The concept of support and resistance is a cornerstone of price action trading. A huge part of price action trading pertains to analyzing support and resistance levels of different degrees. The aim is to integrate them to form your market opinion and execute your trades.
Support and resistance levels are one of the most essential concepts in online trading. Many technical tools rely on support and resistance lines to find or confirm trade setups. They are probably one of the first tools that new traders learn in trading. Support and resistance levels can come in various forms, and even complete trading strategies rely purely on these levels.
When discussing support and resistance levels in Forex trading, we need to touch on an attractive characteristic of these levels: their change of roles. When a support level breaks, be it a horizontal, round number, Fibonacci, or trend line support, that support becomes a resistance level in the future. Similarly, a broken resistance level becomes a support level in future trading. A popular trading technique has been built around this support and resistance level feature called pullback trading.
These levels, which exist in other financial markets, are among the most essential concepts that novice traders should learn early in their Forex journey. Simply put, a support level represents a price level where sellers had difficulties breaking below in the past. In contrast, a resistance level represents a price level that buyers had difficulties breaking above in the past. As a result, these levels can be used to predict market participants’ behavior once the price reaches them again.
Remember that a breakout signals prices are beginning to trend, either upward or downward. As noted earlier, price level breakouts and approaches have very high (~ 75%) success rates.
Prices tend to retest support and resistance levels until broken. Thus, traders can Buy when a coin price is approaching resistance and Sell when approaching support
If the price breaks through a critical level, it tends to continue on its path for a while. Thus, traders would Buy breakouts through the resistance level and Sell breakouts through the Support levels.
Another possible setup is to wait for the price to enter the support zone and Buy it since it will bounce off the Support level most of the time. Vice versa, traders can wait for the price to enter the Resistance zone and Sell (or short) it since it’s most likely to bounce back down.
The resistance trend line now becomes the price target.
Importantly, it’s advisable to place these trades in the direction of the prevailing trend. In the case below, the price is an uptrend and will likely bounce off support and resume an upward trajectory.
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