5 TIPS FOR TRADING SUPPORT & RESISTANCE
Properly applying support and resistance can be the difference between a winning trade and significant losses.
WHAT IS SUPPORT AND RESISTANCE?
Simply put, an area of support is where the price of an asset tends to stop falling, and an area of resistance is where the price tends to stop rising. When there are enough buyers to maintain or lift prices it is said that the market supports prices. However, when there are enough sellers to maintain or push prices lower than it is said that the market is resistant to higher prices.
The interaction of these two forces is the fundamental driver of market action. Corporate data, economic data, news, expectations, fear and greed lead market participants to choose one side or the other and that is what we read in the charts.
WHY SUPPORT & RESISTANCE IS IMPORTANT
Understanding how support and resistance zones work in trading is of paramount importance for traders. Support and resistance levels have a direct bearing on when to open and close trading to gain a profit. A strong trading strategy is based on identified support and resistance levels that are to be monitored throughout the day.
Note: To use support and resistance effectively, you first need to understand how asset prices typically move, so you can then interpret support and resistance from that framework.
That said, our 5 tips will have you mastering support and resistance levels like a pro.
Tip #1: Swing highs and lows
A swing is a distinct movement of the price chart. Highs and lows of such moves are the natural reference points for traders. Take note of swing highs and lows in the visible area of the chart.
It is important to not to forget to check higher timeframes for levels that are not normally in your field of vision but that can still create obstacles near the current price. The more times a level stopped the price and made it reverse, the stronger it is.
Tip #2: Identify Range Points
Levels of support and resistance are not always perfect lines. Sometimes price will bounce off a particular area, rather than a perfectly straight line. Traders need to identify a trading range and therefore, need to identify areas of support and resistance. The area of support and resistance can be identified and is shown in the chart below:
Tip #3: Long Lasting Indicator
Support and resistance lines act like technical indicators and signal generators. Once drawn, these lines can provide target areas where signals can be found far into the future. Lines traders draw during reversals, continuations, and breakouts in the past often affect price action in the future whenever price action returns to that level.
This is an example of the underlying idea behind why support and resistance lines work. These lines mark price levels where buying or selling was heavy, or reversed, or consolidated. Once price action moves on from this point the market is left split between losers and winners. When price action returns to the same level losers will want to get out and/or winners will want to get in. Look at the chart below — This support level established in 2004 affected prices 4 and 10 years in the future.
Tip #4: Exploring pivot points
Pivot points represent an instance when math comes to trading. Pivot points are calculated on the basis of previous highs, lows, and closing prices. There are many custom indicators that will draw these levels for you.
One way is to look at Pivot Points Multi-timeframe indicator for MetaTrader. It shows a central pivot level, 3 support levels and 3 resistance levels for each timeframe. The indicator will let you see daily levels applied to any other timeframe you use.
A good starting point is to analyze weekly levels of this indicator. They are redrawn after the end of every week and provide a very good idea of what the scope of the pair’s movement will be like during the coming days.
Tip #5: Anticipate Support and Resistance Around Big Round Numbers
Ever wondered why that box of cornflakes from Shoprite cost N1599.99 instead of N1600? Marketing professionals have long exploited how we humans perceive prices and how charging a few kobo less can have an impact on your purchasing behavior. While marketers exploit human psychology by not offering round figure prices on products, in the Forex market, the traders do flock around big round numbers and place their orders.
If you are a large bank or hedge fund and want to buy the EURUSD if it falls to 1.1000, would you place an order randomly at 1.0087 or would you place the order at 1.1000? Typically, the answer would be the big round number.
In the image above, we can see a weekly chart of the GBPUSD. Based on the historical price action, there are four major support and resistance levels on the chart. As you can see, the Big Round Numbers like 1.2000, 1.2400, 1.3400, 1.4400 all acted as major pivot zones, providing support and resistance to falling and rising prices, respectively.
If you are new to trading and do not know how to correctly draw horizontal support and resistance levels, always round up to the next Big Round Number.
Click on the link below to open a live trading account with Egmarkets today.