Technical Analysis offers many strategies for traders to use in their trading. Support and resistance as well as trend lines and channels are good starting points for traders to understand price movement and maximize their trade’s potential.
Support and resistance levels are part of technical analysis which once mastered will help the trader take full advantage of the markets. There are typically two steps to utilizing support and resistance levels which are also known as S/R levels. The first step which the trader should learn/identify is where to plot these boundaries/lines and the second step is to determine how these levels will affect the trader’s trades and be certain to take this form of analysis into consideration prior to placing a trade.
What are the levels of support and resistance? A level of resistance is where the price resistance to move higher is predicated on the selling activity of numerous traders and the level of support is typically where the price of the asset resists moving lower because of the buying activity of other traders. One of the most difficult aspects of support and resistance levels in the world of forex trading is determining specific levels of support and resistance (which by no means is an exact science). However, once the trader starts becoming more comfortable with placing these lines on their charts they will learn the power of support and resistance.
There are specific guidelines when it comes to support and resistance. Support and resistance should be identified on the higher time frames i.e.; daily, weekly and monthly. It should be noted that to drill down to support and resistance levels for short periods of time such as five or ten minutes can not only become very confusing but be a complete waste of time.
What are horizontal support and resistance lines? To get a better understanding of support and resistance a trader needs to understand that to take advantage of this strategy you need at least two points of contact where price has bounced. Typically, the more contact points a line has associated to it the more forex traders will view the line as a significant level. In addition, if a line strictly has only two points of contact or there does not appear to be bounces the majority of traders might not take the breakthrough of the line into consideration thus not having a large impact.
The trend lines associated to support and resistance levels can actually last for years. So, the trader when creating their lines needs to understand how far back support and resistance can go in the past and be prepared for this.
Another aspect of support and resistance levels are false breakouts. The trader should really look at support and resistance levels as zones instead of concrete/definitive numbers. A good way for a forx trader to identify zones is to create and find the associated zones on a line chart rather than utilizing a candlestick chart.
There are several types of trend lines that a trader should be aware of. The first trend line is called a positive uptrend line. An uptrend line is deemed positive when there are what a trader would identify a higher high and higher low on a price chart. Usually, if the price/trend is comprised by an upward sloping line, the trend is deemed to be intact. What this means is that there is more demand than supply when the price continues higher. Forex traders should not be fooled and assume that a break of a trend line is going to force a steep sell off. When a trader comes across a down trend they will experience lower lows. A bearish downtrend in the forex markets tends to be violent. A down trending market can be rapid and the trader needs to spot these price action swings immediately. A sideways trending line is usually the result of price within the market traveling between strong levels of support as well as resistance. When witnessing a sideways trending line the trader should see a horizontal trend which dominates the price action for an extended period of time prior to moving to higher high or lower low.
What is a channel when working with trend lines? Channel trend lines may be a very valuable tool to the trader and their strategy. Channels are very useful because the trader can recognize breakouts in either direction of the trend. When utilizing channels the tactic is very similar to the approach when using trend lines. When using the channel the trader will wait for the price to come into contact with one of the channel lines. There are several different types of channels. There is the ascending channel (which is highs and higher lows), descending channel (lower highs and lower lows) and horizontal channels (ranging).
In closing, the trader has numerous technical and charting tools they may utilize in their trading. The trader needs to understand support and resistance levels to give themselves a strong arsenal of tools to trade successfully. The first steps when determining support and resistance are to identify where/how to plot these lines along with determining how these levels will affect the trader’s positions. In addition, it is very important that the trader understand where support and resistance levels reside. Again, the best way for a trader to understand this concept and visualize support as well as resistance is typically predicated on the pricing activity which is generated by traders within the markets. It is not easy for a trader to determine specific levels of support and resistance, and to master this type of technical analysis takes time as well as patience.