hand, frequently hold off on entering a trade until there has been a pullback (towards support or resistance) in an effort to avoid falling into the trap of trading the false breakout.
For instance, the chart below demonstrates a significant degree of support prior to sellers driving the price below support. Many traders could become overexcited and rush to initiate an early short transaction. Before making a short trade, traders should instead wait for the market’s reaction (buyers trying to take control) to falter.
IThe scenario below, traders hold on looking for entry chances until the market reaches the support again after the retreat.
3. Trendline Strategy
The trendline can be used as support or resistance in the trendline approach. Simply connect two or more highs (for a downtrend) or two or more lows (for an uptrend) with a line. Price will bounce off the trendline in a strong trend and go on moving in the trend’s direction. Therefore, for higher probability trades, traders should only be looking for entries in the trend’s direction.
4.Using Moving averages as support and resistance
Moving averages have the potential to serve as both dynamic support and resistance. The 20 and 50 period moving averages are frequently used and can be significantly modified to become 21 and 55 period moving averages in order to incorporate Fibonacci numbers. The 100 and 200 MAs are frequently used by traders. It is up to the trader to pick a configuration that suits them. The 55 MA tracks above the market as a line of resistance, as can be seen in the chart below.
The 55 MA then turns into the dynamic level of support when the market bottoms and reverses. These trendlines help traders decide which markets are more likely to breakout than others and which ones are likely to continue trending.
Pro Tips
- When drawing your support and resistance line, make sure it touches a minimum of three resistance prices and support prices.
- Don’t go overboard trying to depict each and every level on your charts. The most crucial levels to locate are those shown in the samples above as the main daily chart levels.
- You won’t always be able to link two bars with horizontal lines of support or resistance touching the ‘precise’ high or low of those bars. Sometimes it’s acceptable if the line joins bars that are a little to the left or right of the high or low. The most crucial thing to understand is that this is not an exact science, but rather a skill and an art that you may hone with practice, experience, and time.
- If you’re unsure whether to act on a given price action entry signal or not, consider whether it is at a significant level of support or resistance. It could be better to pass on the signal if it is not at a crucial level of support or resistance.
- If a price trading strategy develops from a confluent level of support or resistance in a market, such as a pin bar, fakey, or inside bar technique, it has a far higher probability of succeeding.
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