Support and Resistance

We are on the fourth module, which begins with the most important technical analysis. We’ll explain all the essential information related to the support and resistance concept. The Forex traders use these terms to mention price levels. When they analyze chart patterns, these patterns act as barriers, which means, they don’t let in prices to rush in.

When you learn the support and resistance concept, it will look simple. But over time, you will discover that it has more details that you learn. You will find out more information with experience. Therefore, once you learn the support and resistance concept, you should make sure to practice it often.

The definition of Support and Resistance

The support price level is when the downtrend is subjected to limit due to high demand. When the price of securities or assets falls, the shares increase while increasing the demand; hence, the support line.

Also, resistance levels are created because of sell-off as the price increase.

When the area of support or resistance is found, it offers the chance for traders to enter or exit into a trade. Trade entry points or exit points are highlighted. The reason why this happens is that when the price reaches support or resistance, two things can happen:

• Price level violation while continuing in the same direction, until the next hits.
• Bounce back from the resistance or support level

Most trades are taken place with the belief of the support and resistance levels not being broken. Even if the price is stopped or broken through by support or resistance, the trader can still bet on a certain direction while determining the right or wrong decision.  

Even if the direction is against you, you can still close the position at a considerably small loss. However, a positive price movement will be substantial.

Prominent support and resistance strategies in trading

1) Range trading

This trading happens in the gap between support and resistance as Forex traders decide to buy and sell at support and resistance, respectively. Consider the support and resistance area as a room, whereas support and resistance are floor and ceiling, accordingly. You will encounter ranges in sideways markets, which means there will not be any trend.

You should know that support and resistance aren’t perfect lines every single time. There are chances for the price to bounce off, so there, you can’t witness straight line. If the traders are trying to find the range, they need to spot the support and resistance areas. The below picture will help you understand the ways to identify the support and resistance area:

In a range-bound market, when the price bounces off the support level, traders will search for long entries. When it bounced off resistance, the traders will search for short entries.

The price might break out in a certain range, and it can be because of false breakout or breakout. You should learn risk management because downside risk can’t be controlled without learning it.

2) Pullback or Breakout strategy

After an uncertain directional movement, the price will breakout and start trending. Traders look for these breakouts above resistance or below support to make money on increasing momentum in a certain direction. If it’s a strong momentum, the potential for a new trend is high. Nevertheless, experienced traders don’t make quick decisions because of a false breakout, and in fact, they wait for a pullback before trading.

If you check the chart below, you will understand that the support level was strong before sellers made the price to move below support. Most naïve traders will rush into decision making and even try to enter into short trades. But this is not the right move, and traders should wait for the market response (break down) before making a decision.

In the example below, Forex traders must wait until the market moves down after a pullback situation before searching for entry points.

3) Trendline strategy

This strategy, we discussed in the previous module. But still, let’s recap it a little bit. This strategy uses the trendline as resistance or support. You have to draw a line for downtrend by connecting a few highs, or for uptrend by connecting a few lows. If the trend is strong, the price in the trendline will bounce off and continue in the trending direction. Thus, traders must search for trade entries in the trending direction.

4) Using Moving averages

Moving averages can increase dynamic resistance and support. 20-50 period moving averages are considered popular, this can be changed to 21-55 period moving averages in order to benefit from Fibonacci numbers. However, it is not familiar to incorporate moving averages of 100 and 200. The traders decide to select a setting they are okay with.

Wrapping up

That said, you can use these support and resistance strategies when trading. But you must know that there are a lot of things that you need to learn regarding support and resistance, so all the information can’t be concluded in one section of the course. Therefore, let’s continue learning in the next chapter about predicting support and resistance levels.