It is important you know that support resistance trading is used most often by traders. As Traders tend to plot charts with key horizontal levels and trend lines to indicate the resistance and support levels, this will make up just about half of the battle to more profits; the other half sees to it that the trader is capable of trading these levels using a support resistance indicator.
Every Trader Has His Own Support Resistance Trading System
One way or another, every trader has their custom ways of identifying key resistance and support levels and there are some traders who don’t have any knowledge on plotting. The next few points will assist a trader understanding what resistance and support level are, just so that he will have an idea on how to plot and make use of them effectively without having to compromise the quality of his trading performance for his support resistance trading strategy. Thus, it is more like a foundation for supporting resistance trading.
Key Foundations to a Good Support Resistance Trading System
Using Trend Lines
Trend lines in support resistance trading are useful when depicting price direction on a chart. It is important you are aware of the fact that these trend lines are often utilized to enter trades when the market breaks or touches through them. There is every possibility that prices can decide to not pay any respect to the resistance or support line a trader has plotted because trend lines drawn tend to be subjective in nature.
Connecting three or more consecutive highs decreasing in price for down-trend or consecutive lows increasing in price for up-trend is the generally accepted practice when drawing a trend line in support resistance trading.
There is no doubt that support lines are drawn across sequential candle lows, thus indicating that an area where sellers and buyers are balanced, therefore the price is unable to get lower than it is. This level is perceived as a springboard that helps in pushing the price higher, making it very suitable for a buy entry.
Resistance lines, on the other hand, are drawn across sequential candle highs, thus indicating an area where the buyers and the sellers are balanced. This level is also perceived as a springboard with the primary objective of pushing the price lower, making it suitable for sell entry.
It is important you take note of the fact that resistance and support levels can swap roles when the price gets to break through them. This is that point where price breaks through a support, thus serving as a resistance level as the Market will want to out this level to test before it proceeds to fall further. The same applies to a resistance level that becomes a support level.
Use Round Numbers
Round numbers are perfect when used as potential resistance and support levels as it presents the psychological support in demand and supply. There is no doubt that trader are humans and they have the tendencies of preferring round numbers for exits and entry, as it becomes very easy to calculate and remember profits.
Using Daily Ranges
The daily low and high of every trading day gives a representation of key resistance and support levels for support resistance trading. The market will often want to test these levels. The validity of these levels can be taken for the last two to three days as resistance and support levels.