Support and resistance trading strategy is one of the basic and important trading strategies for beginners as well as for expert traders. Whether you’re trading forex, stocks, or cryptocurrencies, understanding support and resistance can improve your trading strategy. In this guide, we will explain to you what support and resistance are, how to draw them manually on your trading chart accurately, and the best indicators for identifying these key levels. Let’s get started!
What is Support in Trading?
Support level acts as a floor for the price from further going down. It acts as a psychological barrier for price where traders expect more buying pressure to increase. When the price reaches a support level, it has a high chance to bounce back up. However, if broken down, support level can turn into resistance level.
Characteristics of Support Levels:
- It acts as a floor for price movements of any currency pair.
- It indicates strong buying pressure and bouncing back.
- Support level becomes the resistance level if the price breaks down to the side.
What is Resistance in Trading?
Resistance level is the opposite of support. Resistance level acts as a ceiling for the price where selling pressure is strong enough to prevent further price moving up. When the price reaches a resistance level, it has a high chance to reverse downward. However, if the price breaks above resistance level, it may act as new support level for the price.
Characteristics of Resistance Levels:
- Resistance level Acts as a ceiling for price movements.
- It indicates strong selling pressure.
- Resistance level becomes support level if broken to the upside.
How to Draw Support and Resistance Levels correctly?
Drawing support and resistance levels correctly can be so stressful and challenging for beginner traders. But don’t worry, here’s a step-by-step guide where you can learn the support and resistance strategy very quickly.
Step 1: Identify Key Price Levels
Identify first where the market creates higher highs and higher lows. These are the strongest support and resistance zones.
Step 3: Use Horizontal Lines
Support level: first draw a horizontal line where a higher low formed in the market. That is your strong support level where the market has a chance for returning.
Resistance level: Draw horizontal lines at higher high formed in the market. This level is the strong resistance for the price and chance to bounce back from here.
How does support level become resistance and resistance level become support?
Support level to resistance:
When the support level is weak and breaks down to the side, so the support level then acts as a resistance level for the price movement.
Resistance level to support:
When the resistance level is weak and gives a breakout to the upside, so the resistance level then acts as a support level for the price movement.
Best Indicators for Support and Resistance Trading strategy
If you can manually draw support and resistance, a very effective strategy, but some traders can also use indicators for confirmation of these key zones.
1. Moving Averages
- Moving average is one of the best indicators for support and resistance trading strategy. The 50-day and 200-day moving averages act as great support and resistance levels.
2. Fibonacci Retracement
- The Fibonacci retracement level can also act as the best support and resistance level. The O.62 and 0.79 Fibonacci level act as a great support and resistance level for price.
3. Pivot Points
- We can simply use the pivot points to identify the accurate support and resistance level in the market. It is a technical analysis strategy in which day traders use the previous day data, like the previous day high and low, also the opening and closing of the previous day candle, to identify key zones which act as support or resistance levels.
4. Auto Support and Resistance Indicators
- This indicator is available on Trading View, also in MT4, MT5, which gives you auto support and resistance level without having to draw it manually.
Frequently Asked Questions (FAQs)
What is support and resistance trading?
Support and resistance is a trading strategy where traders use these key levels to predict price reversals and breakouts in the future.
How do you identify strong support and resistance?
You can identify these levels manually by marking your higher highs (resistance) and higher lows (support).
What happens when support or resistance is broken?
A broken support level can turn into resistance, and a broken resistance level can turn into support.
What’s the best timeframe for drawing support and resistance levels?
Support and resistance levels work on all timeframes, but the 1-hour to 5-minute charts are best for key levels.
Conclusion
Understanding support and resistance is very important for every trader. Whether you use a manual to draw these levels or indicators, identifying these levels correctly can improve your trading strategy. Using tools like Moving Averages, Fibonacci Retracement, Candlestick Patterns, Trading Chart Patterns, and Support Resistance Trading Strategy can improve your trading accuracy. Start implementing these techniques in your trading strategy to make decent profits!
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