Support and Resistance these are the two words that every experienced trader or a new trader is aware of.
If correctly used these two important technical analysis techniques can be very profitable.
But before using them lets try and understand about them.
What is support?
When the price of an underlying starts falling and it starts holds the fall at a particular price and the underlying finds it hard to go below this particular price then it is known as support level or support price.
Support level is a good entry point for a trader to a position. In other words, to take a re-entry in the underlying in question.
If a trader has good knowledge about support level. They execute the trade properly then their loss in any particular trade can to limited. Henceforth, attaining good profits.
What is resistance?
When the price moves up and finds it difficult to move further upward at a particular price or level. Each attempt to cross the price or level barrier fails each time, then that level or price is resistance level.
Resistance level is usually a good place to book profits or to take exit of from a positional trade. Many professional traders use resistance level to take a short sell position in an underlying.
If a trader has good knowledge about resistance level. They execute the trade properly then their loss in any particular trade can to limited. Henceforth, seeking good profits.
Important strategies for Support and Resistance: –
Using important price point: –
While trying to trade on support and resistance we should keep in mind the most important part, price.
- The direction in which the price of an underlying moves determines if it’s in an uptrend or a down trend, once we understand that we can plan to take a trade depending upon the direction the price is moving.
- For example, if an underlying is moving upwards then we should only take a buy trade in that. Whereas if it’s going down then we should look for short selling trades in it.
- If the price of the underlying is taking constant support at a particular price and stops falling any further, and also tries to move up then we can say it’s a good support level and we can make a buy position in it with the support price or reversal price as the stoploss.
- Same goes for a sell trade, if the price stop moving upward and is finding it hard to sustain at any particular level and falls from there again and again then we can say that the underlying has taken a resistance at that level.
- We can either book profit in existing position or take a fresh short selling trade with the resistance price or resistance level as the stoploss.
Trend line support and resistance: –
Trend lines are most commonly used tool in technical analysis. Yet it is a very powerful tool when it comes to taking a trade.
- We can draw a trendline by joining different points of resistance or support on a chart to analyse and predict future resistance and supports, trendlines can be horizontal or/and angled.
- If the price movement of an instrument respects the trendline and finds it hard to cross either on the lower or higher side we can decide to take the trade in the trending direction. For example, if we draw a trendline by joining the recent bottoms of an underlying then it is highly possible that the price will not go below the trendline, if we see a sign of reversal and price taking support at our trendline we can take a trade there with trendline as our stoploss.
- For a short sell trade, we draw a trendline joing different recent tops of the underlying and sell it on the signs of reversal and resistance with keeping the trendline as a stoploss.
Using averages as support and resistance: –
In technical analysis averages have been the most useful instrument in analysing the price and its movement. They have proven to be very helpful in determining the direction of the price in any financial instrument.
- There are different kinds of averages available like simple moving average, Exponential moving average, weighted moving average and many more. But each one of them serves the same purpose, determining the direction in which the underlying will be moving in near future.
- Some averages are more in pratice than the others like the simple moving average, which can be helpful to determine the entry and exit in a trade.
- The most commonly used period in the technical analysis is 10,20 and 50-day moving average.
- 10-day, 20 day and 50-day average are nothing but the sum total of the price divided by the number of days to derive an average price of the share or any other financial instrument.
- 10 days moving average is helpful in determine the price movement in the nearest future and 20- and 50-days average is for predicting the price in a bit further in future.
Range trading: –
Range trading takes place in a rectangular box where a trader aims at buying at support and selling at resistance. Support is like a flooring from where the price bounces to the top. Whereas the resistance is like a ceiling when touches it falls from there. Price movement is like moving in a tight range where there is no clear indication of trend. Levels of support and resistance are drawn manually hence they are not always perfect. Sometimes the price can reverse from between rather than the line drawn.
Breakout Strategy (pull back): –
There is a lot of possibility that after certain period the price tries to come out of the box termed as breakout. Traders often wait for such breakout below support or above resistance to invest on more momentum in one direction. If this flow of movement is strong then it will give way to new trend.
Moreover, inorder to avoid in entering in the false trap. A trader tries to enter in a pullback towards support or resistance with better risk reward ratio.