Monday, January 28, 2019

Technical Analysis for Beginners Part 2: Knowing Support and Resistance

Recognizing the support and resistance in the currency market is one of the most important knowledge that every beginner traders must hold.  In fact it is very hard to make a trading strategy without basing it on a support and resistance.

 Let us define what is support and resistance.

  • Support – Is an area that acts as a base of the price movement. We can think of it as a floor that when hit by price they push the prices up.
  • Resistance – is an area that resists prices when touched. We can think of it as the ceiling of a house.

Note that when we plot support and resistance we can only make sure of its validity when it is tested at least 3 times.
Support and resistance in the market is an area or zone in which the price bounces off from time to time. 

It usually forms in two ways, one is in a horizontal formation and other is in a trend formation.

What is the difference between the two?

Horizontal support and resistance forms in horizontal sideways motion. It looked like a consolidating market as what we have discussed in the part one of this article series.

Click the image to zoom in

As we can see in the image above, we can say that it’s a valid horizontal support and resistance when the price line is tested at least 3 times.

Take note here that once a support or resistance is broken, it will act the opposite way. Like for example in the pair above. The support line was broken and price closed below it. What happened when the price tried to go up? The broken support now acted as a resistance and now starts rejecting price from going up as indicated in a yellow arrow the candle formed a bearish pin bar.

A trending support and resistance very similarly looks like a either a down trending or up trending market it just that it bounces in the same line of support and resistance when we plotted it.

Click on the image to zoom in

As we can see in the image above, the support and resistance formed in an up rending fashion. Again we can be sure about its validity when its lines are tested at least thrice.

Another thing to notice here also is that when the price broke the support line and closed below it, that support will now eventually act as a resistance as indicated in a yellow arrow a bearish pin bar was formed. Same will happen also if the resistance is broken and the price closed above it, it will then act as a support.

How to use support and resistance as a set up for an entry point?

Many strategies could be generated by using the support and resistance. The most common strategy that I know would be is taking an entry at the retest once the support or the resistance is broken. The set up would look like the one that I’ve labeled on a yellow arrow. A pin bar or an engulfing candle formed in the retest is good enough confirmation for an entry.

Dynamic support and resistance using a moving average

We can also use a moving average as a dynamic support and resistance. I believe that moving averages are the most used indicators in trading. Because not only will it give you a dynamic support and resistance but also it will assist you in identifying the current trend. Just like in our example below.

Click on the image to zoom in

Sometimes I incorporate in my trading strategy the use of moving averages 100 (red) and 50 (green). You may have noticed here that price also respects moving averages. Price tends to bounce when touched by the moving averages.

When price is below the moving averages it will act as resistance to it as labeled with the red arrows. At the same time acts as support when price is above it as labeled in green arrows.

Successful price action trader is good at plotting support and resistance. It may seem hard for a novice trader to see these patterns in the start but with constant market exposure and practice all becomes a piece of cake.

Take a look at your chart and try to see if you can identify and plot any of this support and resistance.

In my next article which is the part 3 of this series, I will talk about the basic Japanese candle stick formation and the psychology behind its formations.

“Tell me and I forget. Teach me and I remember. Involve me and I learn.” – Benjamin Franklin

Until next time, see you in part 3!

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