Importance of Support and Resistance Levels in Trading
You might have heard a lot about support and resistance in trading. In this article, we will focus on several aspects of support and resistance.
How do you find support and resistance levels?
Let’s learn how to find support and resistance levels.
Swing highs and swing lows
Find support and resistance with swing points.
Swing highs and swing lows are previous turning points in the market. Hence, they are the obvious choice for expected levels of support and resistance.
Each swing point is a potential level of support or resistance. However, for efficient trading, one should focus on the giant swing highs and lows.
Consolidation areas
Find support and resistance with areas of consolidation
You have likely developed a psychological bond or an actual trading interest within this price range. Hence, previous consolidation areas are reliable areas of support and resistance.
Areas of consolidation suggest that support and resistance are zones and not a specific price level.
Psychological numbers
People associate certain meanings with certain numbers.
Round numbers are the best example of this. Round numbers are always good for headlines. The trading method of natural numbers draws its trading approach from round numbers.
A 52-week high and low is another example of the psychologically important number.
The calculation of support and resistance
Find support and resistance with moving averages.
You can also derive support and resistance from calculated values such as the moving average. Again, this works best in trending markets.
The combination of candle formations (candlesticks) and a moving average is a reliable trading method, where the moving average is used as support/resistance.
Find support and resistance with Fibonacci.
Another popular method for projecting support and resistance through computation is the Fibonacci retracement. With MT4, you can get the retracement levels or lines in a very convenient way without calculating them yourself.
Ratios or percentages are derived from the Fibonacci number series. Determine the important market swings and focus your attention on the retracement of this price movement, i.e. on the Fibonacci percentage values.
The Fibonacci percentages include 23.6%, 38.2%, 50%, 61.8% and 100%. A retracement percentage of 100% is the same as using a swing high / low as resistance / support.
How to incorporate the support and resistance levels into your trading strategy?
The trading direction
In uptrends, support levels are likely to hold. In downtrends, resistance levels tend to hold.
So if you see the support level holding in the uptrend, you could only consider long trades. The same is true in reverse when you see resistance levels holding in the uptrend.
Pay attention to the price levels as this is an easy way to see a clear market direction.
Filter out bad trades
Your trading strategy may have its way of determining market direction. In this case, do not confuse your analysis with support and resistance. Instead, stick to your trading strategy in terms of basic market direction.
However, you can use support and resistance analysis to improve or expand your trading strategy.
For example, if your trading strategy calls for a buy while prices are just below a large resistance level, you might be able to wait for a clear breakout to break out before entering pullbacks.
You can avoid inferior quality trades by waiting for price action to continue near a support and resistance area.
Trade entries
Look for bullish signals at support levels and bearish signals at resistance levels. This way, you can find out the best trades in any trading strategy.
Trade exits
Support and resistance, even the small ones, are efficient for targets and stops.
Day trading Profit trade – price target previous day low
For day traders, the high and the low of the previous trading session represent important support and resistance levels.
Bottom line
Support and resistance are important factors in the landscape of our charts. They are indispensable in connection with prices and market assessments. Before considering any trade, mark the support and resistance levels. These latent zones of supply and demand will help you understand the market. Use this knowledge in your trading strategy to your immediate advantage.
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