Basic of Support and Resistance

Support and resistance are proven areas where buyers and sellers find some of equilibrium, they are major turning points in the market.
Support and resistance levels emerge when the price reverses its direction. These key levels often act as barriers, containing price movements within their range. However, when a breakout occurs, the price can move beyond these levels, leading to potential new trends.

In trending markets, support and resistance levels are established at swing points. During an uptrend, the previous swing point serves as a support level, while in a downtrend, the previous swing point functions as a resistance level.

The illustration above demonstrates how the previous swing point becomes a support level following a breakout. During a market retracement, the price often respects this support level, setting the stage for the next impulsive move in the trend. By drawing a support level in an uptrend market, we can predict when the next impulsive move will take place.

How to trade

1. Identify Support and Resistance Levels

• Support Level: A price level where buying pressure is strong enough to prevent further decline. It acts as a floor.
• Resistance Level: A price level where selling pressure is strong enough to cap further price increases. It acts as a ceiling.
• Use chart patterns and tools like trendlines, horizontal lines, Fibonacci retracements, or moving averages to identify these levels.

2. Validate the Levels

• Look for areas where the price has bounced off or reversed multiple times—these are stronger levels.
• Check higher timeframes (e.g., daily, weekly) to confirm the significance of these levels.

3. Use Price Action for Confirmation

• Look for candlestick patterns like doji, hammer, or engulfing candles near support or resistance.
• Watch for false breakouts to avoid entering on premature signals.

4. Trading Strategies

a) Trading the Bounce

• At Support:
  • Enter a long position (buy) when the price nears support and shows signs of reversal.
  • Place a stop-loss just below the support level.
• At Resistance:
  • Enter a short position (sell) when the price nears resistance and shows signs of reversal.
  • Place a stop-loss just above the resistance level.

b) Trading the Breakout

• Breakout Above Resistance:
  • Enter a long position after the price breaks above resistance and retests it as a new support level.
• Breakout Below Support:
  • Enter a short position after the price breaks below support and retests it as a new resistance level.

5. Combine with Indicators

• Use indicators like RSI, MACD, or moving averages to confirm the trend and potential reversals.
• For example, RSI near oversold levels at support may strengthen the case for a bounce.