Chapter 1 Support and Resistance Trading
The concepts of trading level support and resistance are undoubtedly two of the most highly discussed attributes of technical analysis. Part of analyzing chart patterns, these terms are used by traders to refer to price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction.
1. Support & resistance levels
Support is an area on a chart that price has dropped to but struggled to break below, while resistance is an area on a chart that price has risen to but struggled to break above.
There are different types of support and resistance, such as minor and major/strong. Minor levels don't hold up and are expected to be broken, while strong levels are more likely to hold and cause the price to move in the other direction.
Areas of minor support or resistance provide analytical insight and potential trading opportunities. If the price does drop below the minor support level, then the downtrend is still intact. But if the price stalls and bounces at or near the former low, then a range could be developing. If the price stalls and bounces above the prior low, then we have a higher low and that is an indication of a possible trend change.
Major support and resistance areas are price levels that have recently caused a trend reversal. If the price was trending higher and then reversed into a downtrend, the price where the reversal took place is a strong resistance level. Where a downtrend ends and an uptrend begins is a strong support level.
Notably, there is also a concept that old support can become new resistance or vice versa.
2. Trading support and resistance levels
The basic trading method for using support and resistance is to buy near support in up-trends or the parts of ranges or chart patterns where prices are moving up and to sell/sell short near resistance in downtrends or the parts of ranges and chart patterns where prices are moving down.
When buying, place a stop loss several pips below support, and when shorting, place a stop loss several pips above resistance.
Buying near support or selling near resistance can pay off, but there is no assurance that the support or resistance will hold. Therefore, consider waiting for some confirmation that the market is still respecting that area.
If buying near support, wait for a consolidation in the support area and then buy when the price breaks above the high of that small consolidation area. When the price makes a move like that, it lets us know the price is still respecting the support area and also that the price is starting to move higher off of support. The same concept applies to selling at resistance.
If you're waiting for a consolidation, place a stop loss a couple pips below the consolidation when buying. When selling, the stop loss goes a couple pips above the consolidation.
3. Identify support and resistance levels
There are many ways to identify support and resistance levels in the market, like Fibonacci retracement tool, trendlines and horizontal support and resistance levels. But here we will cover 3 simple ways.
●Psychological levels
Often called "psych" levels, psychological levels occur when price ends with multiple 0's. It's human nature to gravitate towards round numbers when discussing any topic that involves numbers, forex included.
For example, when traders talk about what they think the Pound will be worth in the future, they probably won't give an answer of 1.2378 or 1.2144. They are much more likely to round off the price to something simpler, like 1.2300 or 1.3000. The same thing happens when forex traders place their orders.
●Swing highs & lows
Swing highs & lows means to mark levels in the past where price had a difficult time breaking through. As price moves up and down, each level that price has bounced off of could be a level in the future that price bounces off of again.
●Pivot points
Pivot points are a built-in indicator on many platforms that will automatically draw key levels without any effort on our part at all. Pivot points are created by the previous period's High, Low and Close prices, with the most common period size being the Daily period.
