Support and Resistance Trading Strategy

Support and Resistance Your trading essentials

Support and resistance levels are significant levels upon the asset chart that the value often retraces from, and trading on breakouts and trend reversals is probably the most popular methods for selecting market entries.

Support and resistance lines are the foremost obvious technical analysis indicator. At least, you need to be with them because investors and traders all over the planet depend on them.

Support and resistance lines upon the chart

The horizontal line inside the IQ Option drawing panel

You are able to draw these lines on any type of chart : bar, candlestick, area, or line. But as along with kinds of technical analysis, they're best visible on candlestick and bar charts (clickable images) :

Area chart

Candlestick chart

Line chart

Bar Chart

Support and resistance levels help traders to work out at what point to purchase an asset having a falling price, so when to rely on the value increasing.

As possible see, support and resistance levels reflect the peaks and troughs on the value chart. These local price extremes will be the foundation of trading.

They reflect rules and regulation from the financial market – seller supply and buyer demand.

Support and resistance levels are formed upon the chart because bidders are guided by the value level that the value reached the final time. They don't want to bring risks, and commence to eliminate their current positions with a safe level.

Traders who use support and resistance levels have strategies with their arsenal both for rebounds coming from the level and breakouts from the level.

Rebounds

When the value approaches levels it bounced back from during the past, It's highly prone to rebound again, thus forming a price channel (Fig. 1).

Fig. 1 Market entry points

Figure 2 shows the value movement in a set with clear boundaries. The upper limit from the flat serves as resistance for the marketplace, and also the lower limit – as support. The very first effective entry point to the marketplace for buying is that the moment of rebound coming from the support level, taking profit at the other boundary.

Similarly, an entry point for selling is that the moment of rebound from the amount of resistance in the upper edge, taking profit in the support level. Along with the horizontal levels of support and resistance, There's also inclined levels. These are generally called trend lines (Fig. 2)

Fig. 2 The tendancy line and the amount of support form a triangle

Trend lines indicate the direction of price movement. They're built by using the local maximums from the downtrend and minimums from the uptrend.

Trend trading is taken into account effective with a technique that uses horizontal levels (Fig. 3)

Fig. 3 Entry points on horizontal levels

Price resistance levels following a breakout may well serve to aid the value sooner or later. This really is clearly seen in Figure 3. The arrows point to entry points for buying. The entry is made on price retracements inside the direction from the trend.

When the retracement is stronger and the value breaks through the tendancy support, traders apply a technique depending on breaking from the support and resistance levels.

Breakouts

Breakouts from the support and resistance levels are a good chance of a trader to catch a robust price momentum. This approach is much more difficult to make use of than the very first one, since the trader needs to watch the marketplace almost constantly so they won't miss the point of entry. Many traders who purchase the breakout don’t enter immediately, but await the retracement following the breakout, and just then make their entry (Fig. 4).

Figure 4 Entering the marketplace following a breakout retracement

Fakeout

Breakouts from the support and resistance levels could be real or fake. False breakouts often mislead traders, since the value broke with the level and should get on a very good wave, but as it happens exactly the other – the value goes back behind the level and heads inside the opposite direction (Fig. 5) :

Figure 5. False support level breakout

In such cases it is advisable to wait till the close of subsequent candlestick following the break and analyze the marketplace situation. If the value comes back following the breakout and also the candlestick is drawn opposite towards the breakout, then this really is probably a fakeout.

In case of a real breakout from the trend, it’s better to enter using the retracement following the breakout, as shown in Figure 4.

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Conclusion

 
Trading on support and resistance levels takes benefit of the psychology from the masses – market participants concentrate on how the value behaved inside a similar situation during the past.

They measure the maximum and minimum prices during the current time interval (for instance, in the last week), and evaluate events that took place during this point or which may occur inside the near future.

When the background information associated with the asset doesn’t suggest any disturbances there aren’t any events that will impact the asset greater than during the past week, It's logical to assume that the value will remain in a similar corridor going forward.

To trade by applying this method, you simply got to understand how to build support and resistance lines and monitor the background news to avoid running into an unexpected breakout.

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