Support and resistance are points in the market that have been tested multiple times in history. How do you know that you have identified the right area of support and resistance? That’s what we will discuss in this section today.
Support And Resistance
The forex market follows a particular predominant trend; whether bullish or bearish. However, the market is not constantly following the trend; as the market follows the trend there will be instances where it pulls back and then continues with the trend. This movement provides areas of support and resistance which provide very useful predictions in the market.
“Resistance” is the highest point the market reaches before the market pulls you back. The resistance levels show a surplus of sellers. A support level is a point at which the market reaches before it continues with a predominant uptrend. Support levels always indicate that there is a surplus of buyers. It is easy to spot the support and resistance levels as these are the points you will find most tested in the market. When the market is above, it is a support level. When the market is below, it is a resistance level.
key = places the market has retested on the SR level
When the market is above this SR level it becomes a support level and when it is below the level becomes a resistance level. The support level turns into the resistance level when the market, being above, breaks through the level and goes below. The resistance level turns into the support level when the market, being below, breaks the level and moves above the level.
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How To Draw The Support And Resistance Levels
- Zoom out to get a better view of the market trend.
- Draw the most obvious levels you can spot.
- Adjust your level to ensure that it touches the greatest number of points in the market; the market touched this level many times in history.
NB: the S&R level is the level touched most point in the market.
How To Trade Price Reversal On The Support And Resistance
- Look out for a power move in the market; this can be symbolized by the formation of large candlesticks. A power move is a strong projection in the market to reach a target.
- Evidence of a strong price rejection on the candlesticks.
- The larger the candles the better; this is because with big candlestick moves mean the areas of resistance will be further from each other thus the resistance you will face becomes less when the market wants to retest.
- The longer the time that the price is away from the market resistance the better. This is because when the market retraces it will have a bigger move with more pips to capture. Use higher time frames to capture such moves as any move that happens in the higher time frame will also reflect in smaller time frames. This may also come as a big move you can capture as a trader.
NB: When there is a strong move in the market to reach a point, which you can see by the size of the candlesticks, many times the rate of reversal will also be as strong. Using this strategy, you will be able to capture big reversal moves.
Trading Breakouts At Support And Resistance
Contrary to reversal trading; in breakouts, you don’t want to see a power move into the market structure.
What You Need To Look At
Higher lows into resistance
This shows that the bulls are pushing the price higher and higher thus bringing about an uptrend.
This shows that the bears are gaining strength as they are able to push the market lower and lower, thus portraying a downtrend. These points of resistance are very useful when setting your targets, take profit and stop loss.
Double Top And Double Bottom Candlestick Patterns On SR Level
The double-bottom candlestick pattern indicates the reversal of a downtrend. This is when the market “tests” the support and resistance levels twice before a reversal of a downtrend.
The double top is a candlestick pattern indicating the reversal or an uptrend. This is when the market tests the resistance level twice forming a “w” and then reverses to form a downtrend.
You will notice that the shadows of the candles break past the support and resistance levels but end up closing above them. It is important not to be misled by the size of the candlestick wicks as they may just be manipulations in the market or a market spike.
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