A typical mistake of almost all novice traders is complicating their stay in the market in pursuit of accuracy. As a result, the work screen is clogged with countless indicators that interfere with the normal evaluation of the exchange rate chart. Experienced traders recommend abandoning this path from the very beginning. Moreover, almost everyone comes to this sooner or later.
The fact is that there are proven ways to analyze the market and earn stable profits. At the same time, they provide simplicity and high reliability. Trading strategy with support and resistance levels has such characteristics.
This name is adopted for the simplest linear constructions in technical analysis. They can be found both separately and as part of any chart formation, since these levels are constituent parts of most technical analysis patterns. And to start mastering trading on charts, it is necessary to study the support and resistance levels.
As the name implies, this level supports the price (figuratively) so that it does not fall below. After approaching the level from above, the course bounces off it like a ball. Three types of support levels can be seen on the charts.
2. Inclined. They are descending and ascending.
If the value of each next level is lower than that of the previous one, then this is a descending level.
Accordingly, the opposite happens in the ascending one.
At the same time, you should keep in mind that an ascending support level is almost always identical to an ascending trend. "Practically" because this is not the case when the "ascending triangle" pattern appears on the chart. The fact is that this pattern has the location of the highs on the same level, and this does not correspond to the classical understanding of the ascending trend.
This level, in turn, resists the price so that it does not rise higher. It also has several types.
2. Inclined, which are also divided into descending ones.
3. And ascending ones.
As with an ascending support level, a descending resistance level is an indicator of a descending trend. And also, the descending triangle is an exception.
Support, resistance and technical analysis patterns
In fact, all technical analysis patterns are based on peculiar combinations of resistance and support levels, which are located under different inclines or without them.
At the same time, there is both their simultaneous use, and separately, in the creation of any formation. Different traders (professionals and beginners) have already come up with a huge number of such patterns. To understand the basic principles, it is enough to consider only a few of them.
Resistance and support are always used together in patterns such as triangles, ranges, channels, wedges. These patterns are of different types. For clarity, it is worth considering a few examples.
A triangle with a present on both sides.
Head and shoulders pattern with support.
Inverse head and shoulders with resistance.
Properties inherent in support and resistance levels
Those who regularly trade in the financial market, most likely often have to hear talk about a "significant level", "important level", "strong level". Similar designations are used in different interpretations, and they are all used in relation to support and resistance levels.
In this case, we are talking about how many times the price touched the support/resistance level. Its strength is in direct relationship to the number of touches – the more there are, the stronger the level is.
In the example above, you can see the price bounced seven times from the resistance level, and the breakout occurred on the eighth touch. A good impulse is needed to break out of a strong level, after which significant movements are usually observed. Using this property of levels allows you to get a significant advantage at the time of making a transaction.
Level strength also has its own characteristics:
1. The interval between the level touches: if for support - then local minuses, and if for resistance - highs.
2. How deep is the bounce from the level.
3. How many false breakouts there were.
When you already have an understanding of what levels are, you should also figure out how they can be used in trading.
The rules by which the levels are defined, built and traded
There is nothing difficult about the rules used to define and build the levels. Moreover, this statement applies to both horizontal and inclined support and resistance levels.
To define the level, the presence of at least two extremes on the chart is required. If this requirement is met, it can be considered that the level definition has been carried out. To build a level, it is necessary to connect the extremes with a line and extend it further, making it a kind of boundary, the achievement of which is a signal for making trading decisions (buy or sell).
This is how it looks on the chart:
1. Revealing and building the level.
Confirmation of the level by further touches and bounces.
The chart shows how the price bounces when the resistance line is reached. In this case, the bounce point from the resistance is a favorable moment for opening sell transactions. At the same time, you must not forget that the stops should be placed above the level.
You also need to remember some nuances. The possibility of a breakout of the level by the price cannot be ruled out. In addition, the possibility of a false breakout cannot be ruled out. To avoid losses from such situations, you should pay attention to such recommendations:
- Trade from a higher timeframe. Anyone who works out some kind of chart formation or candle pattern knows in advance in which direction he will trade, and what must happen in order to cancel the expected. For example, if a bearish trend is seen on a higher timeframe, then you should not trade for breakouts of levels up on a lower one.
- Search for information in disputed points, based on expectations from the higher frame. If trading is carried out from purchases, then when trading levels, it makes sense to switch to a lower frame. At the same time, in disputed points, search for and work out reversal formations and candle patterns.
Important! When working with levels, it is unacceptable to set limits on the opening of new positions, in expectation of important news, by the type of rate changes and the like. In this case, there is a risk to have a significant loss. To comply with the risks, it is recommended to check the statistics calendar regularly.
Now, as for false breakouts. Very often they provoke excellent movements that have practically no pullback.
Level retests are usually called the situation when the price returns to a point after a breakout. Retest trading has a large number of supporters among traders. However, if the movements are strong, then retests may not happen and an explosive continuation of the movement occurs.
Also, the possibility of a breakout at the very beginning of the day trading session cannot be ruled, and then it will be quite difficult to enter a position. Because a retest may not occur, and entering a rapidly growing trend is risky, since in this case it will not be easy to attach a reasonable stop.
You should always remember that making emotional transactions is an irrational approach, the result of which can be a total loss of the deposit.
An example of a chart in which there is a retest of the resistance level.
The resistance was broken, after which there was a return to the level, but from above. After the retest, the chart moved further in the direction of the breakout. You should pay attention to the fact that there were four resistance touches before, and this is also a solid argument in order to continue moving towards the breakout.
Do not assume that the price bounce from a support or resistance level is mandatory. Sometimes the price passes the levels quite calmly. This should always be taken into account in your trading strategies.
It takes at least two points to define the level, but beginners are very often tempted to define the second point by making a prediction. That is entirely understandable, because who does not want to "catch" the very minimum or maximum of the movement and it seems like a justified risk.
But the market very often punishes newcomers for such a trip. Therefore, it is necessary to set a strict limit on the number of transactions if it is decided to predict the second point. Otherwise, you can get so carried away that the trading day will end with large financial losses.
For those who want to master trading with levels, we can advise you to visit our forex software store. Here you will find a lot of indicators, Expert Advisors and scripts that make analytics and trading much easier.