Support and Resistance Trading Strategy

 

Support and Resistance in Trading

Every market and timeframe on every market demonstrates trading Support and Resistance zones. They are  big element in how markets move, thus it is critical for a trader to understand how they function, how to spot them, and how to display them on your charts.

Momentum drives market movement. Either the bulls have control or the bears have control, so momentum is paused while the bulls and bears battle for dominance and power.

As markets move, traders create views and opinions about where they believe prices will go in the future. When the market is set in favour of the price rising, the bulls seize control. When the market is speculating on prices falling, the bears have the upper hand.

Traders will always choose price marks that, if reached, would cause them to believe that their conviction is correct and that the market is heading up, down, or will halt. These price levels serve as entry and exit points for trades. Levels to buy or sell They are critical levels because trading activity and market volume tend to peak at these points. These levels are often game changers.

Here are a few market levels that are often important:

The previous days' prices: open, close, high, low.

Round  numbers. For example, 150, 100, 50, and so on.

Highs and lows from previous swings Intraday swing highs and lows, daily swing highs and lows, and weekly swing highs and lows are all included. The longer the time span, the more significant the level.

Pivot points are generated using a method that takes into account the previous day's price movements.

Definition of Support and Resistance - These levels are referred to as Support and Resistance because when price hits them, it will provide either support or selling resistance.

Sometimes price hits one of these levels precisely and then reverses back in the other way. Price routinely hits these levels and then stops. There is a fight between bulls and bears until one side takes control and the market either goes beyond the Support and Resistance levels or reverses.

When I initially began learning to trade, I would initiate a trade when the price hit one of these levels, anticipating it to return in the same direction. After all, they are referred to as the Support and Resistance levels. Is not this what is supposed to happen? No, it does not.

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If Support and Resistance levels permanently held prices, they would not move and trading would be too simple. They should be regarded as price pause levels. Rather than immediately entering a fade trade (trading in the opposite direction of the current trend), a trader must wait for proof that a price level has truly offered enough support or resistance to repel prices.

More often than not, pricing will approach one of these levels and either halt just before it and begin reversing, or it will blast clear through it.

The reason for this is because of trader psychology:

1) A trader who expects Support and Resistance to hold may often abandon a trade before the level is reached, anticipating a reversal. They put their earnings in the bank before the market may take them away. In an upswing, this will result in a large number of sell orders entering the market immediately before the level. When sell orders flood the market, prices fall to a level where buyers may be found. Prices may begin to fall as a result of this.

2nd Scenario

A trader who expects a Support and Resistance level to fail may decide to wait and see what happens after the level is reached. Is the price going through or is the level holding? 

When the price breaks through the level, there are usually a lot of purchase orders. These are purchase orders placed by two groups of merchants. Traders who opted to bet on the Support and Resistance levels remaining in place after previously going short. 

When they perceive the Support and Resistance levels failing, they will leave their positions (out of fear of losing) and purchase back the stock or contract that they previously sold — this is known as short sellers covering their shorts. This will also occur if a short seller's stop is reached.

 Furthermore, when the price moves through Support and Resistance, Bulls will place orders, anticipating the price to continue rising and dreading losing out on possible winnings. Some of these orders will have come from Bulls who sold just before the Support and Resistance levels were reached and then re-entered their trades.

The psychological forces listed above cause panic buying and selling at the Support and Resistance levels. As a consequence, there may be a significant increase or decrease in prices around these levels.

As a result, for short-term transactions, Support and Resistance levels are usually the worst places to initiate and exit trades using automated buy or sell orders.

If price has reached or almost reached a resistance level and has rebounded lower, it will find a level where there are buyers and retrace its move back up to the level.

If price has pushed through the Support and Resistance levels and soared higher, it will often come to a halt and revert down to the level as bulls take profits and new buyers at the upper levels exhaust themselves.

In terms of trading potential, what occurs next is most significant. Does the level operate as a support or a barrier? When a level that was previously a Resistance level is broken and subsequently functions as Support, it is probable that a move upwards will occur. When a level that was previously Support is broken to the downside and thereafter functions as Resistance, a downward move is expected.

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All of this might happen in a short amount of time, or there could be major congestion at this Support and Resistance level, and price could sit at this level for quite some time before making a meaningful move.

Moving Averages as Support and Resistance

Moving averages may also serve as levels of support and resistance. These lines may be automatically plotted using your charting program and your trading platform.

There are moving averages for every period, so selecting the ones that are appropriate for your market is critical. One of the reasons they operate as price support and resistance is because they are often utilized as a signal to join and exit trades by large financial institutions (as well as smaller traders). The most often utilized market averages are probably the 20, 50, 100, and 200 period averages.

Moving Averages as Support and Resistance

Large institutions do not withdraw all of their money off the table at once since doing so would cause the market to move dramatically, causing issues with their orders. They often execute a series of buy and sell orders, gradually moving in and out of markets, loading and emptying their positions. 

Price crossing a market average may be one of the signals for beginning to sell out of a market. Eg Moving from above to below a 50-day moving average.

Moving average crosses are used by other traders to determine when to buy and sell. When one moving average crosses over another, this happens.

On the other hand, other organizations evaluate markets depending on whether the present price is higher or lower than the average. If it is lower, they may purchase it with the assumption that it will return to its average. If it is higher, they may sell on the assumption that it will go back to its "fair value."

As a result, market averages tend to represent price support and resistance levels that are continuously shifting.

Trading levels of support and resistance

When you look at a chart, you may see that price is continuously bouncing off a moving average or another Support and Resistance level as it swings up or down. As a general rule, the more times a Support and Resistance level is held, the stronger it grows. It is more likely to hold in the future, and if the price does break through, it will jump away from it. 

At times, it will repeatedly cross the same level. This is the unpredictability of the markets, and it is one of the reasons why it is worthwhile to wait and watch how the market responds when it comes into contact with a Support and Resistance level before trading.

 For example, when does support turn into opposition? When does opposition turn into support? Is the level stable? What candlesticks are formed when the price reaches these levels?

Also Read: How To Earn A Consistent Pips in Forex Trading

Zones of Support and Resistance

 Here is a list of common  Support and Resistance levels:

Moving Averages

The previous days' prices: open, close, high, low.

Round numbers. For example, 150, 100, 50, and so on.

Highs and lows from previous swings Intraday swing highs and lows, daily swing highs and lows, and weekly swing highs and lows are all examples of swing highs and lows. The longer the time span, the more significant the level.

Pivot points are generated using a method that takes into account the previous day's price activity.

Pivot points

There are a plethora of them! As a consequence, you may discover that some of them are extremely near to one another at times. When two or more Support and Resistance levels are at or near the same price, they become more potent and serve as Support and Resistance zones rather than individual levels.

Example of Support And Resistance By Bollinger Band

Support And Resistance By Bollinger Band

When price reaches one of these zones, there is usually some form of response. Either breaking through or instantly reversing. These are the areas where price tends to produce its most violent reversals. The candlesticks made inside these zones are particularly worth paying attention to. A reversal candlestick that falls inside or touches one of these zones might be an excellent trading indicator.

Traders have a high amount of emotion engaged in these zone regions, and as a consequence, price may fluctuate swiftly. Many traders position their stops on the other side of these zones, against the direction in which the market has been trading. 

As a result, when price breaks through the opposite side of a Support and Resistance zone, it may move swiftly and violently. When this happens, pay close watch since it will most likely return to the zone shortly. 

What happens when it returns to a Support and Resistance zone after breaking through is most essential in terms of a trading strategy that uses them. Is it a resistance zone or a support zone?