Support and resistance analysis is required for all traders to understand the market’s condition and trading opportunities. Traders can choose from many indicators, but all traders should use support and resistance analysis.
Before trading, it is beneficial to analyse support and resistance. Knowing the closely watched price levels beforehand will help you find better entry and exit points.
What is support and resistance?
Support is a price level below the current price where the market expects prices to rise if touched.
Resistance is a price level above the current price where the market expects prices to fall if touched.
Many traders try to make trading complicated as they think it will lead to better performance. An approach to finding support and resistance which is complicated will lead to indecision and losses.
Each of the five methods of calculating support and resistance is important. Traders use all methods when looking for support and resistance levels.
Support method 1: Precious lows
The most well-known method of finding support is looking for recent lows which prices have risen from in the past. The more times the same low has been touched in the past, the increased importance that support becomes.
Support method 2: Past resistance
When the market rises above past resistance, traders enter a short position (sale) and will incur losses. Should prices return to previous resistance, traders will look to exit to avoid making losses. At this time, buy orders increase, so resistance turns into support.
Support method 3: Moving average
Moving averages are the most widely used indicator, with more than 50% of traders using moving averages. The moving average will point higher and act as support in an uptrend.
Support method 4: Trendline
An uptrend line is a straight line made by connecting recent lows. Similar to the moving average, an upward-sloping line will act as support.
Support method 5: Round number
Round numbers are easy to remember and used by many traders. A round number is when the last figures of price end in zero.
Round figure examples:
Dow Jones Index 35000
Round figures can act as support as traders look to buy around these numbers.
Resistance method 1: Previous highs
Traders remember previous highs at which the market has fallen and will look to sell again should the market return to previous highs.
Resistance method 2: Previous support
If the price falls below support, the trader who bought will incur a loss. Sell orders increase when the price returns to previous support as traders try to avoid losses. At this time, previous support turns into resistance as sell orders increase.
Resistance method 3: Moving average
In a downtrend market, the moving average turns downward and acts as resistance.
Resistance method 4: Trendline
Connecting lower highs in a downtrend will make a straight line. Like moving averages, downward-pointing trend lines also act as resistance.
Resistance method 5: Round number
Round numbers serve not only as support but also as resistance.
Support and resistance analysis does not mean the market will stop and reverse at those levels exactly. Using zones above and below support and resistance when building a trading strategy can lead to better results.