How to Trade Using Support and Resistance Levels

How to Trade Using Support and Resistance Levels

Support and resistance are some of the most important tools in Forex trading and  difference (CFD) trading. Technical analysts often make use of these support and resistance levels. They consider them a crucial part of understanding market psychology and determining supply and demand.

There are many applications of support and resistance in trading. Plus, they are not only relevant to the Forex market but also in other kinds of financial markets, such as stock markets, cryptocurrency markets, commodity markets and many other financial markets.

It is safe to say, the concepts of support and resistance are some of the most used in technical analysis. They form a big part of analyzing charts and patterns. Subsequently, traders often use these terms to refer to price levels on charts. These charts then help them predict the behavior of the market.

Both support and resistance come in various forms, and it can take some time to grasp them. For many people, these concepts are difficult to master. However, this article will make the process of beginning to understand these two aspects of trading easier.

Let’s begin.

Table of Contents

What is Support and Resistance in Trading?

Support is a price level at which demand is strong enough to stop financial instruments like stocks, options, or CFD, from falling. This is a zone where we see increased demand from buyers. Every time a price reaches the support level, it has difficulty going beyond it.

The logic here is that as a price drops, and it approaches support, buyers (demand) are more likely to buy. Similarly, it also means that sellers (supply) are less likely to sell.

Take a look at the image below. You can refer to it as your graphical guide to understanding how support works.

support level

Resistance is the opposite of support. It is the level at which the supply is stronger than demand. In this case, the supply is strong enough to stop the stock from going any higher. For example, each time the price goes up and reaches resistance, sellers (supply) are more likely to sell, and buyers (demand) are less willing to buy.

Once an area of support or resistance is found, the price levels it indicates can serve as possible entry and exit points. This is because as a price reaches a point of resistance or support, it will do one of two things:

  • Bounce back from the support or resistance level
  • Continue in the same direction

It is going to perform one of these actions until it hits the next support or resistance level. Looking at the image below will help you understand resistance more clearly.

Resistance level

Why are Support and Resistance Important?

Traders use support and resistance to determine the timing of trades. This belief is based on the fact that the support and resistance levels will not be broken.

What this means is that whatever direction the price takes (forward or backward), traders can bet on it. They can quickly understand whether they are right or wrong.

If the price ends up moving in a direction other than predicted, the position can be exited at a small loss. But if the price moves in the predicted direction, the move can be beneficial to the trader.

This is very important for technical analysts and offers them many benefits. A few of these benefits are:

  • Support and resistance levels help traders understand the general situation of the market.
  • They can be effectively used to predict any reversal in trends.
  • Their presence is a necessary part of trend analysis.
  • You can easily separate false signals from real ones.
  • Based on support and resistance levels, you can design an entry, exit, and stop strategy.
  • They help traders understand the psychology of the market.

How Do You Identify a Support and Resistance Zone?

Typically, there are two ways of finding and identifying support and resistance indicators. We will discuss both below.

Horizontally Aligned Tops and Bottoms

Financial instruments like stocks or currency pairs have “tops” and “bottoms.” For instance, a bottom is a price development where the prices on both sides (earlier and later) are above the lowest price. Sometimes multiple bottoms or tops (or both) are aligned together horizontally on a chart.

We can also say that they happen at the same price. So, when this occurs, we can identify a zone of support and resistance by drawing a straight horizontal line at this level.

These horizontal lines can often change their roles. For example, a strong resistance line can sometimes act as support after it is broken through.

This method of using horizontal lines identifies the current trading range of the underlying financial instrument.

Trendlines By Connecting Multiple Tops or Bottoms

The second method is that of trendlines. In this case, the tops and bottoms don’t need to be aligned horizontally.

What that means is that whenever a stock forms higher bottoms, we can draw a line that connects these. This is called a trendline. A trendline acts as support for the development of the next bottom.

In the same manner, when a stock is on a downtrend, it will make lower tops. We can then draw a line that connects the different tops together. This line is called a resistance line.

This particular line acts as resistance as the price goes down.

Support and resistance level

How to Find Support and Resistance Lines in Day Trading?

Finding trading lines in day trading means we are trying to find a level at which the currency’s price is facing correction. Some indicators that can help us do that are Fibonacci numbers, trendline indicators, moving averages, and peaks and valleys.

Let’s have a look at them below.

Fibonacci Numbers

Using the Fibonacci retracement tool is an advanced trading technique used in support and resistance. It is used to find areas of support and resistance by using the price history. By utilizing the price history, we can form a sequence. The Fibonacci retracement makes ratios for significant price points that we can then use to find support and resistance.

Trendline Indicator

Finding trading lines in day trading means we are trying to find a level at which the currency’s price is facing correction. Some indicators that can help us do that are Fibonacci numbers, trendline indicators, moving averages, and peaks and valleys.

Let’s have a look at them below.

Moving Average

A moving average is a simple technique that uses past currency trends and produces the average prices based on them. We can find short-term and long-term support and resistance zones based on moving averages for different time frames. A short-term time frame can be something like 10 days long. Conversely, a long-term time period can be 52 weeks long.

Peaks and Valleys

In the peaks and valleys strategy, we analyze the behavior of a currency over a specific period of time. This means that we look at the highs and lows of that currency. This helps us understand the psychology of the market.

If we see that a currency’s price matches that behavior, that indicates strong market sentiments. In this technique, the highs and lows of the price are the indicators of support and resistance, respectively.

How to Draw Support and Resistance Lines?

To draw support and resistance lines, you need to follow these steps:

  • Find suitable time frames. Set your objective. For short-term trading, time frames are usually below six months. A time frame of 12 to 18 months is suitable for long-term trading.
  • Identify the price zones. In your determined time frames, there will be price hikes and drops. These will indicate past S&R levels. Identify three or more of such time periods to know the overall behavior of the currency.
  • Draw the support and resistance lines. After identifying the price zones, connect them with a horizontal line. For price areas in an ascending triangle formation, the line represents the resistance. Similarly, for a descending triangle, the price zone will show support. It is important to mention that the drawing of support and resistance lines is more reliable using daily, or even weekly, time frames.

Support and Resistance Role Reversal

An important thing to remember in technical analysis is the reversal of a support or resistance level. This happens when the price breaks through either level.

If the price falls below a support level, it will then turn into resistance. Likewise, if the price rises above a resistance level, it will become support.

This happens because as the price moves past the support or resistance points, we think that there is a shift happening in supply and demand. This then causes the level to reverse its role.

The Bottom Line

The concepts of support and resistance are of great importance in technical analysis. With this article, I have aimed to give you a head start in the world of trading by helping you understand them.

Support and resistance levels are trustworthy elements of trading that can be applied to many different financial markets, and they can help you predict future prices and determine what actions to take.

Whatever trading technique you use, always work hard and dedicate yourselves to becoming good at it.

If you enjoyed this article on How to Trade Using Support and Resistance Levels or have any questions for me, please feel free to leave them in the comment section below!


Recommended Resources: If you’re interested in learning more about online trading, check out my book “Trading for Success; 8 secrets why women are better forex traders” and take a deep dive into my blog.

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    Giovana Vega

    Best Seller Author, Award Winner, Trader & Investor Blogger

    I’m Giovana currently living in Amsterdam, I used to work in big corporate firms in the finance sector. I quit my job after working more than a decade and started the path as a trader, investor and blogger. End  your search now and grow your financial knowledge with my book “Trading for Success: 8 secrets why women are better forex traders”. If there is an opportunity and adventure, count me in. 

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