Being able to spot and mark support and resistance zones on your chart, is one of the most important skills you need to learn as a trader. I will explain exactly how to do this and how you can benefit from it.
Once you master this part you’ll feel like Neo in The Matrix! 😉
Different types of support and resistance
You may have heard about support and resistance before, because it’s found in almost every trading strategy and there are different variations. But unfortunately, most traders do not use the real support and resistance.
They use things like Fibonacci , Pivot points, Gann levels, etc. But there is a problem with those variants of support and resistance. They use mathematical formulas to divide the chart into pieces and they guess or calculate where the support and resistance are located.
So in my opinion, those zones have much less to do with actual price action and the reality of real trading.
Support and resistance my way
I prefer to base my support and resistance zones or real price action and what I actually see on my charts.
First, let’s start with the terms I use when I talk about support and resistance.
What is a support zone?
A support zone is also called a buy zone or bull zone . So when I talk about a buy zone on my trading blog, I am talking about support and vice versa. These terms are interchangeable.
For example, if I say that there are many buyers or bulls in this zone, I am talking about support. You can also look at support as a floor. Support zones are always below the current price .
Characteristics of support:
- Buy zone or bull zone
- Support is like a floor
- Always below the current price
What is a resistance zone?
A resistance zone is also called a sell zone or bear zone. So when I’m talking about a sell zone, I’m talking about resistance and vice versa. Just like with support, these terms are interchangeable.
For example, if I say that there are many sellers or bears in this zone, I am talking about resistance. Resistance can also be seen as a ceiling. Resistance zones are always above the current price .
Characteristics of resistance:
- Sell zone or bear zone
- Resistance is like a ceiling
- Always above the current price
What are support and resistance zones and what do they do?
Support and resistance zones are barriers that block price movement. Resistance blocks a rising price and support blocks a falling price.
This blocking does NOT always happen with 100% certainty, but the chances are higher.
Example: If price is in a bullish trend you will see higher highs and higher lows . That means price is rising. Price then hits a resistance zone followed by indecision. Because there are sellers grouped in that zone. There is a good chance that the direction of the price will reverse here (reversal).
Groups of buyers and sellers
Buyers and sellers are grouped in specific zones for different reasons. The reason why does not matter to us as traders. The point is that we know they are there and know that those zones act as barriers or walls.
Your stop loss must be difficult to hit and your take profit target must be easy to hit. Always place your stops BEHIND a barrier and your take profit orders IN FRONT of a barrier.
Support and resistance allows us to predict with a high degree of accuracy what the price will subsequently do.
Just look at the chart below. I have marked the support and resistance zones with black lines. See how the price reacts to these zones over and over?
If buyers push price up and hit resistance or sellers push price down and hit support, there are usually two options:
- Price stalls and moves sideways (range)
- Price direction changes sharply (reversal to new trend)
However, there is also the possibility that the prize breaks a support or resistance zone. So it is not enough just to sell on resistance or to buy on support. More on that in later posts.
Knowing how to place support and resistance zones gives you a huge advantage. It is super powerful to know where there is a good chance that the price will change direction or stall.
It allows you:
- To take reversal trades
- Spot trend continuations
- When to get in
- When you have to get out
- And much more
Small example: Suppose you want to take a long trade based on a news item, but you see that you are only a few points of resistance. You know that there are sellers there who can push the price down. Is it still smart to buy?
I do not think so! 🙂
The more you pay attention to support and resistance while trading or, the more you’ll see how valuable and powerful this is.
I Feel free to ask your questions below and don’t forget to share with your trading buddies.