In the process of investing in the forex market, there are two important concepts that investors need to understand: support zones and resistance zones. Join Forex Trading to learn about support and resistance and how to identify support and resistance in this article.
What is support and resistance?
Support resistance is defined as an area or historical limit of a stock’s price. There, stock prices experience a deceleration. Or change direction before continuing a new trend (up/down). To understand better, learn the concept of support and resistance below.
What is a resistance zone?
A resistance zone is where the price is trending up and is expected to decline, change direction, or slow down in growth. In this situation, investors may decide to sell the stock if they identify that the price is in a resistance zone. To ensure profit preservation.
What is support?
A support zone, or bottom, is a price level that is expected to stop a downtrend. And it may be where the trend reverses or slows down. During this time, investors often tend to buy when the stock price approaches the support zone.
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Distinguish support and resistance zones
What is the difference between support and resistance? The support and resistance areas on the price chart are important points. Create a reaction from the market, but they have the following differences:
- Support Area: This is the place on the price chart where the asset’s price has been falling sharply and has been pushed down. But then support was met and the price turned back. This point can be how to find support and resistance zones by identifying the lowest price the asset has ever reached before rebounding. When the price of the asset decreases and approaches the support zone. Many investors may be interested in buying, increasing support, and helping asset prices return.
- Resistance area: This is the place on the price chart where the price of the asset has been strong and pushed up. But then resistance was met and the price pulled back. This point can be determined by determining the highest price the asset has ever reached before falling back. When the price of the asset continues to increase and approaches the resistance zone. Many investors may be interested in selling, strengthening resistance, and helping asset prices bounce back.
In short, support and resistance areas are both important points on the price chart. However, support areas are often seen as buying points. While resistance areas are often seen as selling points.
How to identify support and resistance
Below is the most accurate and effective method
Method 1: Use the candle shadow as the area
Support and resistance are all price areas, not a specific price level. You just need to use the candle shadow to determine. Specifically:
- At the peak, if there are many candles it forms a resistance area. That will be a strong resistance area, making it difficult for the price to overcome.
- At the bottom, if there are many candles, it forms a support area. That will be a strong support area, making it difficult for prices to fall through this area.
Method 2: Use Trendline
Support/resistance zones are a basic concept in technical analysis. Helps investors determine the appropriate price range to buy or sell. Take into account the frequent fluctuations of stock prices in an upward or downward direction. The use of trend lines is the recommended method.
- In a stock’s bear market, connecting two price peaks over a period of time creates a resistance line. Where selling pressure will increase as the price approaches the trend line.
- Conversely, connecting the lowest points of the price will form a support line. As the price falls to the support line, buying pressure will increase. This can lead to the price reversing and continuing to increase.
Method 3: Use the moving average (MA)
Moving averages (MAs) can be applied to how to identify support and resistance in the short term. Moving averages help smooth out price noise.
- When the price is close to the moving average, selling pressure will increase, leading to a decrease in stock price.
- When the price is far from the average line, the buying pressure will increase and the price will return to the uptrend.
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How to effectively trade with support and resistance zones
It should be noted that the support-resistance zone is not an absolute boundary. They are price ranges that can change. Therefore, apply the effective trading strategies below.
Place an order at the support and resistance zone
It is important to place buy or limit orders right in the supported area. Place a sell or limit sell order right at the resistance area. When orders are placed at these points, investors will often experience Stop Loss being triggered. Although the support and resistance area still worked effectively, strong selling pressure caused the candle to fall above the support/resistance level. Then it reverses, leading to profits turning into losses.
Wait for the reversal signal before placing an order
Wait for a reversal signal before placing an order. What is support and resistance? The reversal signal here can appear in many different ways such as a trendline breakout. Reversal of MA, MACD, momentum indicator, RSI, or through candlestick reversal patterns. Some people often choose signals from candlestick reversal patterns because they often appear at major support or resistance levels. Provides quality signals and can set Stop Loss points right on the candlestick pattern.
Place an order when the support and resistance zone is broken
When they notice that an important support zone has been broken, investors often immediately execute trading orders.
- If the support zone is broken, they often place a sell or sell-stop order immediately.
- Similarly, if the resistance zone is broken, they often place a buy order or stop buying immediately.
Wait for the price to return to the area that was just broken
How to identify support and resistance by waiting for the price to return to the area that was just broken as follows:
- When the support level is broken, it will turn into a resistance level
- When the resistance level is surpassed, it becomes support.
Therefore, investors should wait until the price returns to that level (retest) for an opportunity.
Conclude
In summary, in technical analysis of financial markets, support and resistance are two important concepts. Support is the price level where the price cannot decrease further. While resistance is the price level where the price cannot increase. Forex Trading hopes you have a clear understanding of how to identify support and resistance to make more effective investment and trading decisions.
Frequently asked question
Why is finding support and resistance levels important in trading?
Identifying support and resistance levels is very important in trading. Because they represent key price levels where buying (support) or selling (resistance) pressure often appears.
What technical indicators are commonly used to determine support levels?
Popular technical indicators to identify include moving averages, trend lines, pivot points, Fibonacci retracements, and volume profiles.
How do traders use support and resistance levels in their trading strategies?
Traders use it to determine potential entry and exit points for trades. They may buy near support levels with the expectation that the price will rebound higher. Or sell near resistance levels with the expectation that the price will reverse down.
