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Support and Resistance is one of the most commonly used ideas in trading, the idea is that Support is a level at which price will not fall below, and one which price would bounce of and move upwards instead, think of it as the floor. Resistance is the level at which price will not rise above and a level at which price is likely to bounce downwards from, think of it as the ceiling. In the example below you can see price bouncing between Support and Resistance levels during an up trend.
It is almost impossible to to predict the exact number at which a Support or Resistance level will be, so it is much more wise and is much safer to think of these levels as zones instead of exact points.
Quite often when a support or resistance level is broken, price tends to continue in the direction it was going until it faces another level of support or resistance, when price does break through it is defined as a "breakout". One important thing to remember is that when price breaks through a support level, that support level becomes a new resistance level, and when price breaks through a resistance level that level becomes a new support. You must take care when trading breakouts, as sometimes price can breakout and then reverse into the opposite direction, this is known as a "fakeout". You may be asking yourself, "how do I know when it's a breakout or a fakeout?" well there isn't a definite answer, but there are things that can help your chances in predicting correctly. One way is to wait for price to come back and retest a support or resistance level if it holds then chances are the original breakout was legit, if it breaks through that level then it was a fakeout. Below is an example of a fake out.
How to Trade Support and Resistance
There are two simple ways you could trade using support and resistance, these methods are known as: The Bounce and The Break.
The Bounce:
One mistake traders often make is to set their entry orders directly on a support or resistance line, this might work sometimes but you could run into some trouble using this method. One method of trading support and resistance is by waiting for price to bounce off of a support or resistance level and then entering, by doing this you not only have confirmation that the support or resistance level will hold, but you also avoid a situation in which price breaks through the support or resistance level.
The Break:
Support and Resistance levels do not always hold, they are often broken, so you are not always able to use the bounce method, however you can use this to your advantage. There are two ways you could do this, the conservative way or the aggressive way.
The Aggressive way:
Wait for price to break through a support or resistance level significantly before entering your position
The Conservative way:
This method requires patience, this is because instead of entering on the break of a support or resistance level, you have to wait for price to pullback and retest the support or resistance level and bounce back out, this is a much safer way as it confirms that the original breakout was legitimate and not a fake out.However bare in mind that this does not always happen and sometimes price just carries on going after a break.