Support and resistance levels are a core part of trading analysis, especially in forex trading. These help traders to identify where, at a specific point in time, the market had a strong buying or selling power. Knowing this helps forex traders in making calculated decisions about whether they should enter or exit a trade.
This article will discuss in detail, what support and resistance levels are, how they work, and how traders use them effectively.
Support is a price level where the demand of a specific security is strong enough to prevent a price drop. Most traders expect a rise in prices as an asset reaches a support.
Similarly, a resistance is a point in time where the selling pressure of an asset prevents the price from rising. Traders expect the prices to drop when the asset reaches a resistance level.
These levels are formed due to the previous price points, how the market is changing, and how traders are responding to the market changes. And they help the price continue in its path after breaking into either level.
There are numerous different types of levels, some of which are discussed here;
Horizontal Support and Resistance:
This type of support and resistance levels is formed when the price of an asset bounces back from the same price in a small period, creating horizontal lines.
Trendline Support and Resistance:
This type of resistance and support occurs when the price of an asset increases or decreases in a trend, moving in a diagonal line. They are identifiable by drawing trendlines on the chart.
Moving averages as Dynamic Support/Resistance:
Moving averages act as dynamic levels by smoothing out fluctuations in the prices. If the prices stay below a certain moving average, it is identified to be a resistance level, if the price stays above, it acts as a support level.
Traders can use resistance and support levels in multiple ways, utilizing other tools along with them to make efficient profits. Firstly, and most importantly, traders should purchase the assets at a price close to the support levels, and aim to sell them at a price that is close to a resistance level, make sure to use breakouts to ensure the price movements are going as expected. Along with using candlestick patterns to keep market conditions in mind.
To properly interpret these levels, traders need to make sure that they’re avoiding certain mistakes. For example, traders should make sure to wait for confirmation with breakouts before entering or exiting a trade.
Refrain from placing stop losses too close to the opening price, and prevent the price fluctuations from triggering them. Along with making sure to readjust the levels over time to make up for the price adjustments.
In conclusion, support and resistance levels are a technical analysis tool that help in finding whether a security was big on buying or selling. Different types of levels can be used in different scenarios, along with other analysis tools to further help the trader to make a decision, making sure to avoid specific mistakes that can reduce their profits.
