Support and resistance (S/R), or the lowest and highest limit of the market movement analysis is a powerful pillar in trading. Most strategies incorporate some form of support and resistance level analysis.
These levels tend to form around key areas where price has repeatedly approached and rebounded. This article defines support and resistance and discusses the best trading strategies associated with them.
Difference between support and resistance
One of the vastly used technical analysis techniques in the financial markets is support and resistance. It is a simple method for quickly analyzing a chart to determine three points of interest to a trader:
- The market’s trajectory
- When to enter a trade
- Identifying exit points for a trade
If a trader can answer the three questions above, they have a viable trading idea. Reckoning the lowest and highest market limit on a chart can help traders answer these questions.
On a chart, support is an area where price has dropped but has struggled to breakthrough. The rate of an asset drops to the area of the lower limit and then ‘bounces’ sharply from there.
This area, in theory, is the zone of a chart at which demand (buying power) gets strong enough to prevent the price from falling further. The reasoning is that as the price approaches to support and derails downwards in the process, buyers get a better deal and are more likely to purchase.
Sellers are less likely to sell because they are looking to get a better deal. In that case, demand will outnumber supply, preventing the price from falling below the lowest line. View website of Saxo and learn more about the support level as it will improve your trade execution process.
On a chart, resistance is an area where price has risen but has struggled to break beyond it. The price rises to the area of resistance and then rejects that certain level.
The market condition that makes a supply (selling power) strong enough to prevent the trend from rising further is referred to as resistance. Note that a strong resistance should have a strong cluster of candles which will limit the bullish rally of the price.
The reasoning behind this is that when the price approaches towards the resistance and becomes more expensive, sellers are more likely to sell, and buyers are less likely to buy.
In that case, sellers will outnumber buyers, preventing the price from rising above the resistance line.
Different Types of S/R
Apart from the horizontal S/R lines, there are 4 other types. A Forex trader should be aware of all of them. To ease your learning process, we are going to briefly discuss about these factors.
Round-number price levels, according to psychology, frequently act as bounce levels because they can house a vast portion of pending orders made by market joiners. The value of round numbers appears in a variety of financial markets. The exchange rates of 1.20, and 1.25, or 1.30 could be significant levels specifically in the GBP/USD pair.
Trend line support and resistance
Trend lines and channels can form the path for the trend traders in the market. Such levels are named Trending supports or trending resistances. Swelled buying pressure might provoke the market to get bounced off the trend line each time it tests it.
Fibonacci retracement tools
During market corrections, the Fibonacci estimate is frequently used to recognize reversals. If you learn the proper way to draw the Fibonacci retracement levels, you may consider these levels as the critical support and resistance levels.
Indicator to find the SR levels
These technical indicate support and resistance level, or pivot center, which plays as pivot below, and above lines, can also be used to identify market swing levels.
Having the deepest understanding of the concept of different supports and resistances is crucial for traders. Because most of their trading decisions will be based on that concept. It will greatly hamper the outcome of a trade if they don’t know this basic market analysis procedure.