11 October 2020
Trading
Support and resistance trading strategy
Support and resistance trading strategy

There are a lot of different trading strategies. Many users choose support and resistance trading due to its reliability and convenience.

Basic principles of support and resistance trading strategy
Trading is a high-risk but profitable way to make money. However, such risk can be significantly reduced by choosing the right approach. In the modern world, information has become one of the most important resources and wealth. For example, knowledge of how the market works and what factors affect the price change of an asset helps to choose the right strategy and determine the optimal entry point to trade. There are many different techniques - this article explained the support and resistance trading strategy.
What does stock support and resistance mean?
Resistance and support explained market trends and current limits for falling price growth on a certain timeframe. Of course, you need to know more theory before you start trading. Changes in the value of an asset are cyclical - after each growth, there will be a fall and vice versa. With good strategy the client can determine the main pivot points of the price. This allows you to play both on the rise and the decline of the asset rate.
What is a support level?
A support level is an area below the current market price where participants will buy and there is a chance to hold this area thanks to sellers. At the moment of testing the support level, prices begin to rise. This means that the pressure from the sellers is decreasing since they cannot consolidate below the level to continue moving down. In this case, buyers are stronger.
Such levels can be determined on price charts. These can be both daily and hourly support and resistance charts. Experienced traders prefer higher time frames. For example, the support level on the daily chart will be much stronger than the support area on the 5-minute timeframe.
In the daily time frame, prices can test support for weeks before the bears can push the price lower. Also, after overcoming the support level, one can judge the completion of the development of the upward movement. In this case, it is the continuation of the upward trend. If at some point a breakdown of the support level occurs, then the upward trend on the chart may end.
What is a resistance level?
If support is below the current market price, then the resistance area is above the current market price. Resistance denotes an area where selling pressure is much higher than buying pressure, prices push back and a fall occurs. Therefore, at the moment of a strong resistance level, prices quickly repel and begin to move in the opposite direction.
The basic rule is to sell at resistance and buy near the support area. Therefore, if the trend goes down, then a correction occurs, after which prices test resistance. In this case, the strength of buyers dries up, and a decline in the direction of the current trend takes place.
The basic rule is to sell at resistance and buy near the support area. Therefore, if the trend goes down, then a correction occurs, after which prices test resistance. In this case, the strength of buyers dries up, and a decline in the direction of the current trend takes place.
How to do a support and resistance line?
Of course, charting with indicators in the right places is a matter of practice. It is important to have a long period for analysis and to determine the boundary of the asset price rebound in the past. Also, you must remember that a support or resistance level is not just a specific price on a chart, it is an area. Therefore, you can define several points of the "gray zone" (this is important for the hourly timeframe). For the daily timeframe, you can define several tens of points. Experience and understanding of how to locate resistance and support come with practice, so it is necessary to practice every day (using a demo account is recommended) to bring this process to perfection.
Use cases for support and resistance indicator
The beauty and danger of trading are that there are no specific strategies and recommendations for the user that will bring 100% success. Each client decides how exactly he can use the acquired knowledge. Someone will trade according to support and resistance lines on Forex with a minimum timeframe, others prefer pending buy or sell orders near levels. If the price on the daily chart in the past bounced off the resistance level, then it is more likely that the price will not be able to break through this area the first time and there will be a rebound - you can make money on this.
The easiest option is to buy at support and sell at resistance. However, if you see a bullish trend in the market, then here you can buy at support or buy with a breakdown of the resistance level. If the trend is downward, then in this case it is important to sell at the moment of the resistance level and sell when prices fell below the support area. There are various strategies for this kind of trading.
• Trade for pushing off levels. A simple approach that traders use most often during sideways market trends. When the price tests the support area, he buys the asset and puts the Stop Loss a few points below the support level. If the price pushes away from this support level, you can either immediately fix the profit, or move the Stop Loss to the entry point and wait for a strong rebound from this area. A similar scheme also works with trading at the resistance level.
• Trading on the breakout of levels. This option can be used both at the moment of going beyond the side trend and at the moments of a strong trend in the market. When prices test support, the trader does not buy, but simply waits for the price to dip even lower. At this moment, you can sell the asset, and set Stop Loss above the support level. A similar situation occurs when prices reach the resistance level. Here the trader does not open a sell trade but waits for the candlestick to close above the resistance level. As soon as this has happened, you can buy, the Stop Loss is placed below the level.
• Using the MACD indicator. Such an indicator is capable of generating good signals -"Divergence". Together with the use of support and resistance levels, you can improve the quality of signals and get an additional entry into the market. For example, if there is a formation of the MACD “Divergence” near the resistance level, then no need rush to sell, but wait for the moment when the signal line on the indicator leaves the area.
• Using the RSI indicator. A popular signal that is also used as an additional tool along with resistance and support lines. RSI allows you to conveniently build trend lines, and the breakdown of such a line will give a signal to enter the deal. At the moment of testing the support level, the trader needs to open a bought deal and waits for the RSI indicator values ​​to test the resistance line. Only after that, the transaction is carried out. Stop Loss is placed below the level of support.
Conclusion
Graphical analysis, plotting of resistance and support lines are the results of a client's subjective approach. Using horizontal levels may seem daunting at first glance, but many clients trade using such levels in the stock, Forex, and cryptocurrency.
With experience, finding such areas on price charts will become a simple task, and with the addition of various indicators, you can develop a unique and simple trading strategy. It is not necessary to make money with the help of complex strategies, you can follow simple methods of work, the main thing is to follow the rules of money management and choose a reliable broker as a partner.
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