Support and Resistance
Last updated
Last updated
“Support and resistance” is one of the most widely used concepts in trading.
Strangely enough, everyone seems to have an idea of how you should measure support and resistance.
Let’s take a look at the basics first.
Look at the diagram above. As you can see, this zigzag pattern is making its way up (a “bull market”).
When the price moves up and pulls back, the highest point reached before it pulls back is resistance.
Resistance levels indicate where there will be a surplus of sellers.
When the price continues again, the lowest point reached before it started back is now supported.
Support levels indicate where there will be a surplus of buyers.
This way, resistance, and support are continually formed as the price increases.
The reverse is true during a downtrend.
In the most basic way, this is how support and resistance are normally traded:
Trade the “Bounce”
Buy when the price falls towards support.
Sell when the price rises towards resistance.
Trade the “Break”
Buy when the price breaks up through resistance.
Sell when the price breaks down through support.
A “bounce” and “break”? Say what? If you’re a bit confused, there is no need to worry; we will cover these concepts in more detail later.
One thing to remember is that support and resistance levels are not exact numbers.
Often you will see a support or resistance level that appears broken, but soon after, you find out that the market was testing it.
With candlestick charts, the candlestick shadows usually represent these “tests” of support and resistance.
Notice how the shadows of the candles tested the 1.4700 support level.
At those times, it seemed like the price was “breaking” support.
In hindsight, we can see that the price was merely testing that level.
There is no definite answer to this question.
Some argue that a support or resistance level is broken if the price can close past that level.
However, you will find that this is not always the case.
Let’s take our example from above and see what happened when the price closed past the 1.4700 support level.
In this case, the price had closed below the 1.4700 support level but rose above it.
If you believed this was a real breakout and sold this pair, you would’ve been seriously hurtin’!
Looking at the chart now, you can see and conclude that the support was not broken; it is still very much intact and now even stronger.
Support was “breached” but only temporarily.
To help you filter out these false breakouts, you should think of support and resistance more as “zones” rather than concrete numbers.
One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart.
The reason is that line charts only show the closing price, while candlesticks add extreme highs and lows to the picture.
These highs and lows can be misleading because, often, they are just the “knee-jerk” reactions of the market.
It’s like when someone is doing something strange, but when asked about it, they reply, “Sorry, it’s just a reflex.”
When plotting support and resistance, you don’t want the reflexes of the market. You only want to plot I into movements.
Looking at the line chart, you want to plot your support and resistance lines around areas where the price forms several peaks or valleys.
When the price passes through resistance, that resistance could potentially become support.
The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance has been holding.
You can spot potential support and resistance areas easily with a little practice.
Types of Support and Resistance
There are two Types of Support and Resistance Levels
Static
Dynamic
Static Support and Resistance Levels
Pivots All Types
Swing Levels
Previous Highs and Lows
Previous Open and Close prices
Gaps
Supply and Demand Zones
Round Numbers
Dynamic Support And Resistance
Moving Averages
Trend Lines
