Support & Resistance in Technical Analysis
Support and resistance levels are definitely two key concepts in technical analysis that traders frequently use when studying charts to spot levels where an asset price can react.
Although the explanation for recognizing these key technical levels may look simple at first, you’ll quickly realize that support and resistance may take many forms, making it more challenging to master than it initially appears.
But don’t worry, we will tell you everything there is to know about support and resistance in technical analysis, so then you know how to best integrate them into your trading strategy. Let’s dive right in.
What are support and resistance levels in trading?
Support and resistance lines help technical investors to position themselves in accordance with the trend, as they reflect key price levels where buyers and sellers struggle to take control of the markets. But to profit from buying and selling signals, you first need to understand what support and resistance levels are and how to recognize them.
When a declining financial asset bounces back on a certain price level, that price point is considered a support level in technical analysis. A support level requires optimistic investors to accumulate more buying orders than selling orders to take control over bearish investors and push markets higher.
When a rising asset stops at a certain price level and then heads downward, then that level is considered a resistance level, and requires sellers to accumulate more selling orders than buying orders to take control over bullish investors.
It is also possible to have ascending or descending support and resistance lines depending on the main trend, rather than horizontal levels. In that case, they will be materialized by trendlines. When trendlines act as a price envelope, this is called a “channel”.
Not all support and resistance levels are equal
It’s worth noting that in many cases, support and resistance are not hard and fast price levels but rather psychological pricing ranges.
But in any case, it’s important to understand that for a support or resistance line to exist and be relevant, prices need to truly react when they come in contact with this line: prices need to go up after touching a support and go down after reaching a resistance.
It is also interesting to note that there are trading tools you can use to analyze and determine the relevance of a support or resistance line, as not all of them are equal.
For instance, round numbers are often considered very important psychological levels for the markets, which tends to push traders to accumulate trading orders.
You can also analyze the evolution of the trading volume when prices get closer to a significant price level. Usually, trading activity tends to increase closer to a key support and resistance level.
As you know, technical analysis operates on the assumption that “history tends to repeat itself”. That’s why the more a support or resistance level has already been tested, the more significant it is.
It is also possible to use chartism to see if a chart pattern is forming around a key level, as this may trigger a greater price reaction.
Finally, there are technical indicators you can rely on to quickly spot support and resistance levels on a chart, especially the pivot point indicator. This tool is so popular among professional traders that ActivTrades has developed a unique Pivot Points indicator for MetaTrader 4 and 5 users with 3 levels of Support and Resistance.
Fibonacci retracements and moving averages are two other popular tools to identify key price levels.
How can you best take advantage of support and resistance levels in your trading?
If you’re using technical analysis as a main method to analyze the markets, there is no chance you can succeed without knowing about support and resistance. Now that you’ve understood what they are and know how to recognize them, let’s talk about the best ways to trade them.
The first trading technique is to use support and resistance to enter or exit the market, as prices usually reverse when meeting support and resistance levels. You can then open long positions on supports and short positions on resistances.
The second technique is to trade the breakout when prices do not reverse on support and resistance levels but rather break through these levels to keep moving in the main direction. This happens when the trend has strong momentum and high volume. Depending on your risk profile and trading strategy, you can either wait for a close above/below the resistance/support level to be sure that prices are going through the key price level, or enter just before the breakout to take advantage of the price acceleration.
You can also use support and resistance levels to trade on pullback when prices come back to those levels after breaking through them. In that case, a support becomes a resistance and a resistance becomes a support.
Finally, you can use support and resistance levels to trade within ranges. When an asset moves back and forth between a certain high and low during a given time frame, this is called a “trading range” – some traders like to take advantage of these movements. The price of the given asset within a range often finds a resistance around the trading range’s upper boundary and a support near the range’s lower extremity.
As you now know, the price of a financial asset may react at psychologically significant price levels known as supports and resistances, and the direction of the asset might either retrace or strengthen following the previous trend.
That’s why you should integrate support and resistance trading into your strategy. They can also be useful in money management to place protective orders like stop-loss and take-profit.
To avoid false trading signals, always take into consideration trading volume, potential divergences on technical indicators, as well as chart patterns. You can also use candlestick charts to get a better understanding of market psychology. In that case, consider the size of the candle and the wicks.
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