Understanding Support and Resistance Levels is fundamental for any trader as they form the basis for many trading strategies.
Definition of Support and Resistance Levels
Support Level
A support level is a price point on a chart where a downtrend can be expected to pause due to a concentration of demand. As the price of an asset drops, the demand for the asset increases, forming a support level.
- Key Characteristics:
It acts as a floor, preventing the price from falling further. - It is identified by previous lows in the price chart.
- When the price reaches this level, it tends to bounce back up.
Resistance Level
A resistance level is a price point where an uptrend can be expected to pause due to a concentration of supply. As the price of an asset rises, the supply for the asset increases, forming a resistance level.
- Key Characteristics:
It acts as a ceiling, preventing the price from rising further. - It is identified by previous highs in the price chart.
- When the price reaches this level, it tends to bounce back down.
How to Identify Support and Resistance on Charts
Identifying Support Levels
- Historical Lows:
- Look for points on the chart where the price has previously bottomed out and bounced back up.
- These points indicate where buying interest is strong enough to overcome selling pressure.
- Round Numbers:
- Psychological levels such as 1.0000, 1.0500, etc., often act as support levels.
- Traders tend to place buy orders at these round numbers.
- Moving Averages:
- Common moving averages (e.g., 50-day, 200-day) can act as dynamic support levels.
- The price often bounces off these moving averages.
Identifying Resistance Levels
- Historical Highs:
- Look for points on the chart where the price has previously peaked and then fallen back down.
- These points indicate where selling interest is strong enough to overcome buying pressure.
- Round Numbers:
- Psychological levels such as 1.1000, 1.1500, etc., often act as resistance levels.
- Traders tend to place sell orders at these round numbers.
- Trendlines:
- Draw trendlines connecting the highs in an uptrend.
- These trendlines can act as resistance levels.
.
Using Support and Resistance in Trading Strategies
Bounce Trading
Bounce trading involves buying at support levels and selling at resistance levels. The idea is to capitalize on the price bouncing off these levels.
- Buy at Support:
- Enter a buy position when the price approaches a support level.
- Place a stop-loss order just below the support level to manage risk.
- Sell at Resistance:
- Enter a sell position when the price approaches a resistance level.
- Place a stop-loss order just above the resistance level to manage risk.
.
Breakout Trading
Breakout trading involves entering a trade when the price breaks through a support or resistance level, expecting the price to continue in that direction.
- Buy on Breakout Above Resistance:
- Enter a buy position when the price breaks above a resistance level.
- Place a stop-loss order just below the resistance level.
- Sell on Breakout Below Support:
- Enter a sell position when the price breaks below a support level.
- Place a stop-loss order just above the support level.
.
.
.- Do you have 6 months to 2 years trading experience?
You have had some success, but you’ve realised you need help from an experienced trader.
- You seek freedom & independence, not a get-rich-quick scheme.
- You want to learn a simple technical analysis technique to identify low risk trades.
- You want a low-maintenance, trend following “Set & Forget Strategy”.
– Enter trades in the morning, with calculated stop loss & targets, and wait for entry levels to be hit during the day.
4. My ‘Earn While You Learn’ Signal Service is designed for you.
https://www.daytradeideas.co.uk/product/fxsignals/
