What Is “Support and Resistance”? A Guide to Support and Resistance Trading.
- July 13, 2021
- Posted by: Daniel Richard
- Category: Forex Trading
“Support and resistance” is a popular technical tool in trading that is highly used and discussed by traders. It is helpful for the traders to understand the market movement. If you have a clear idea about support and resistance, hopefully, you will trade successfully in the forex market. It (support and resistance) will help you identify when you should open and close the trade.
In this article, you will get a clear idea about support and resistance and how to use this chart in trading for adapting an adequate amount of profit.
What Is “Support and Resistance”?
“Support and resistance” is one of the most reliable financial analysis techniques for traders that indicates the price level in the market. It is one kind of chart diagram, and by this diagram, the trader idealizes the market direction. Hence, it will guide traders regarding a suitable time for opening the trade, and the exact exit time, as well. Support and resistance can announce the future market conditions.
In the chart, when the price line goes down and stops at a point and then starts to go up again, this particular point where it starts up again is called the support. Support indicates the lowest price level. This level is suitable for traders to buy.
At the support level, the buying power is stronger than the sell because of the lowest price. So, buyers feel comfortable buying. In this case, the demand will cross the supply, and for the lacking of supply, the price will start to go up.
Resistance is a particular point where the rising price stops and starts to move down.
It refers to the highest price level above which the price cannot go up. The resistance level is profitable for the seller.
Because of the highest price, the selling power is more powerful than the buying power. Buyers are unwilling to buy, and sellers are willing to sell at this resistance level. At the level of resistance, the supply will cross the demand. Therefore, for the vast supply, the price level will start to fall.
Top 4 Support and Resistance Trading Strategies
The top four support and resistance strategies are discussed below:
- Range Trading
The range trading stays at the area between the support and resistance. If you think of support and resistance as a room, the support will be the floor, and resistance will be the roof of this room. So, the range trading places anywhere between the floor and ceiling.
Pro-Tip: Support and resistance do not always follow the exact line. The price level may rise and fall in a particular area. When the price stays at the range trading area, it will be comfortable for the trader not to trade.
As a trader, you should identify the range trading area and also the support and resistance area for buying and selling at the right time. When the price follows the ups and downs strategy close to the support level, the trader tends to buy; on the other hand, when the price moves around the resistance level, traders tend to sell.
- Breakout Strategy (pullback)
Sometimes, the price level crosses the support or resistance level and moves continuously. Traders wait for this breakout for profitable trading.
When the support level breaks, the price level drops, and the following resistance level acts as support. So, it is profitable for sellers to sell. On the other hand, generally, when the resistance level breaks, the price level rises, and the following support level acts as resistance. So, at the time of the break resistance, it is profitable for the buyer.
Someone might say that when the price crosses the support or resistance, the breakout occurs. But this idea is not always accurate because it may test the market. The price may cross the support level and also return without following any resistance level.
- Trendline Strategy
Trendline connects the upper points of resistance and the lower points of a support level.
In a powerful trend, the price will rise and fall in the trendline and follow the right direction. You can easily draw these lines by connecting two or more high points in one trendline and two or more low points in another trendline.
If a trendline crosses the upper or lower line, the trendline will break. There are three types of trends, namely uptrend, downtrend, and sideways trend. Uptrend is suitable for the buyers, and a downtrend is for the seller. Still, the sideways trend is not suitable for buyers or sellers.
- Using Moving Averages as Support and Resistance
Moving average consists of the closing price of some previous period. It may include a twenty and fifty-period closing price. But sometimes, traders can use 100 and 200 moving averages. By this moving average, traders utilize the market movement and also identify the future price movement.
In a simple moving average, first, the price of every period is added. Then the total amount has been divided by the total period. Suppose you want to identify a five-day moving average. So, add five days’ price and then divide by five. Therefore, the ultimate result will be the moving average of five days.
Support and Resistance Trading Key Takeaways
- Support and resistance is a robust method in trading; almost every strategy has technical analysis.
- Support and resistance sometimes follow the range trading strategy, and sometimes, it may follow the breakout strategy.
- Price will not always follow the support and resistance level; it sometimes crosses them.
Hence, identifying support and resistance levels is critical for traders who want to be successful.