Trading Strategies: Support and Resistance Lines

Trading Strategies: Support and Resistance Lines

Trading Strategies: Support and Resistance Lines

Each trading strategy is like a subject in school. It takes time, practice and homework to become good at it. Just like in class, some you’ll get immediately, others might take a while, but they should prove useful over the long term with the more time and different situations you encounter.

Support and resistance lines, together form what is known as trend lines. Here we’ll show you how to “see” them on a chart and identify possible entry points for buy or sell positions, when they reach the support and resistance line respectively.

A support line can be identified by connecting the low points of an instrument’s price, that were reached at certain points in the past. They are identified as low points if the price rebounded upwards right after reaching them. By definition the support line needs at least two points (obviously) to be formed. It can be horizontal or angled, it makes no difference.

The more points there are, the stronger the support line, but this would also depend on how far back you look at the respective currency, stock, commodity or index. Some might find a solid support line that was touched in 1961 and 1994 and base their trades on that, although most do prefer shorter timeframes.

Resistance lines are effectively the same as support lines, with the marked difference that they are above the current price and act as a ceiling from which the price usually falls from. Again they can be horizontal or angled and again, there need to be at least two points that can be connected, from which the price has moved downwards.

Support and resistance lines are not always found on the same chart. In fact that is the case only when the price has moved within a range – a situation where fluctuations are limited to a corridor or tunnel with a strong support and resistance. Good thing that only one of the two will suffice, if you’re confident that it will hold.

Something to be aware of when looking at support and resistance lines with many points that confirm them – don’t rely on them forever. Sooner or later something will change and there will be a breakout (the subject of our next article in this category). If you’ve invested too much in the trade and haven’t approached it with the necessary money management in mind, it could be a huge punch in the gut.

Many traders prefer not to use the term “line”, when talking about support and resistance, but go for “zones”, as a better description of what actually acts as a barrier. These zones can vary in size, from several to tens of pips for different currencies (cents or pence for stocks). Different schools of thought have different opinions on this and every trader chooses which one they prefer based on their experience. There is one common notion though – zones are more widely observed and used on longer term views of price movements.

It has to be said that strategies do not cover all possible scenarios. A multitude of factors can influence an instrument’s price at any given moment. It’s up to traders to understand when these factors are at play and when they have a smaller impact. No strategy is bullet-proof and no price moves like an arrow across the chart, but being aware of support, resistance, breakouts and trend reversals can boost your success rate if used correctly.

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