Support resistance trading is most often used by traders. As traders will plot charts with trendlines and key horizontal levels to mark the support and resistance levels, this will only constitute half of the battle to more profits; the other half requires the trader to be able to trade these levels.
Every Trader Has His Own Support Resistance Trading System
Somehow, each trader has his own way of identifying key support and resistance levels and there are some who do not even know how to plot. The next few points will highlight what are support and resistance levels so that a trader is able to plot and use them effectively without compromising the quality of his trading performance for his support resistance trading strategy. Therefore it serves as a foundation to support resistance trading.
Key Foundations To A Good Support Resistance Trading System
Using Trend Lines
Trend lines in support resistance trading are used to depict the direction of price on a chart. These trend lines are often used to enter trades whenever the market touches or breaks through them. As trend lines drawn are subjective in nature, there is a possibility that the price can choose not to respect the support or resistance line a trader has plotted.
It should only be used as a guide to determine a trader’s trade intention of a buy, sell or stand aside base on the trend.
Generally accepted practice to draw a trend line in support resistance trading is by connecting three or more consecutive lows increasing in price for up-trend or consecutive highs decreasing in price for down-trend.
Support line is drawn across consecutive candle lows which indicate an area where buyers and sellers are balanced, therefore price unable to go lower. This level serves as a spring-board to push price higher, suitable for buy entry.
Resistance line is drawn across consecutive candle highs which indicate an area where sellers and buyers are balanced, therefore price unable to go higher. This level serves as a spring-board to push price lower, suitable for sell entry.
Note that support and resistance levels can often swap roles whenever price breaks through them. This is when price breaks through a support; it will serve as a resistance level as the market will want to test this level before proceeding to fall further. The same also goes for resistance level becoming a support level.
Use Round Numbers
Round numbers are excellent to be used as potential support and resistance levels as it represents the psychological factor in supply and demand. Traders are humans with tendencies to prefer round numbers for entry or exits as it is easy to remember and calculate profits.
Using Daily Ranges
Daily high and low of every trading day represents key support and resistance levels for support resistance trading. Often, the market will want to test these levels. The validity of these daily levels can only be taken for the last two to three days as support and resistance levels.
Use Long Term Support And Resistance For Support Resistance Trading
Look out for resistance and support levels from longer timeframes as the validity of price respecting these values are often strong. Moving to shorter timeframes, the validity will decrease but these are the levels where a trader can hunt for bargains and make their move.
Support Resistance Trading Conclusion
The above six point gives an idea to the trader on how to start plotting key support and resistance levels as a foundation to trade analysis and trade entries for support resistance trading. This will eventually boost a trader’s confidence and trading performance.
Source by Charlie Ng