Winning Support and Resistance Strategy
Support and Resistance
Support & Resistance lines - make or break price points
Support and resistance lines conform the most basic analytical tools and are commonly used as visual markers to trace the levels where the price found a temporary barrier. In other words, where price had trouble crossing.
From a strategic point of view, support and resistance levels represent smart places to anticipate a reaction in the price of an asset, and therefore represent a basic tool in technical analysis.
Numerous traders use them, but the
diversity in application and integration tell us that charting is definitely not an exact science and more of an art.
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. In this page we provide enough set-ups and real-time examples, to make sure you thoroughly understand this simple yet important dynamic.
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Support and Resistance Levels
Price zones
Don't be disappointed if S&R lines haven't worked for you until now. You see, in reality, support and resistance are price zones, not exact numbers. This is clearly visible when switching from a higher timeframe to a lower one: an horizontal line on a weekly chart can perfectly be made by an horizontal price channel on a one hour chart.
This is why it often what appears to be a break of a support or resistance level is just the market testing it. These 'tests' of support and resistance are usually represented by the candlestick shadows piercing the S&R
levels.
If the market were made by S&R lines and not by people, then the exchange rate would always rise and fall to the same exact price points, over and over again.
But because that rarely happens it's important to think of support and resistance as zones on the chart where people buy and sell.
One way to induce the habit to treat S&R lines as zones is drawing them with fat lines, avoiding a fine-point trace. That way you won't fool yourself into believing you have identified the exact price at which a currency pair is going to turn around and start moving in the opposite direction. And even better: draw the lines, especially the horizontal ones using two lines, an upper and a lower one, or use rectangles to mark the zones. Your chart platform has all these fancy tools for sure.
Identifying Supply and Demand
There where the difference between the number of buyers and sellers get more remarkable, it tends to form a Support or Resistance level. Your next logical quest will be to identify them on a price chart.
Historical and potential levels, can
lead to several constructs: horizontal lines and dynamic trendlines are the most used ones and can be based on significant highs and lows. Lines are also used to delineate price channels as well as classical chart
figures such as triangles and wedges.
Some technical indicators can act as potential levels, such as sentiment chart, moving averages, Pivot Points and
Fibonacci cycles which are commonly used in Elliott Wave analysis.
Round numbers - those quotes ending in 00 or 50- and emotional spikes are often perceived as Support and Resistance levels.
When these levels encompass a larger area on the charts technicians speak of a Support and Resistance Zone.
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Editors' picks
EUR/USD jumps back towards 1.1900 ahead of busy calendar day
EUR/USD is holding the higher ground but remains below 1.1900. The US dollar trades softer for the third day amid mixed sentiment ahead of the key NFP release. In the meantime, traders await the EU Retail Sales, US ADP and ISM Services PMI. Fedspeak, covid updates and stimulus news eyed as well.
GBP/USD refreshes daily high near 1.3940 on softer USD
GBP/USD extends the upside momentum above 1.3900 amid a cautious mood. US Dollar Index slips below 92.00 amid mixed economic data and Fed officials’ views. Sterling remains underpinned ahead of the BOE’s ‘Super Thursday’. US ADP and ISM Services PMI awaited.
Gold tweaks three-day fall above $1,800 on softer USD
Gold snaps a three-day downtrend while heading towards $1820. In doing so, the yellow metal benefits from the downbeat US dollar but the commodity buyers remain cautious ahead of the day’s key data, namely US ISM Services PMI and ADP Employment Change.
Bitcoin SV suffers 51% attack, BSV price loses critical support level
Bitcoin SV, a fork of Bitcoin Cash has suffered a 51% attack shortly following a series of attacks last month. Over 12 blocks have been reorganized and three versions of the blockchain have been mined simultaneously. Crypto exchanges could continue to delist the token given the security issues associated with BSV.
ISM Services PMI Preview: Business psychology begins to deteriorate
Rising COVID counts in many US states have revived the spectre of last year’s devastating lockdowns. Even though hospitalization and fatality rates are far below those of 2020, the potential damage has business operators on edge.
