Support and Resistance Trading Strategy

The prices of assets often move in a zigzag motion, bouncing off horizontal levels of support and resistance. These levels are denoted by multiple touches of price without a breakthrough.

Once the price has broken one of these levels, the level is then considered to have become the new support or resistance. If the price breaks through support, that support is expected to turn into resistance (and vice-versa).

The idea behind this is that once the price has broken through a level, it should have gained enough momentum to continue moving in its new direction. However, if it fails to do so and reverses, it will likely find resistance from the previous support level (or support from the previous resistance level).

There are certain characteristics that can help you determine whether a level is strong or weak. Some of these include:

There are three main types of support and resistance levels

Minor levels – Minor support and resistance levels form within a trend, when the price approaches them, it bounces back up. This means that there is still demand for that currency at that price level. These levels are more likely to break when price moves further in a certain direction and are more likely to hold when price has made a smaller move.

Major Levels – Major support and resistance levels establish themselves at the end of a trend when the price has moved significantly. These types of levels indicate that there is no longer demand for that currency at that price level. These levels are more likely to hold when price has made a larger move and are less likely to break when price moves further in a certain direction.

Major Trend Lines – Major Trend Lines mark the end of an extended trend and act as significant barriers to further movement in a particular direction. They also act as very strong psychological barriers because investors who have been holding on to their positions may decide to sell at these points due to the loss they have incurred by not getting out earlier.

Major Support and Resistance Levels in forex

In the financial market, there are two types of levels that the traders use to make their decision:

Support level – These are the levels at which the price tends to reverse after a fall. If you consider a downtrend, then these support levels will be like the lower highs and lower lows. A trader can sell at this level as he/she believes that the trend will reverse.

Resistance level –  These are the levels at which a reversal is expected after a rise. A trader can sell if he/she sees that a price has risen from this resistance level.

Major Support and Resistance Levels – It’s been said that “the trend is your friend,” but what happens when your friend breaks up with you?

When the market is trending, traders who are betting on higher prices will enter the trade. Once a price level has been reached, they will exit the trade and take their profits. This creates a natural stop-loss point, which is often referred to as a support level. Support levels are areas of price consolidation where traders tend to find stability and enter a trade.

However, as the market moves up and down, it eventually enters an area where there is less market participation. This area is referred to as a resistance level. Traders who have entered the market at this level tend to exit their trades or even sell their positions before the price falls below this level. These areas of minor support and resistance provide opportunities for increasing your holding.

Major levels are those areas that create trend reversals. When the prices are making higher highs and are in an uptrend, then reversed into a downtrend, the area at which the reversal took place can be considered as a major resistance level.

Trendline to Identify Support and Resistance

Trendlines are a simple, powerful tool that all traders should understand.

Trendlines are horizontal or angled lines that are drawn to connect a series of highs and lows in a chart. Trendlines can be drawn by hand on any chart, but for best results, use trendline software that draws the trendline for you automatically based on the location of the price bars.

Trendlines can be used in any time frame and on any chart. You can draw trendlines across multiple time frames on the same chart.

The line you draw should look like it is part of the natural price action, not something that was added later to make things look neat. Trendlines work best when they are not too close together or too far apart. Your goal is to keep them as close to an actual moving support or resistance level as possible while still looking natural.

A bullish trendline forms when prices move higher and make higher highs, and a bearish trendline forms when prices make lower lows and lower highs over time. Connect the highs and lows during an uptrend or downtrend, then extend it out to the right to see where the price is likely to find support or resistance in the future.

Fibonacci Retracement to Identify Support and Resistance

The Fibonacci retracement tool is one of the most useful tools for traders and investors. The tool is used to identify levels of key support and resistance.

The Fibonacci retracement tool can be used on all time frames, but it is most commonly used on the daily and weekly charts. The reason these two time frames are used is because they show a lot of price movement over a period of days or weeks. This makes it easy to spot key support and resistance levels, especially if there has been a sharp move up or down in price.

The basic formula of the Fibonacci retracement tool is to take two extreme points of an asset’s chart and project them onto the chart, extending them out so that they intersect with a trend line. The trend line acts as support or resistance depending on whether the price is above or below it at that point in time. The idea behind using this tool is that a significant reversal will occur when an asset bounces off of its 50% retracement level. For example, if a stock rises from $20 to $30 and then pulls back to $25, the 50% retracement level would be $27.50.

Psychological Numbers as Support and Resistance

Psychological numbers are the most important trendlines to watch. They represent key milestones in a stock’s price movement. For example, if Apple’s stock moves from $90 to $110, it will have to break through the psychological barrier at $120.

Trying to determine where these numbers lie can be difficult. An R2R (retracement to resistance) or an R1R (retracement to support) may tell you that a level is significant. Or you can simply look at the stock chart and see where there have been sharp reversals in the past.

The fact that other traders use these levels can make the price action more predictable for you. So even if you aren’t planning to use them for stops and profit targets, knowing where they are will help you predict future price movements more accurately.

Understanding New Support and Resistance Level in Trading

When the price of an asset is rising, the last low and last high are of particular value to a trader. If the price falls below the recent low, this indicates that it may rise again. But if it remains high, then it is more likely to continue to be high in the future.

In addition, if a price continues to make higher highs and higher lows, then it indicates that the asset is in an uptrend and there is a long-term tendency for prices to rise.

Support levels will help you understand where support might exist or not exist at any particular time. This can help you anticipate what a good entry point might be or what a good exit point might be.

Resistance levels are exactly the opposite of support levels; they define where resistance might exist or not exist at any particular time.

You should keep drawing new support and resistance levels and delete the old support and resistance levels which are no longer important as the prices have already broken through them.

False Breakouts to Identify Support and Resistance

False breakouts are a strategy that provides excellent trading opportunities. The basic idea is to wait for a fake breakout and then enter the market when the price reverses.

For example, suppose that the trend is up, and the price is pulling back to support. Let’s say that the price breaks through support, but rallies back above it before pulling back again. In this case, you would wait for the price to break through support again before buying when the price starts rallying back above support again. You would sell when the price breaks below resistance at some point in the future.

Similarly, if the trend is down, and the price is pulling back to resistance. Let’s say that the price breaks through resistance, but drops back below it before pulling back again. In this case, you would wait for the price to break through resistance again before selling when the price starts dropping back below resistance again. You would buy when you see evidence of a rally past resistance at some point in the future.

New Support and Resistance Levels & Trading Decisions

One of the most fundamental concepts of technical analysis is to mark key support and resistance levels on the chart.

These are areas where the price historically has found difficulty in breaking through, and which are likely to become relevant again if the price approaches them.

Such areas must be clearly marked on your chart so that you can easily spot them when you’re analyzing it. For example, you could use a different color for these areas than for other parts of the chart.

If you have a number of different time frames, it’s best to use different colors for each one so that you can quickly digest what’s happening on each one.

In some cases, a strong support or resistance level will hold for significantly longer than originally expected. In that case, it’s best to keep marking it over and over again as it becomes relevant once more—but only until it stops being relevant again. You should then delete the line from your chart to avoid clutter and confusion once you’ve moved past that point.

It is also common to mark key support and resistance levels when they’re at their most relevant on your chart—or at some other moment that seems particularly important, such as when a trend changes direction or when a new trend begins. 

FAQs

When to use the Support and Resistance?

The main use of the Support and Resistance is by traders who are looking for a trade entry point or exit point. The trader is waiting for a break of the level in order to enter a trade or wait for a test of that level before exiting his current trades.

However, it can also help you by identifying areas where the price may be turning. Especially when you draw trendlines. It can also help you identify potential continuation patterns such as Flag, Pennant and Triangle.

Is support and resistance level important for trading in 15mins chart?

When you’re using longer-term charts and trading stocks, futures or forex, it can be difficult to find the appropriate support and resistance levels. It’s hard to know where those levels are without taking a look at the historical chart. But when you’re using 15-minute charts for swing trading in the stock market, it’s easier to see where support and resistance levels are likely to form.

A stock forms support on a 15-minute chart when its price hits a level that it has touched several times before. Because the price has hit that level several times before, traders feel confident in placing their buy orders there. The same is true with resistance levels. When the price hits a level of resistance — one that has been touched several times before — it’s likely that the price will bounce off it again.

If you’re watching a 15-minute chart and the price breaks through either support or resistance, throw out that level and wait for another point of reference before placing an order. Just because one point of reference didn’t hold doesn’t mean that another won’t; if you wait for a confirmation signal, you’ll have more confidence in your trade entry.