In Acuity Trading’s continuing series of educational videos, today we want to take a look at Support and Resistance Trading.
If someone forced me to use only one indicator in trading, which indicator would I pick? Easy! The horizontal line.
The line on this chart is called a line of Resistance. It represents the highest price that market participants are willing to pay for a certain asset. If we look at this 30 minute chart on EURAUD we can see a line of resistance where the maximum price that market participants were willing to pay was roughly 1.46 AUD.
On the other side, the lowest price they were willing to pay was AUD1.45.2 This new level is called a line of Support. So, we now have a ceiling and a floor. We would call this a ranging market as there is no discernible trend and this particular range lasted over 4 days.
If we move out to the 1 Hour chart, we can see a very common occurrence. The line of resistance we noted, used to be a line of support. So, the 1.46 maximum price here used to be 1.46 minimum price.
One of the most common mistakes that new traders make is buying too close to a line of resistance or selling too close to a line of support. You can see why. The safest move would be to wait for the bounce. The bounce serves two purposes; firstly, it is a clear confirmation of a reversal of price off support or resistance; secondly, it gives the trader a logical place to place a stop/loss just in case the trade does not go as planned.
Just to clarify. These lines of resistance and support do to always hit price in exactly the same place. In fact, we have to consider these to be support and resistance zones, like these.
Sometimes we may witness what we think might be a breakout above resistance or below support. False breakouts occur and our risk management strategy is key in situations like this.
A few days later, EURAUD went on a Bull Run then settled back into a few more days of ranging again. Here we see a line of Resistance where Price had not been able to break through on several attempts. Looking at our Acuity Radial Gauge, we can see that News Sentiment was Bearish on the pair so we were confident going short on the next bounce. Selling was the correct move as price spent the next couple of days heading towards a line of support where we could happily close the position.
Here is another example on CADCHF where the pair had been ranging for over a week. Price could not break through this line of Resistance which had been a line of support the month before. Our Acuity Radial Gauge had gone quite Bearish overnight and going short was the correct call. In fact, this began a Bearish Run and price eventual broke through Support.
The best way to use Market Alerts is to use the notification as an opportunity to take a look at a chart to see what may have caused a sudden shift in News Sentiment. In this case, we see a new Hourly Market Alert on USDCHF. The chart shows us clear contact off a line of support. Again, this level around 0.984 Swiss francs has held for several days and, as we can see, it used to be a line of resistance. So, thanks to our Market Alert, waiting for a bounce off support and going long was the correct call and 3 hours later price hit a line of resistance at 0.99 gaining us over 50 pips!
Here is another example with Copper. A Daily Market Alert on Copper had us spot this important level at $2.26. It had bounced off resistance in the preceding days and again twice in one session. Going short was the correct call.
On the Support side, we were drawn to USDTRY by an hourly Market Alert. Over the last 6 days, this was the third touch on an obvious key level and price had already started to reverse when we got the Market Alert. 6 hours later, this long position turned out to be quite profitable.
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