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How to use levels of support and resistance in trading

Trading

9 min read

Support and resistance levels are important levels displayed on the asset graph, which serve as a reference for the price. Trading on breakthroughs and inversions is a popular method for determining entry points.

The support and resistance lines are the most obvious technical analysis indicator. At the very least, it is worth using them because a very large number of investors and traders all over the world rely on them.

The support and resistance lines on the graph

Screenshot 1 2The horizontal line on the IQ Option tracking panel

You can draw these lines on any type of chart: bars, candles, areas or lines. However, like other forms of technical analysis, they are more clearly visible on the candlestick or bar chart. The support and resistance levels allow traders to determine when they want to buy an asset with a falling price and the right time to sell it.

As you can see, the support and resistance levels reflect the peaks and drops on the price chart. These extremes of price are the fundamentals of trading. They reflect the law of the financial market: the supplier's offer and the buyer's demand. The levels of support and resistance are formed on the chart because who buys is driven by the price level reached last time. In an attempt to avoid the risks, they begin to dispose of their current positions at a safe level.

Traders who use support and resistance levels use strategies for both rebounds from the level and for breakthroughs.

Rebounds

When the price approaches the levels from which it has rebounded previously, it may rebound again, thus forming a price channel.

Screenshot 2 2

The image above shows the price movement in plan, with well-defined ends. The upper limit of the plane serves as resistance to the market, while the lower limit serves as a support. Many traders consider rebounding as an entry opportunity, closing the position when the price reaches the upper end.

Similarly, an entry point for sale is the moment of rebound from the resistance level at the upper end, obtaining a profit at the support level. In addition to horizontal levels of support and resistance, inclined levels also exist. They are called trend lines.

Screenshot 3 1The trend line and the support level form a triangle

The trend lines indicate the direction of price movement. They are formed using the local maximum levels of the downward trend and the minimum levels of the upward trend.

Remember that you can also add horizontal layers on the price chart, as part of the overall strategy.

Screenshot 4Potential entry points on horizontal levels

It is also possible to transform an old resistance level into a new support line (when the price of the asset increases), and vice versa for a downward trend. The arrows indicate the potential entry points that could be used in this particular case. Retracements in the trend direction can be considered one of the signals.

If the retracement is stronger and the price breaks through the support line, traders will consider adopting a strategy based on the breakthrough of support and resistance levels.

Sweeping

Breakthroughs in support and resistance offer an opportunity to ride a strong trend. Note that this technique is more complicated to apply than the previous one, because the trader will have to monitor the market almost constantly in order not to miss an entry point. Many traders who take advantage of the breakthrough do not immediately enter, but they are retracing after the breakthrough, and only then do they enter.

Screenshot 5Entry on the market after a retracement

False

Breakthroughs in support and resistance levels can be real or false. The false breakthroughs often confuse traders, because the price goes beyond the level and should therefore follow a good wave, but instead takes the opposite behavior – the price returns to the level and goes in the opposite direction.

Screenshot 6

In such cases it is preferable to wait for the closing of the candle after the breakthrough and analyze the market situation. If the price goes back inside after the breakthrough and the candle forms in the opposite direction to the breakthrough itself, it is probably a false signal.

In the case of a real breakthrough, some traders prefer to enter with the retracement following the breakthrough.

Conclusion

Trading on levels of support and resistance exploits the psychology of the masses: market participants focus on how the price has behaved in similar situations in the past. They measure the maximum and minimum prices of the current time frame (for example, the previous week) and evaluate the events that occurred during this interval or that could take place in the near future. If the background information about the asset does not suggest any disturbance and there are no events that could affect the behavior of the asset more than the previous week, it is logical to infer that the price will remain in the same corridor for a certain time.

To apply this method in trading, you will need to learn how to build the lines of support and resistance and monitor the news in the background to avoid facing an unexpected breakthrough. Remember that no technical analysis tool is 100% accurate, since everyone can provide false signals.

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This article does not represent an investment advice. Any reference to past movements or price levels is informative and based on external analyzes, we do not provide any guarantee that such movements or levels may reoccur in the future. In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.

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CFDs are complex instruments and carry the high risk of losing money quickly due to the leverage effect. 76% of retail investor accounts lose money when trading with CFD through this provider. You should make sure you understand how CFDs work and if you can afford to take the high risk of losing your money.


Source: IQOption blog 2018-11-22 14:00:20

PLEASE NOTE: The articles on this website are not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.

In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.

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