Traders who generally base their trading decisions on technical analysis understand the value of support and resistance levels. It is through these levels that opportunities in a chart become visible. Furthermore, support and resistance levels present the possible levels where price levels are expected to bounce or reverse. So how can you master the use of support and resistance levels to reduce risks and improve trading skills? Here’s a comprehensive guide to using support and resistance on Pocket Option.
What are Support and Resistance Levels?
Before we can head right to mastering support and resistance, it is important to know what they are and their functions. The image below shows an example of support and resistance levels on an actual chart in Pocket Options. Red arrows and red lines show the Support levels and points of support, while the green arrows and lines show the resistance levels and points of resistance.
‘Support’ refers to the price level at which a downtrend is assumed to stop or pause before bouncing back up. Support levels are located below price movements or below swings. Furthermore, the support level is assumed on the chart by referring to past or historical price movements. To draw support levels, refer to previous price levels with a high concentration of buyers or sellers – usually at consolidation levels, and draw a horizontal line that connects the majority of price highs and price lows.
The main purpose of support levels is to establish a floor or bounce level where a downtrend is expected to bounce.
‘Resistance’ level on the other hand is the price level at which an uptrend is expected to pause or stop before reversing downward. Resistance levels are found above price movements or swings. To draw resistance levels, refer to previous price movements and draw a horizontal line that connects the majority of price highs and price lows.
The main purpose of resistance levels is to establish a roof or reverse level where an uptrend is expected to reverse.
Diagonal Support and Resistance
There will also be instances when the support and resistance levels are positioned diagonally in the same direction of the trend. The means, the support, and resistance levels have the same direction as the trend.
Drawing diagonal support and resistance levels simply requires drawing a line that connects the average highs and average lows respectively (as shown on the above image).
Consequently, drawing diagonal support and resistance levels identifies candlestick pattern formations on the chart such as bullish flag pattern, head, and shoulders pattern, bearish flag pattern, and others (as shown on the image above). For a more detailed discussion about candlestick pattern formations and their meaning, please check out our article about the frequently traded candlestick patterns on Pocket Option.
How to Use Support and Resistance Levels
With the assumption that support and resistance levels show where the price is likely to bounce or reverse, the support and resistance levels present ideal to buy and sell signals.
Referring back to all the sample images, all green arrows show the resistance points and levels which indicate the ideal sell levels on the chart. Selling or ‘shorting‘ on all the green arrows are all assumed to be profitable from all the examples. On the other hand, all red arrows show the support points and levels which indicate the ideal buy levels on the chart. Buying or going ‘long‘ on all the red arrows are all assumed to be profitable from all the examples.
In the example below, a horizontal S & R and diagonal S & R are established.
From the horizontal support and resistance level on the image, the price reversed twice immediately after touching or reaching the resistance level. An ideal sell point in this regard would be at the third point (shown by the red arrow on resistance level). At the same time, the ideal buy point would be after the price bounces for the fourth time on the support level.
On the other hand, the diagonal support and resistance level on the image shows that the price reversed multiple times after reaching or touching the resistance level. The Ideal ‘short’ or sell point in this regard is shown by the red arrow while the ideal entry or buy point would be shown by the green arrow from the support level.
One thing to note from this particular example is that there are times when the price tends to break through the support and resistance levels. Whenever this happens, a ‘breakout’ occurs – which simply means the price breaking out of the trend line (encircled on the image). When breakouts happen, it will signal the end of the current support and resistance formation. Breakouts present an opportunity to sell or buy depending on its location.
Support and resistance levels are indeed a helpful guide to determine possible reversal and bounce levels on a chart. However, the use of support and resistance levels alone cannot guarantee the success of a trading decision.
While it is great to know how to draw support and resistance levels on a chart, it is also important to know candlestick patterns as well as all other concepts and strategies that make use of support and resistance levels. In this regard, the concept of support and resistance level is the basic concept of all strategies. Being well-versed in using support and resistance levels on a chart can enable a trader to understand any technical analysis.
If you want to master how to draw support and resistance levels on any chart, the best way to do so is by practicing. Pocket Option offers a demo account where you can trade real-time assets using virtual funds. It is only through constant practice with actual charts that you can effectively utilize support and resistance levels.
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Enjoy trading and good luck!
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