In literal terms, The Cambridge Dictionary describes Support as agreement or giving encouragement to someone or something because you wish it to succeed. The act of fighting against something that is attacking or refusing to accept something is resistance.
We are traders, and trading is our business, therefore we mean this in its technical forex terms, that is S/R (Support and Resistance). Support is the price level where a downtrend of a price chart is expected to pause due to a concentration of demand or buying, meanwhile resistance zones arise due to selling interest when price have gone up or too high and there is selling pressure.
Technical analysts normally use support and resistance levels to identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trends.
Importance of S/R (Support and Resistance) in trading
The support level is a key level for traders as it acts as a key buy entry level for trades. Most chart prices have a distribution phase where the price consolidates at the support level and at the signal of any candlestick pattern than signifies an upward trend, it acts as the best entry level for traders entering the market. The support levels similarly act as the take profit levels for traders who were short in a trade. When the price hits the support level, there is a chance of a possible reversal or breakout. However, it is advisable for traders to take the set target profits at the stipulated support level.
The resistance level equally is a key level for traders as it acts as strong sell entry into the markets. Chart prices do have a consolidation around the resistance level before any reversal or breakout happens. Any candlestick pattern visible that signifies a downtrend, acts as the best entry level into the market. The resistance levels equally act as the take profit levels for traders who were long in any trade. Therefore as the price hits the resistance level, there is a chance of a possible reversal or breakout about the price.
TYPES OF S/R (SUPPORT AND RESISTANCE)
Fixed support and resistance levels: These levels are fixed and unchangeable. They are invalidated when price breaks above or below them. Physiological and sentimental levels, such as all time highs and lows are examples of fixed S/R. In stocks, numbers such as $100 or $2000 for Gold price are considered as the S/R levels.
Dynamic support and resistance levels: This type of levels, as the name suggests are subject to change of forces of demand and supply. Technical indicators such as MA (Moving Average) and Bollinger Bands create dynamic support and resistance levels in price as time changes.
Semi-dynamic support and resistance levels: These levels change as time and price change but they change at a fixed or predetermined rate. Technical indicators that plot semi-dynamic S/R levels are the Fibonacci Tool & Pivot points. These indicators plot support and resistance lines that change methodically as time and price changes.
How to find support and resistance levels on a price chart.
Peaks and troughs: Mark visible highs and lows on the price chart. The higher highs and lower highs serve as resistance levels while the lower lows and higher lows are the support levels. Plotting trendlines on longer time frames is recommended as it is more reliable.
Fibonacci levels: There are two tools; Fibonacci retracements are used to identify best entry points when the trending market is retracing while Fibonacci extensions help traders identify the most optimal targets points of a trending market.
Trend lines: They form the foundation of technical analysis and help traders to trader with a trend. In an uptrend, the trendline is drawn from a low point to a higher connecting the higher lows and in a downtrend, the trendline is drawn from a high point to a lower one connection the lower highs.
How to trade the S/R
There are two ways traders can take advantage of support and resistance trading and that is:
Range trading: This means that the trader can buy at support levels and collect profit at resistance levels as well as sell at resistance levels and collect profits at support levels or
Breakout trading: This means as a trader you enter into the market only when the price breaks out of the support or resistance levels expecting the price to continue in the same uptrend or downtrend.
Trading using the Support and Resistance levels for traders in a well executed manner will help achieve great returns. As a trader, you should learn more about the implementation of the support and resistance levels to become profitable.