What is support and resistance level in trading?
Or the Support and Resistance line?
From the previous post about Trendline,
Determine support and resistance level is one of the results you can get from the Trendline Analysis.
So what is the support and resistance level mean?
An image is better than a thousand words,
As you can see, when market price trending up, the line we draw at the bottom of the price is the support of the price, it supports the price and prevent it from trending down.
At the same time, when we draw a trendline on top of the trend and it forms the resistance line. It is called resistance line because it resists the market price from going any higher in that period of time.
Thus, Support and Resistance Level are the level that restrained the movement of the market price.
Drawing The Line For Support and Resistance
There are typically two ways to draw the line for the Support and Resistance Level.
One of it is using slope lines, which is the Trendline just like we draw to identify trends (it’s the same as the diagram above).
Another one is the Horizontal Line.
This is the most simple line that anyone can draw.
All you need to do is to draw a horizontal line on the recent high or recent low of market price.
E.g. the horizontal line you draw on recent high will normally be the resistance for the uptrend and horizontal line on the recent low will be the Support Level.
In the diagram, the market price once tried to break through the support line, but later, it is “pulled” back inside the support and resistance level.
The diagram also shows that the market price touched the support level 4 times and 2 times for the resistance level.
Channel of the market price is meant by the bouncing of market price within two trendlines.
Channel can be trending up or down. But it also can be a sideways trend.
For the first diagram, it also showing a trending up channel. Other than that, the second diagram shows the sideways channel.
The function of Channel is to let us know what the estimated next recent high or recent low level will be. Then we can know the tread is reasonable to trade or not.
Sideways Support and Resistance Level
For the big sideways, the channel may consist of strong support and resistance level. (Big sideways mean by the resistance level and the support level not too close to each other).
This is the typical support and resistance that traders need to be aware of.
Especially it just touched the support and resistance level for only 2 or 3 times.
The support line and the resistance line have the same character as the trendline that is:
the more number of times market price touch the line, higher chances of market price break the line.
So, there is more caution need to be place when market price touch the line more than four times and above.
Placing Better Stop-Loss And Profit Taking Level
The location of stop-loss And profit taking level should within the support and resistance level.
It is advisable that the stop-loss and profit taking level should placed within the support and resistance level and not too close to the line.
When you placed them within the level, it gives the market price a good “space” to moves.
Hard to understand in words?
Try to look at the diagram below:
As shown in the diagram the maximum level of profit taking should ideally placed inside the top red line (resistance level); the maximum level of stop-loss should placed just below the bottom red line (support level).
The Zone Near Support And Resistance Level
Same as trend line, the zone of the support and resistance line is near to the line.
The “bouncing” of market price not necessary happened ON the line but also NEAR the line.
This may happen because of many reasons. If we can decrease the times of the “zone problem”, we will produce a better result of technical analysis.
One of the most effective method to decrease this from happening is to have more practice on drawing a better line. Practice makes perfect.
How To Trade With Support And Resistance Level
Trade At The “Bounce”.
One of the method to trade with the help of Support and Resistance Level is to trade for the “bounce” of market price.
Assume you already identify the Support and Resistance Level. Now, the price hit the Support Level.
And you have analyzed the price will reverse it direction after it hit the Support Level.
Then, you long(buy) it.
Remember this method of trading require other oscillator or indicator to give you a help to minimize the losses.
The other method to trade with the Support and Resistance Level is…
Trade At The Breakout.
When you have your support and resistance level analyzed, you can trade by waiting the market price breaks the support or resistance level.
Trade at the breakout.
Diagram shows the examples of breakouts.
Trade at breakout requires a good analyzed support or resistance level. Other than that, you need to ensure that the market price is not a fake breakout.
You can use some PATTERN ANALYSIS or WAIT FOR RETRENCHMENT after breakout to minimise the chances of the fake breakout.
Multi Time Frame Analysis
Trade in the smaller trend with big sideways
Some of the time, when we are trade on an upward trend, it is normally a down trend for the higher time-frame.
E.g. 1-hour time frame shows up trending and 4-hour time frame shows downward trend.
In this situation, it is important for us to identify the support and resistance level. This may help us to know the trade we want to place have a higher chance to win or not, is it will hit the support and resistance level or not.
We do not want to place our stop-loss and profit taking level outside of the support and resistance level.
Learn how to determine where are the support and resistance is important in trading.
When you identified the support and resistance level, you can:
- Place a good stop-loss level,
- Place a good profit taking level,
- Identify the current potential limit of the price can go,
- Identify the limit of a trend,
- Knowing when NOT to trade.
You need to know there are two simple ways to determine support and resistance level, which are using trendline and horizontal line.
After you know how to trade with the Support and Resistance Level, try to optimize your trading strategy with identify the opportunity to trade at bounce or/and breakout.
Lastly, using multi time frame analysis to know the big picture of the market price.
Give it a try! I’m sure it will be very beneficial to your trading journey.
Thanks for spending your precious time together.
Let us grow and learn together.