Use of Support and Resistance in trading is most important and widely used in technical analysis. Price Action trading is based on the price movement of securities such as stocks, commodities, Forex which uses support and resistance levels for analyzing future price of securities.
Support And Resistance In Trading –
Support and Resistance is highly discussed and highly used in technical analysis for predicting future prices of a securities. We will discuss Support and Resistance in Trading in details.
Support is nothing but the certain levels from where price struggle to fall down further or price moves in upward direction. It shows that demand of the securities increases and supply decreases at certain levels. If the price is falling and during the fall if it touches certain level and bounces back, it means bulls have started buying on that price levels, so the price will rise then we can mark that zone as a support zone.
Resistance is nothing but the certain levels from where price struggle to rise further or price move in downward direction or falls. It shows that demand of the securities decreases and supply increases at certain levels. If the price is rising and during uptrend of a price, the price touches certain levels and reverses from there and starts falling, it means bears have started selling from that price levels, then we can mark that zone as resistance zone.
Above is 30MIN time frame chart of Apple Stock, We can see the price was struggling to rise at the start that’s why the zone acted as resistance. When price broke that resistance then that resistance became support and price started taking support from that levels. Then after taking support, the price starts to rise and at certain levels when the price struggle to rise again and starts falling, then that zone became resistance.
When price started falling, the price falls till the support zone and it reversed and moved upward till Resistance zone. After touching resistance price fell again and started moving towards the support zone. During the fall, the price broke the support zone and it went further down and then that support became resistance for the price. This is how resistance and support works in technical analysis. In this we can use support and resistance in trading.
In previous paragraph, We have discussed about support and resistance in horizontal levels. In this paragraph we will discuss about trendlines. Trendlines are basically work as support and resistance in rising and falling prices. When price makes higher high and higher low then we can say there is uptrend and when price makes lower low and lower high then we can say there is downtrend.
Above is 30MIN time frame chart of EUR/USD Pair, As we can see, when price was falling, price was making lower lows and lower highs, it means price was struggling to rise beyond the resistance levels. When price struggles to rise in downtrend, then we can mark a line by joining lower high, which is known as trendline which act as a resistance. Similarly when price was rising, price was making higher highs and higher lows, it means price was struggling to fall further in uptrend, so then we can mark a line by joining higher lows which is known as trendline which act as a support. In this way, we can use trendline for support and resistance in trading.
Moving Average –
In above chart, We can see how moving average act as a support and resistance in trading in technical analysis. We can change moving average time frame according to our comfort. Moving averages can be useful for entry and exit positions in trading. If we take moving average of 50, it means last 50 candles average can be taken into consideration for use. So we can take 20MA or 50 MA or 100MA OR 200MA according to our comfort. This is how we can use moving averages for support and resistance in trading.
There are different chart patterns like Triangles, Wedges, Pennants, Flags which we can use for trading which also act as support and resistance. This patterns shows consolidation of prices in a particular manner and when the price gives breakout, we can take entries for particular trades. The consolidation of price is nothing but support and resistance levels where price moves. In this way, we can use chart patterns for support and resistance in trading.
Also check – Investopedia article on Support and Resistance Basics