Understanding support and resistance zones
Beginner course. Technical Analysis
Understanding support and resistance zones
Support and resistance zones are fundamental to technical analysis in trading.
Traders use these zones to forecast price movements, identify potential entry and exit points, and set stop-loss and take-profit orders.
This guide will provide a detailed overview of support and resistance zones, including how to identify and draw these crucial levels and their significance in trading.
Support Zones
A support zone is a price level where price tends to find support when it's falling. This means the price is more likely to bounce off from this level rather than break through it.
Support zones are identified by analyzing historical data where the price has consistently rebounded after touching a specific level as shown below:
Note that the point marked above is a support and resistance zone, not a level. Which means it’s an area where prices tend to bounce from. Sometimes price can touch and push slightly past it, or sometimes it can fail to touch it closely.
How to Draw Support Zones
To draw a support zone, follow these steps:
Identify at least two recent lows where the price has bounced back.
Switch to the line chart to see these bend more clearly.
Put a horizontal line below these bends, make sure it can be extended to the right to predict where future support may occur.
Wait for the price to retest this zone.
Buy.
Put your stop loss slightly below the zone.
Note: The strength of a support zone is gauged by the number of times price has retested it and bounced back.
However, there are times the support zone is breached, which often turns it into a resistance zone as shown below:
Once the breakout happens, you can wait for price to push higher to the support zone that just turned resistance and sell.
Here are the point to note before selling:
The bends price made when touching the support zone should be very sharp. I.e. look like a V. To confirm this switch to line chart. Example:
Notice how price formed a V every time it retested the zone? This means it’s a very strong zone.
The breakout from the zone should be very strong too i.e. driven with strong momentum usually just one candlestick. Avoid zones broken by so many candlesticks. Example:
Wait for the price to close below this zone, then retrace back to retest it.
Sell
SL slightly above the zones.
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