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Support & Resistance Trading Guide for Beginners!
Updated: Apr 22
Introduction:
Support and Resistance are two important concepts in trading that can help traders make informed decisions when buying or selling stocks, forex, or other assets. In this guide, we will cover everything you need to know about Support and Resistance, including its definition, importance, and how to identify levels.
I. Understanding Support
What is Support? Support refers to a price level at which demand for an asset is strong enough to prevent its price from declining further. In other words, support acts as a floor, preventing prices from falling lower.
How to identify Support levels?
Look for price levels where the asset has bounced back up after a downward trend.
Identify a previous low point in the price trend and connect it to the current price trend.
Use trading indicators like moving averages to identify the support level.
Examples of Support:
Imagine a stock that was previously trading at $50 and then dropped to $45. If the stock then bounces back up to $50, $45 becomes a support level.
Another example is the 200-day moving average which is a commonly used indicator for identifying support levels in stock prices.
II. Understanding Resistance
What is Resistance? Resistance refers to a price level at which the supply for an asset is strong enough to prevent its price from rising further. In other words, resistance acts as a ceiling, preventing prices from rising higher.
How to identify Resistance levels?
Look for price levels where the asset has bounced back down after an upward trend.
Identify a previous high point in the price trend and connect it to the current price trend.
Use trading indicators like moving averages to identify the resistance level.
Examples of Resistance:
Imagine a stock that was previously trading at $50 and then rose to $60. If the stock then bounces back down to $50, $60 becomes a resistance level.
Another example is the 50-day moving average which is a commonly used indicator for identifying resistance levels in stock prices.
III. Trading Strategies using Support and Resistance
Bounce Trading Strategy:
This strategy involves buying the asset when it reaches a support level and selling it when it reaches the resistance level. The goal is to take advantage of the asset's bounce between these two levels.
Breakout Trading Strategy:
This strategy involves buying the asset when it breaks through the resistance level or shorting the asset when it breaks through the support level. The idea is to take advantage of the strong momentum that often occurs when the asset breaches a key level.
Trend Continuation Trading Strategy:
This strategy involves identifying the overall trend of the asset and then using support and resistance levels to enter trades in the direction of the trend. The goal is to take advantage of the continuation of the current trend.
IV. Chart Analysis for Support and Resistance
Types of Charts for Analysis:
There are several types of charts that traders can use to analyze support and resistance levels, including line charts, bar charts, and candlestick charts. Each type of chart has its own strengths and weaknesses, so it's important to understand which type of chart is best suited for your trading style.
Trendlines for Support and Resistance:
A trendline is a line drawn on a chart connecting two or more price points. By connecting a series of lows or highs, traders can identify potential support or resistance levels.
Indicators for Support and Resistance:
There are several technical indicators that traders can use to identify support and resistance levels, including moving averages, Bollinger Bands, and Fibonacci retracements. It's important to understand the strengths and weaknesses of each indicator and how they can be used to identify key levels.
Conclusion:
Support and Resistance are important concepts for traders to understand as they can provide valuable information about the supply and demand for an asset. By properly identifying support and resistance levels, traders can make informed decisions about when to buy or sell. Additionally, by using appropriate trading strategies and chart analysis techniques, traders can increase their chances of success.