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Support and Resistance Trading Essential Ultimate Guide 101

Support and resistance trading
Support and Resistance trading

Support and resistance trading is the most important building blocks of profitable trading. In the cryptocurrency, forex, and stock markets, there are many traders who employ support and resistance trading strategies. This blog will teach you all the ideas and how to use support and resistance trading for the biggest returns.


Table of Contents


What is support and resistance trading?

The technical study of price movement and price behavior is fundamental to trading.

Technical analysis and Price Action Trading therefore begins with a study of the support and resistance.

When we look at the historical price movement of any instrument, for instance – Crypto, Forex, or Stocks.

We can see that there are some particular price zones from where the direction of the price move changes.

Resistance line
Prices move lower from a specific area—becoming a resistance for prices.

This price level or price zone acts as resistance to prices.

Whenever prices are moving higher, and they get close to it, price direction changes.

Another way to think of resistance is the area in a price chart where sellers become active and the price tends to move downwards.

Similarly, the point in a price chart where buyers become active and prices tend to rise higher is known as support.

When prices are heading downwards and approach support, prices climb upward.

Support line
Prices move higher from a specific area—becoming a support for prices

Why Does Support & Resistance Trading Work?

Many traders make the error of projecting price reversals from a single price level. To get to the point, you must first grasp how support and resistance function.

Two types of framework describe the working of S&R:

1. Demand and Supply Framework

Let’s take a very practical look at supply and demand:-

Imagine a retail seller who sells watermelons all year long.

He is aware that demand for his watermelons rises in the summer, but the supply also rises because there is a large crop during that time.

As a result, watermelon prices tend to be stable, but once the crop has been consumed, there is a shortage on the market, and watermelon prices soar.

This is the basic idea behind price , demand, and supply.

Now, if you look at the same thing from the perspective of the market, you need to consider two crucial factors –

  • The price range in which the majority of market participants sell that particular asset is known as the supply zone. The demand range is the range in which the majority of market participants want to buy that particular asset.
  • These zones exist primarily as a result of how most market participants interpret prices psychologically. Prices that are considered to be good to buy by the majority fall into the demand zone, while prices that appear to be good to sell fall into the supply zone.
Demand and supply
Demand & Supply Zones

2. Order flow and Psychology Framework

There is consistent order flow in liquid markets.

What this means is that traders, whether institutional or retail –

place orders in accordance with their own goals and feelings regarding price.

Price that is high for me may be low for another person, creating a seemingly random distribution of price movement. The most important foundation of technical analysis, along with support and resistance is human emotions and psychology.

An example of human psychology in order flow:

Let’s use an example to better understand this: Suppose a trader wants to purchase a particular stock at a price of 100; at the moment, the price is 95.

Who might be a potential seller at this price?

1. Who purchased the stock at a substantial discount and is seeking to make a profit.

2. Who would like to start a new short position because they think the price is excessive and might drop.

What will the above sellers be thinking if there are numerous buyers placing buy orders at 100 along with our trader driving prices higher and above 100?

The first possibility is that the sellers who booked profits at 100 may believe they have closed their positions early and want to join the rally.

Given that prices are rising and that there are already buy orders from traders who are participating in the rally, those who have recently opened short positions at 100 will be panicked due to unrealized loss and their stops will be hit if prices move higher.

All of the above effects create a strong support area for the price near 100. Even if the price does return to this level, it is still possible that traders who missed the early buying opportunity will open new long positions.

In the case of resistance, the opposite happens and prices fall from a level, creating downside pressure for traders who have fresh buying positions and sellers who join in for the downside rally.

Important :-

It is vital to notice that in order for support and resistance to work precisely as before, every trader must place the identical order flow at the same moment as before.

Is this possible?


That is why it is critical that you see support and resistance as areas rather than particular prices.

[READ : More about Charts and patterns]

How do you determine support and resistance?

Now that you have a basic understanding of support and resistance trading and its significance in technical analysis, we can concentrate more on “how to perform” part-

1. The first thing is to know the timeframe for which you want to determine support and resistance. While the fundamental analogy holds true regardless of timeframe, higher timeframe support and resistance are more significant than lower timeframe support and resistance.

2. Identify those price areas from where the price move has changed the direction.

areas of price change
Area in chart from which price move is getting changed

3. Try to connect these areas with a rectangle (don’t use lines; remember, we’re just identifying zones, not prices).

support and resistance
Support and Resistance Zones

As you can see from the examples below, there isn’t always symmetry in price deflections.

Identifying significant price changes and areas of resistance

Another important thing to note here is that there are all kinds of market participants—big hedge fund managers , institutional traders, banking and financial institutions—and because of their huge position sizing, these kinds of variations occur also the concept that we discussed about order flow is very much relevant here.

To ensure a much wider price range and prevent fake breakouts and stop loss hunting, try to increase the width of the rectangle used for support and resistance in accordance with the volatility of the instrument you are trading in.

volatility and S&R
Volatility adjusted resistance zone

You can practice and try to draw these zones for now; once you have a good eye adjusted to the market moves and price zones, it will be very easy for you to precisely draw the support and resistance. The concept of volatility and its implications is a separate topic, and I will be covering it in my next blog.

Best support and resistance indicator

Moving averages, Fibonacci retracements, and trend lines are just a few examples of support and resistance indicator for dynamic support and resistance, but our main objective is to use indicators to increase the confluence of static support and resistance. For this reason, the best support and resistance indicator that perfectly combines S&R is the Pivot Points Indicator.

For greater confluence and accuracy of price reversals, the idea is to use both pivot points and conventional S&R zones, as shown below:

support and resistance using pivot points
Pivot points with support and resistance

By utilizing pivot points with S&R, we accomplish two objectives:

  • Additional evidence of the price reversal area
  • The accuracy of support and resistance as zones increases.

Another example :-

Pivots with s&r
Using pivots with support and resistance -2

Used Case : Support and resistance in Crypto

A very profitable support and resistance trading opportunity recently appeared on the Bitcoin daily candle chart. By using the S&R method, a sizable profit in bitcoin could have been realized.

bitcoin futures
Source : Trading view BTC CME FUTURES on the daily timeframe – 9 may 2022

Used case: Support and resistance trading in Forex

The example that follows employs the same support and resistance trading methodology and is also incredibly profitable, but this breakout took place after resistance was broken: –

usdinr chart for support and resistance trading
Source: Trading View USDINR on the daily candle timeframe – 3 march 2020

Key Takeaways

  • To use support and resistance trading profitably, it is crucial to comprehend the order flow and trading psychology of traders.
  • Support and resistance trading works on every timeframe, but the significance of the higher timeframe is greater.
  • To fully account for volatility, S&R should be drawn as zones rather than lines.
  • To get better accuracy, pivot points can be used alongside S&R.
  • In cryptocurrencies, forex, commodities, and stocks, Support and resistance trading is equally as effective.

[ Suggested Reading :Top 10 Candlestick Patterns For Trading ]

Author is Senior Technical Analyst
At Bulls Arena Trading
info@bullsarenatrading
New Delhi
India

BULLS ARENA TRADING

Author

  • RUPIN JOSHI

    Rupin Joshi Senior Technical Analyst, Finance Writer, and Trading ExpertRupin Joshi is a seasoned Trading Expert with over a decade of experience. As a prolific Finance Writer, he has authored numerous research papers in Technical Analysis and Price Action. Rupin's insights and strategies have earned him global recognition, including awards in Trading Competitions. Currently serving as the Director at Bulls Arena Trading, he continues to empower traders and investors with his expertise and innovative approaches.

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