Support and resistance advanced are two important factors in trading. They are commonly applied in most strategies, more or less. Support and Resistance zones often appear near key points where the price often approaches and then reverses. This Forex Trading article will introduce the concept of Support and Resistance and popular trading strategies that use them.
General understanding of support and resistance advanced
In technical analysis, the concept of support and resistance is applied to predict the potential future price momentum of an asset. At the same time, to determine the appropriate point to enter or exit the transaction.
What are support and resistance? How to determine the threshold
Support and Resistance are two popular technical analysis methods in the financial markets. It is highly effective in evaluating the chart to determine three key factors:
- Market direction
- Order opening time
- The time the floor closes the order regardless of profit/loss
Support is the area on the chart where price typically falls and has difficulty overcoming. Charts often show price declines to support areas. Then there was a positive reaction, pushing prices up sharply.
Resistance is the area on the chart where the price typically increases and has difficulty overcoming. The chart often shows a price rise to a resistance area. Then there was a negative reaction, pushing prices down sharply.
How to identify support and resistance zones: Support and resistance levels should be defined as price zones instead of a specific level on the chart. When you see the price moving in an area with a narrow range and consolidating. This often indicates hesitation on the part of buyers and sellers. This is an area with potential for buying and selling pressure. To determine this point, draw a support and resistance zone.
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Why should you pay attention to support and resistance levels?
In fact, using support and resistance levels is very effective. Because most traders care about and consider them. Price will react accordingly and this affects their trading decisions. When the price approaches support or resistance, traders often pay attention and can make decisions such as:
- Close current position
- Open a new position if there is a false breakout or the price reacts from the support/resistance level
- Place pending orders to receive the real breakout
- Wait for a clear response before making your next decision
Principles of Polarization and support and Resistance Advanced psychology
Principle of Polarization: According to the principle of polarization, when a support or resistance level is broken, there is a high possibility that its role will reverse. Once surpassed, the previous resistance level could become support for a new downtrend. The broken support level could become resistance to a new uptrend. The principle of polarization reflects the movement of supply and demand in the market.
Mentality support and resistance advanced:
- Support and resistance levels identify points on the chart where the price does not normally move at the present time. They are largely influenced by the overall sentiment of the market. At the same time, it also reflects human behavior. Traders are usually disciplined with the previous state of the market. And adjust to a number of changing conditions.
- In the financial markets, there are three main groups participating at each price level. Includes long-term traders, short-term traders and undecided traders. The table below illustrates the buying and selling pressure that builds up at the respective support and resistance levels.
4 trading strategies using support and resistance advanced
Here are four trading strategies using support and resistance that are widely used:
Range Trading
Range trading occurs when the price fluctuates between Support and Resistance levels. Where traders intend to buy at Support and sell at Resistance. Imagine the area between Support and Resistance as a room, with Support as the floor and Resistance as the ceiling. “Range” occurs when the market is moving sideways, with no clear trend.
Trading Tip: Support and Resistance are not always specific price levels. Sometimes, the price will return from a “price area” instead of a certain “price level”.
The trader needs to determine the trading range and from there identify the respective Support and Resistance areas. Support and Resistance zones can be identified as shown in the chart below:
When the market is trading in a range, traders often look to buy positions when the price approaches the Support zone and sell positions when price approaches the Resistance zone.
However, price does not always “respect” the Support and Resistance zones. Therefore, traders should consider placing a stop loss below Support with a long position and above Resistance with a short position.
When the price breaks out of the above range, this can be a real breakout or a false breakout. It is important to apply appropriate risk management measures to minimize risks.
Trade the Breakout price
Usually after a period of unclear trend, the price will break out. It will start to form a new trend. Traders often look for such breakout opportunities below Support levels. Or it could be above Resistance to take advantage of potential upside or downside momentum. If this momentum is strong enough, it can lead to a new trend.
However, to avoid falling into the trap of a false breakout, experienced traders often wait for a correction back to the Support or Resistance zone before opening a position.
For example, in the chart below, a strong Support level was broken when sellers pushed the price below that zone. Many traders can get carried away and open Short orders following the trend. However, traders should instead wait for the market’s reaction. Bulls try to regain control) before breaking Support. Then open a Short order.
In the scenario below, traders should wait for the market to continue to decline after the correction before looking for entry points.
Trade according to the Trendline trend line
The trendline trading strategy uses the trendline as Support or Resistance. Simply draw a line connecting two (or more) peaks in a downtrend. Or two (or more) bottoms in an uptrend. In a strong trend, the price will often react to the trendline. It will continue to move in the main direction of that trend. Therefore, traders should look for opportunities to open positions according to the main trend. The aim is to increase the winning rate to the highest.
Use MA lines as support and resistance lines
Moving Averages (MA) can be used as dynamic Support and Resistance levels. Popular MAs include MA 20 and 50. Or can be adjusted to MA 21 and 55 according to Fibonacci numbers. Many traders often combine both MA 100 and MA 200. It is important to find the most suitable setting for yourself.
In the chart below, we can clearly see that MA 55 initially acted as Resistance. After that, the market bottomed and reversed, turning MA 55 into Dynamic Support. Traders can use these MAs along with momentum MACD to make decisions about trend continuation or market reversal.
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What traders need to remember when using support and resistance
Remember these things when using Support and Resistance:
- Support and Resistance are two quite powerful tools in trading. It is used in almost all strategies, more or less.
- There are two main types of strategies that use Support and Resistance: range trading, where price “respects” these levels. “Breakout” strategy, when expecting to break Support and Resistance zones.
- Price does not always “respect” Support and Resistance. To avoid losses when prices move against predictions, traders need to use reasonable risk management measures.
Conclude
Above Forex Trading has provided readers with information about the support and resistance advanced strategy. In short, mastering how to identify and use support and resistance levels can be a great advantage for any trader. This helps make the trading process easier and more efficient.
Frequently asked questions
What are the differences between Support and Resistance?
Support level appears during a downtrend. Indicates where the downtrend may stop due to the concentration of demand. Resistance levels appear during rising trend momentum. It represents the upper limit beyond which the asset price has difficulty moving due to selling pressure.
What is the definition of the Support and Resistance strategy?
The Advanced Support and Resistance Strategy is a method of chart analysis. It is applied to determine the best entry or exit points for the trader.
Do support and resistance really work?
Identifying Support and Resistance is one of the effective ways to predict market trends. Support and Resistance levels are determined at the point where supply and demand meet.
