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
AUD/USD dips below 0.6600 following RBA’s decision
The Australian Dollar registered losses of around 0.42% against the US Dollar on Tuesday, following the RBA's monetary policy decision to keep rates unchanged. However, it was perceived as a dovish decision. As Wednesday's Asian session began, the AUD/USD trades near 0.6591.
EUR/USD lacks momentum, churns near 1.0750
EUR/USD cycled familiar levels again on Tuesday, testing the waters near 1.0750 as broader markets look for signals to push in either direction. Risk appetite was crimped on Tuesday after Fedspeak from key US Federal Reserve officials threw caution on hopes for approaching rate cuts from the Fed.
Gold wanes as US Dollar soars, unfazed by lower US yields
Gold price slipped during the North American session, dropping around 0.4% amid a strong US Dollar and falling US Treasury bond yields. A scarce economic docket in the United States would keep investors focused on Federal Reserve officials during the week after last Friday’s US employment report.
Bitcoin price coils up for 20% climb, Standard Chartered forecasts more gains for BTC
Bitcoin (BTC) price remains devoid of directional bias, trading sideways as part of a horizontal chop. However, this may be short-lived as BTC price action consolidates in a bullish reversal pattern on the one-day time frame.
Living vicariously through rate cut expectations
U.S. stock indexes made gains on Tuesday as concerns about an overheating U.S. economy ease, particularly with incoming economic reports showing data surprises at their most negative levels since February of last year.
