What is Support & Resistance? Beginners Guide
One of the most commonly used trade terms is “support and resistance.”. The most successful trading strategies are discussed in this article, as well as the definitions of support and resistance.
WHAT IS SUPPORT AND RESISTANCE?
One of the most commonly used technical analysis methods in the financial markets is support and resistance. It’s an easy technique for quickly analyzing a map and determining three points of interest to a trader:
- The direction of the market
- Timing an entry in the market
- Establishing points to exit the market at either a profit or a loss.
If a trader can answer yes to the three questions above, they have a forex trading concept. Identifying levels of a chart will provide traders with answers to these questions.
TOP 4 SUPPORT AND RESISTANCE TRADING STRATEGIES
The following are four of the most effective help and resistance trading strategies:
1) Range trading
Range trading takes place in the space between the support and resistance as traders aim to buy at support and sell at resistance. Think of the area as being a room. Support is the floor and resistance the ceiling. Ranges tend to appear in sideways trading markets where there is no clear indication of a trend.
Levels of support and resistance are not always perfect lines. Sometimes price will bounce off a particular area, rather than a perfect straight line.
2) Breakout strategy (pullback)
It is common for price to breakout and begin trending after a time of directional uncertainty. Traders sometimes look for such breakouts below support or above resistance in order to profit from the momentum’s continued increase in one direction. This momentum has the potential to start a new trend if it is big enough.
3) Trendline strategy
4) Using Moving averages as support and resistance
Moving averages can function as dynamic support and resistance in the market. The 20 and 50 period moving averages, which can be slightly modified to 21 and 55 period moving averages to use Fibonacci numbers, are common moving averages to use. Traders frequently use the 100 and 200 MAs, and it is eventually up to the trader to find an environment that they are comfortable with.
KEY TAKEAWAYS
- Support and resistance is a powerful trading pillar, and most strategies incorporate some form of support/resistance analysis.
- Support and resistance strategies may be dependent on price adhering to these levels (range bound strategy) or expecting the break of support and resistance (Breakout and pullback strategies).
- Price will not respect support and resistance forever. With this in mind, traders must use sound risk management to reduce losses if a breakout occurs.
