Support and Resistance Basics In Trading. How To Trade

Big Idea: To most investors/traders, support and resistance levels are the number 1 most commonly used price action tool for gauging when to enter and exit trades. It is also one of the most accessible indicators to see even without putting much effort into spotting them on a chart.

Understanding Support And Resistance

Support and resistance help traders identify points in the chart where we might find reversal points. The basic concept of support and resistance is through supply and demand levels. It uses different groups on the charts to identify where there is buyer interest or seller interest.?

How to Identify Support And Resistance

Using historical data, we can identify levels on the chart where we may see reversals happen in the future.?One way to do this is to look for V's and upside-down V's on the chart. This will show us a pivotable point where a level of support or resistance may lie.

Support Zones

Support zones, by definition, are areas or price points that act as a level of demand for buyers. In other words, when the price of a certain pair/stock/crypto comes down to touch a level of support, it is an incentive for buyers to step in for the chance of price recovering to the upside. An important thing to note: if this indicator is easy to spot, then it is likely that most traders will spot the same thing, and that will make your trades more accurate in both the short and long term.

Resistance Levels

Resistance levels, however, work in the same way, just vice versa. A recurring theme in business and economics is supply and demand. Support acts as a level of demand for buyers to want to get in while resistance acts as a level of supply. Basically, it means there is less demand for this pair at a higher price (the trade looked more attractive at a lower price). This also means that a level of resistance will be hard to beak and could cause price to fall back to support. Although any kind of indicator isn’t 100% accurate, support and resistance is still a great way to gauge entries and exits.

EUR/USD

Here is a picture of a chart of the EUR/USD pair on the 4H timeframe. You can see the lines that act as support are marked in green and the zones of resistance are marked in red. On the green areas of demand, you can see how price fell to that level before bouncing back up. This doesn’t always happen, but more often than not, you can find that they do work. And the same thing applies to resistance levels. On that area marked in red, you can tell that the most recent candles on this chart are testing the area that it couldn’t break the first time. Notice how these candles never bounce or retrace at an exact level but around the same area. Lots of traders try to pick perfect entries which usually come with a tight stop loss, so most of the trades end up not working out for them. The trading world isn’t a perfect one, so it’s better to use tools like this to help find a good area to enter after doing considerable fundamental analysis as well. With enough practice, trading support and resistance can end up being very beneficial to you and your account. And as usual, practice minimizing risk to protect your account.

Key Takeaways

-Support levels act as areas of demand -Resistance levels act as areas of supply -One of the most commonly used tools in trading is support and resistance -There isn’t a perfect way to trade, but these setups help -Practice risk management to protect your account!