Support and resistance levels
Look here, we put two levels on the chart. Unlike the trend line,
support (below) and resistance (above) are always
horizontal.
To build these levels by yourself, you need to determine the points where the constant
price stop is regularly taking place.
The chart on the right displays the resistance level is an upper limit
of the price channel, and the support level is its lower border.
Note that all that is correct for the upward trend only. For the downward
movement, it will be vise versa: the resistance level – a lower limit,
and the support level – the upper one.
As soon as the chart breaks through one of the levels, this can be a strong signal of a
further decline or increase.
Sometimes it is impossible to establish unambiguous support/resistance levels: then it
is better to determine areas.
You can put on support and resistance on RockfieldTrade trading platforms by
bodies or shadows of the candles.
How to use support and resistance levels?
Look at the chart: (a), (b) and (c) may well be excellent points for opening
Buy trades; (d), (e) and (f) would be good opportunities for
Sell positions.
Of course, signals of support and resistance levels are not enough. You need to
strengthen your decision with technical indicators (see next lessons).
Please note that support levels can later become
resistances and vice versa, depending on whether the asset price falls
or rises.
Look at the chart. As you can see, the asset price tested the resistance level twice
(points 1 and 2). After the movement beyond the range limits, the resistance became the
support level (points 3 and 4).
How to find out whether the asset chart simply tests the support/resistance level or is
it going to break through and go further?
It is believed that the more often the price chart reaches the level and turns then back
(tests it), the stronger this area is and the harder it will be for the
price to go through. It is not recommended to open trades in the middle of the range
(when the price is between support and resistance), as further movement can be an
unpredictable direction.
When is it best to open a trade using support and resistance?
After the price has started moving from level to level, open a position after the first
new candle formed from the border inside the range.
In this case, the trade should be closed even before the chart touches the opposite
line, because the price may simply not reach it at all.
Consider that in this case, the support will become the resistance.
These descriptions are just for example and are not a guide to action.
Where is better to place Stop Loss?
E.g. we have opened a trade, 5 pips below the Support. Then Stop Loss makes sense to set
at the same distance just above the level.
Similarly, if the asset price overcomes the Resistance, you can open a trade, for example, 5 points higher than this level, and Stop Loss will be below.
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