THESE terms are vital for effective trading.
With a solid knowledge of the two, it is easier to forecast when a price will cease falling or growing. However, this is not the only value you can gain. Here is an overview of support and resistance levels from FXTM website, your ultimate destination for trading expertise.
How to Apply
Not only do you need to spot these levels. It is essential to understand their overall logic — i.e., how assets generally move. There is more than one type of resistance, and the same applies to support.
Minor and major levels are defined by the strength of the trend. The weaker — minor ones — are seen as easily breakable. Major levels are more persistent. They are more likely to trigger the opposite price movement.
How to Use Trendlines
These are horizontal lines (sometimes angled) marking support and resistance. Imagine that a price holds and reverses twice in a row while staying within the same area. Here, a horizontal trendline will show the level the market cannot easily move beyond.
In an upward scenario, the value reaches increasing highs and decreasing lows. Connection of these high and low points forms two trendlines — for resistance and support, respectively. Such simple graphic aids help us comprehend and foresee market dynamics.
Minor levels are weak. For instance, in a downtrend, a price can drop, bounce, and fall lower. Here, the first fall marks a weak support level. The decrease was halted, but the level is likely to be broken through.
What Is the Practical Value?
The point of following these indicators is to analyze trends more accurately. Meanwhile, potential opportunities become easier to spot. For instance, you can tell that a downtrend is persistent if you see minor support levels broken through. And what if the value fluctuates around the previous low instead of falling deeper? Here, you may expect a trend turnaround.
Trading Based on Support and Resistance
Basically, you should try to buy assets close to their support in any upward range or trend. Similarly, selling should be initiated close to the resistance level within a downward range or trend. Hence, it is easier to identify long-term changes.
To illustrate the logic, think of your behavior when a downtrend is followed by a range. In this case, you should consider short-selling at the resistance level. This makes more sense than purchase at the support. On the other hand, buying is preferred in an uptrend scenario, when a triangle pattern becomes obvious. Purchase the asset near support.
Generally, you may suppose that buying should be done at support, and selling at resistance. However, things are a bit more complex than this. It is advisable to wait to check the strength of the area.
How to Check Strength
The general logic is identical for support and resistance alike. If an area is strong, the value will struggle to breakthrough. For instance, in case of strong support, you will notice these features:
- the price bounces upward concerning the level,
- the pattern repeats several times, and
- the price may eventually break through, but not quickly.
Buying at Support
Here, you should spot the ideal moment when the price is lower and likely to rise significantly. Wait until you see consolidation in the support zone. Once the value goes higher than the peak of that consolidation, initiate buying.
This situation points to the strength of the support area and the probability of subsequent higher lows. Make sure your stop-loss is placed slightly below the support and consolidation.
Selling at Resistance
Similarly, you ought to wait for small consolidation in the area before executing the trade. Short selling should be triggered by a drop below the bottom of the consolidation. It is recommended you place your stop loss marker slightly above resistance and consolidation.
Entrance and Exit Tips
It is important to enter with an exit target in mind. In the buying above-mentioned buying scenario, you should exit before a strong resistance level is reached. For short-selling, close the trade before strong support is reached.
Final Words: Be Flexible
Make sure your decisions are as dynamic as the support and resistance lines. When looking at an uptrend, focus on the last low and the last peak. A subsequent lower low points to a probable reversal. On the other hand, a higher high means the trend still holds.
Generally, strong areas are where the trend experiences the most trouble. If they are broken through, this is unlikely to happen at the first attempt. This gives you time to think about your actions.
To make monitoring easier, mark strong areas of support and resistance on your chart. Breakthrough and subsequent movements beyond the lines means they are no longer relevant.