Support and resistance indicator are an indispensable part of technical analysis. Once resistance zones are identified, identifying support will assist investors in making accurate trading decisions. So what are support and resistance? How do we trade with this indicator? All will be shared in detail by Forex Trading
Overview of Support and resistance indicator
Support and Resistance are two important indicators in technical analysis. It has existed for a long time and is considered a popular tool in the financial market. Both provide valuable information about important price zones during trading. To help investors shape their trading strategies and decisions
What is support and resistance?
Support and resistance refer to price zones on a stock chart. What many traders expect is that the trend will reverse or slow down before continuing. This behavior may recur in the future.
Support is the price area where investors expect the downtrend to reverse into an uptrend. Here, the buying force of stocks is often stronger than the selling force.
Resistance is the price area where investors expect the uptrend to reverse into a downtrend. Here, the selling force is often stronger than the buying force.
For example, in a stock’s uptrend:
- The peak before the continuation of the uptrend is considered a resistance zone.
- The low bottom before the uptrend continues is considered a support zone.
Conversely, in a downtrend, support and resistance zones are also determined based on price fluctuations over time.
See more: Be more successful through this technical analysis
Types of indicators that determine support and resistance levels
Support and resistance are considered the most important tools in basic technical analysis. It is especially for investors. According to how trends work and form, investors often classify support and resistance into the following seven types:
- Following the trend: Formed by connecting the two closest peaks and two bottoms together. Aim to identify price areas that can be support or resistance points.
- Follow moving averages: Moving averages (MA) are often used to identify trends. Or can also be used to identify support and resistance points.
- According to Fibonacci retracement levels: Use the numbers % of the Fibonacci series. For example, 23.6%, 38.2%, 50%, 61.8%, and 100% to determine support and resistance levels.
- According to the trading range: Determined by drawing two lines parallel to the nearest top and bottom. This is intended to create support and resistance levels.
- Gap Following (GAP): Analyzes gaps on the chart to identify support and resistance levels after price corrections and recoveries.
- At-round prices: Determined based on rounded prices. Like 1.2000 or 1.3000, as a base for support and resistance points.
- Combined timeframes: Combine analysis from major and minor timeframes to identify support and resistance levels. To help investors have a comprehensive view of the market.
How to determine the correct support and resistance levels
There are many methods for identifying support and resistance in trading, including:
Support – Resistance is based on connecting the tops and bottoms of the chart.
- Use indicators such as MA (moving average) and Bollinger Bands to determine support-resistance.
- Analyze trends and trend channels to determine support and resistance levels.
- Use Fibonacci retracement and extension to determine support-resistance.
- Determine support-resistance levels based on market psychology.
- Use Gap analysis to determine support-resistance.
However, to become a professional investor, you only need to master the following two methods to verify support and resistance:
- Use the method of connecting the bottoms and tops of the chart to determine support and resistance. These zones are called static support and static resistance. Because they retain their properties over time.
Specifically: When the price is fluctuating in a cycle, connect bottoms to determine support and connect tops to determine resistance.
- Use the SMA20 moving average to find support and resistance. This method is easy to use but can be affected when the market fluctuates strongly. Support and resistance levels depend on SMA20 fluctuations. Hence they are called dynamic support and dynamic resistance.
Instructions for trading with support and resistance lines
The Support and resistance indicator line is a technical tool plotted on a price chart. Aims to determine price levels that the market generally considers important. Creating this indicator line helps us identify potential buying and selling points. From there, increasing the chances of success in the trading process.
Basic steps to draw the Support and resistance indicator line
To draw support and resistance indicator lines, we need to perform the following steps:
- Identify important tops and bottoms: First of all, you must identify important tops and bottoms on the price chart. Peak is the highest point and trough is the lowest point during a certain period of time. This helps us find the most important points to find support and resistance levels.
- Drawing support and resistance lines from important tops and bottoms: After finding important tops and bottoms, we will draw support and resistance lines. This line will be drawn from the key peak to the key bottom. This process helps us identify price levels that the market generally considers important.
- Find additional support points: After drawing the main support and resistance lines, we can find additional support points.
How to use support and resistance in trading
Find new buying points: To find new buying points, we can use the following two methods:
- Buy when the price breaks above the resistance level and confirms stability at this level. Once the price has surpassed the previous high and has successfully tested this level, it is possible to buy at this time.
- Buy when the price drops near the strong support zone. However, remember that buying when the price is at its lowest or falling sharply is a risky move. Therefore, we recommend that you give preference to the first method.
Note: When combined with the reversal candlestick pattern, the likelihood of trading success will be significantly improved.
Find take profit and stop loss points: To find take profit and stop loss points, the most effective tool is to use support and resistance levels. Here’s how:
Stop loss point:
- Identify the strongest support zone closest to your buy point.
- Choose the lowest price within that support zone. Reduce by 0.5-1% to have the most optimal stop loss point.
Take profit point:
- Identify resistance levels on the price chart and depending on the market momentum, you can take profits on part or all of the trade.
Evaluating trading opportunities: The most effective way to evaluate trading opportunities is to use the profit/loss ratio. Specifically, a successful trader will only enter a trade if their profit/loss ratio is at least double the risk in that trade.
How to trade support and resistance in forex effectively
There are two main methods that many traders use when trading with the Support and resistance indicator:
Trading when prices bounce back: This method focuses on waiting for prices to bounce back after coming into contact with support or resistance areas. The idea is to wait for a reaction from the market once the price touches these levels. Avoid risks when prices break support or resistance zones.
Trading Price Breaks: Often support and resistance levels cannot hold forever and are frequently broken. When price breaks these levels, there are two approaches:
- Aggressive way: Trader will enter a buy or sell order as soon as the price clearly breaks the support or resistance zones.
- Conservative way: Instead of entering an order as soon as the price breaks these levels, you can wait for the price to “rebound” to the broken support or resistance area before placing the trade.
See more: Exness – Trade With The World’s Leading Broker Exness
Notes when using Support and resistance indicator
- Support and resistance, especially when using the Woodies CCI indicator, will become strong as prices often fluctuate in this zone. It will be unbreakable. When the price breaks support, this could form a new resistance level in the future. If the price continues to decrease at this time. Conversely, when the price breaks resistance, that level can become support if the price increases sharply.
- Before making a trading decision, make sure that the price formation is clear. The market can sometimes create fake breakout moves. This causes investors to misjudge the situation.
- For intraday traders, focus on the current day’s price action. You should not rely too much on finding support and resistance zones from previous days. This helps avoid information overload and distraction. Pay attention to what’s going on right now. Mark the support and resistance levels for today as they have been formed.
- Trading support and resistance requires a lot of practice. Look for these resistance and support levels. It is recommended to test them in a demo account first. Only if you have steady profits for several months, consider trading with real money.
Conclude
Above, Forex Trading has provided readers with how to exploit the Support and resistance indicator. Support and resistance are important tools that help traders enhance profits and control risk. However, to use them effectively, you need to understand how to properly identify them and recognize their uses to apply them intelligently.
Frequently asked questions
Should the support-resistance indicator be used?
Using support and resistance indicators brings many benefits in technical analysis. From there, you can make trading decisions. It helps spot potential buying and selling points. Thereby improving the possibility of success in trading.
Is it possible to apply the support-resistance indicator line to the forex market?
The support and resistance indicator line can be used for all markets. Including in foreign exchange markets. The principle of drawing support and resistance indicator lines does not change based on the specific market.
How to recognize important peaks and troughs?
To identify important peaks and troughs, observing the highest and lowest points on the price chart is necessary. This can be done by looking at the chart. Also, identify points where price creates important peaks and troughs.
