Support and Resistance

The concept of support and resistance is very important for traders. Basically, support and resistance represent areas where price action is expected to face obstacles. Let us study this in detail. Support is a price level at which its fall tends to decrease or reverse. This means that the price is more likely to “bounce” off this level rather than break it. However, once it has passed this level, it is likely to continue lower until it finds another support level. Resistance is a price level where its increase tends to decrease or reverse. It is more likely that the price will recover from this level rather than break it. However, a break above this level opens the way for further price growth until another resistance level is found.

How to operate?

Support and resistance allow traders to guide themselves through the market. Once you mark these levels on the chart, you will see the structure of the market and will be able to predict the direction of the next price steps, as well as its size. The idea is that these levels will likely stop the price action and reverse it. As a result, it is a common approach to open buy trades at support and sell trades at resistance. If you want to profit from trading a trend, then you will buy at support during an uptrend or sell at resistance in a downtrend. If you do not trade trends, you can still use the support and resistance levels as entry points and close positions at the following support/resistance levels. In fact, SyR levels also give the trader a clue on where to close a trade. Therefore, if you have an open sell position and the price is approaching a support level, you can think about closing your trade. The same goes for a buy trade, the difference is that after opening a buy position, you must take into account the resistance levels. Support and resistance can be located in each temporality. However, keep in mind that the longer the time frame, the more important the support/resistance level is. Also, despite the fact that we talk about levels here, trading is not a precise science, so you really have to think of S&R as areas. When you have identified support or resistance, you will need to include a couple of pips around it. This will help you make your trading more accurate.

How to locate support and resistance?

Support and resistance come in different forms. First, there are the diagonal trend lines we explained earlier. A trend line can connect price highs and limit the upward trend. In this case, this trend line is called the resistance line. You can also draw a trend line through the price chart lows and limit the price action to the downside. Such a line is called the support line. Support and resistance lines can be drawn in both uptrends and downtrends. You need at least 2 highs or 2 lows to draw a trend line through them.

Keep in mind that during an uptrend, the support line is the most important because if the price breaks below it, the trend will change to a downtrend. During a downtrend, the resistance line is the key, as a break above it would mean an upward reversal.

As the market moves constantly, it often happens that support and resistance lines and levels change places. As you can see in the image above, after the price fell below the support line, it started acting as a resistance line.

Support and Resistance Levels

There are also horizontal support and resistance levels. One of the simplest and most effective ways is that they can be plotted using the previous highs and lows of the price chart: