The support resistance trade is the most used by traders. As traders will chart with trend lines and key horizontal levels to mark support and resistance levels, this will only be half the battle to further profit; the other half requires the trader to be able to trade these levels.
Each trader has their own support resistance trading system
Somehow, every trader has their own way of identifying key support and resistance levels and there are some who don’t even know how to draw. The following points will highlight what the support and resistance levels are so that a trader can chart and use them effectively without compromising the quality of his trading performance for his support resistance trading strategy. Therefore, it serves as the basis to support the resistance trade.
Key Fundamentals for a Good Support Resistance Trading System
Use of trend lines
Trend lines in support resistance trading are used to represent price direction on a chart. These trend lines are often used to enter trades whenever the market touches or crosses them. Since drawn trend lines are subjective in nature, there is a chance that price will choose not to honor the support or resistance line that a trader has drawn.
It should only be used as a guide to determine a trader’s trading intent to buy, sell or stay out based on the trend.
The generally accepted practice for drawing a trend line in support resistance trading is to connect three or more consecutive lows that rise in price for an uptrend or consecutive highs that fall in price for a downtrend.
drawing support
The support line is drawn through consecutive candlestick lows that indicate an area where buyers and sellers are balanced, therefore price cannot go lower. This level serves as a springboard to push the price higher, suitable for the buy entry.
drawing resistance
The resistance line is drawn through consecutive high candles that indicate an area where sellers and buyers are balanced, therefore the price cannot go higher. This level serves as a springboard to push the price down, suitable for a sell entry.
Keep in mind that support and resistance levels can often swap roles whenever price breaks above them. This is when the price breaks through a support; it will serve as a resistance level as the market will want to test this level before falling further. The same goes for the resistance level that becomes a support level.
Use round numbers
Round numbers are great to use as potential support and resistance levels, as they represent the psychological factor in supply and demand. Traders are humans with tendencies to prefer round numbers for entry or exit as it is easy to remember and calculate profit.
Using daily ranges
The daily highs and lows for each trading day represent 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 to trade support resistance
Watch for resistance and support levels of longer time frames, as the validity of price respecting these values is usually strong. Moving to shorter time frames, the validity will decrease, but these are the levels at which a trader can bargain hunt and make his move.
Support Resistance Trade Conclusion
The above six points give the trader an idea on how to begin plotting key support and resistance levels as a basis for trade analysis and trade entries for the support resistance trade. This will eventually increase a trader’s confidence and trading performance.
