Tips For Using Support And Resistance

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Tips For Using Support And Resistance

This is a compilation of tips and tricks I know for trading with support and resistance lines. The tips range from where to draw the lines, to how to confirm the lines, ways to trade and how to derive some targets. For more information on what, why and how support and resistance lines work check out my other articles on the subject. I have been using these lines for over a decade and can say, with confidence, that they are a very valuable tool for traders and one that should not be ignored. No other indicator can give you as precise a target for potential entries and exits.

Support and resistance lines denote areas where traders are buying and selling stocks. When there are enough buyers to maintain or lift prices it said that the market is in support prices. When there are enough sellers to maintain or push prices lower than it is said that the market is resistant to higher prices. The interaction of these two forces is the fundamental driver of market action. Corporate data, economic data, news, expectations, fear and greed lead market participants to choose one side or the other and that is what we read in the charts.

Time Frame – Time frame is an important aspect of support and resistance. Longer term support will be stronger than shorter term support, and also shorter term resistance. It is necessary to be aware of where these lines fall in higher time frames than what you are trading in order to avoid false signals. For example, a resistance line drawn from a chart of weekly prices will likely provide enough resistance to negate a signal taken from a chart of daily or hourly prices. You can avoid this by drawing lines on weekly charts in one color, daily in another and hourly in another. This way you can tell which lines are more or less likely to affect your trades once prices action reaches them.

Long Lasting – Support and resistance lines are one of the longest lasting technical indicators and signal generators I know. Once drawn, these lines can provide target areas where signals can be found far into the future. Lines I have draw during reversals, continuations and break outs years in the past without fail affect price action in the future whenever price action returns to that level. This is an example of the underlying idea behind why support and resistance lines work. These lines mark price levels where buying or selling was heavy, or reversed, or consolidated. Once price action move on from this point the market is left split between losers and winners. When price action returns to the same level losers will want to get out and/or winners will want to get in. Look at the chart below. A support level established in 2004 affected prices 4 and 10 years in the future.

Gaps And Windows – Gaps in price action, otherwise known as windows, are places on the chart where price action moves so rapidly as to create a gap between one day, or one candle, and the next. This can be caused by good or bad news of a wide variety but regardless of the cause, presents the same opportunities for trades. First, gaps and windows provide strong support and resistance. This is usually because the market moved so fast that many traders were left out. As prices retrace back to the gap level those traders who were left out of the move will scramble to get into the next one. Now, gaps provide not one, but two different levels of S/R; the upper and lower ledge, or window sill. In the case of an uptrend and up gap, the upper sill will provide support but if broken, the lower sill becomes the target. The same is true in reverse for down trends. I should also note here that most gaps will eventually close, that is, once price gaps up, sooner or later it will retrace all the way to the original price level.

Fibonacci Retracements – Fibonacci Retracements are a great tool for finding support and resistance levels but also for confirming a support or resistance level. Not only that, depending on which retracement level is closest or coincident with your support/resistance line you can also make further predictions about price is heading.

Reflexive Theory Of Support And Resistance – It is well known that support and resistance lines that have been broken will reverse in nature. This means that if prices are moving up and break through a known resistance level that resistance level then becomes support. When prices retrace to the break out level you can expect for buyers to step in. Why is this? Think about it like this; resistance is there because a large part of the market wants to sell, the breakout occurs because over time buyers over power the sellers. When prices move past this level they can move fast which can leave a lot of potential bulls out of the market, and also prevent bears from exiting at a price of their choosing. When prices retrace to the break out level it provides an additional exit for those on the loosing side of the line and an additional entry for those on the winning side. Look at the chart below, this is the same chart as above but with different annotations. See how support held in 2008, then broke and then provided resistance in 2009. See how prices approached that same resistance line in 2020, were held back. See how that line was then broken in 2020 and became support.

How To Use Support And Resistance Lines When Trading Binary Options

One of the fundamentals of trading binary options involves the use of support and resistance levels. They are plotted on a chart to help determine the direction in which asset prices are likely to head. You can imagine how useful they are when they have been plotted accurately.

A lot of beginning traders – particularly those who are unaccustomed to charting price action – think support and resistance lines are complex. In reality, they are relatively simple. Once you understand them, you’ll have a powerful tool at your disposal for executing profitable binary options trades.

Below, we’ll take a close look at using support and resistance lines to make smart trades. We’ll start with definitions and then work our way toward using this piece of technical analysis to make a consistent profit. It doesn’t matter whether you’re trading binary options for gold, stocks, or currency pairs. Making trading decisions based on support and resistance levels works.

Support And Resistance Lines Explained

A support line is the level below which the price of an asset has been unable to fall during a given period. Every time the price approaches this line, it slows and reverses direction. For example, suppose the price of Google’s stock has bounced between $775 and $810 over the last month. $775 would represent a support line.

A resistance line is the level above which the price of an asset has been unable to climb during a given period. It is essentially the opposite of a support line. Each time the asset’s price rises toward this level, it begins to pull back. In the “Google stock” example above, $810 would represent a resistance level.

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The time period over which you should plot support and resistance lines varies by your goal. A lot depends on your trading activity. For example, if you’re simply buying and selling shares of Google, you can get away with tracking the levels from month to month. On the other hand, if you’re trading short-term binary options, you should plot them at 10 to 15-minute intervals. Otherwise, you’ll miss opportunities to execute trades ahead of the price curve (This will become clearer in the following sections.)

Why Support And Resistance Lines Are Important

Traders use support and resistance lines to identify price patterns. These patterns can prove useful in determining the direction prices are likely to move. With such signals, traders can execute calls and puts with a higher level of confidence. In fact, they can get ahead of increasing buying and selling volume to leverage price momentum.

Let’s use our “Google stock” example from earlier to demonstrate how this works…

Recall that shares of Google have (hypothetically) bounced between $775 and $810, forming support and resistance levels at those points. Let’s suppose that over the next 30 minutes, the real-time price falls toward $775.

You know from studying your charts that Google has bounced back from that support level multiple times. It is likely to do so again. You also know that trading volume is likely to increase once the price per share reverses direction and heads upward. By putting in a call binary option for Google near $775, you stand to profit from the move. Additionally, as trading volume increases on the buy side, the price per share will likely gain momentum.

A similar binary options trading strategy can be used with an asset’s resistance level. But instead of executing a call binary option, you would execute a put option. This is done in anticipation of the price reversing and moving downward.

Identifying “True” Support And Resistance Levels

Thus far, we’ve defined support/resistance levels and explained why traders use them. But in order to use them, you need to be able to identify them.

The only way to come up with price levels that offer reliable support or resistance is to chart an asset’s price action. There are a lot of ways to do it. Here’s one way to do it manually…

First, as the asset’s price moves upward, make a note of each high point it reaches before it reverses direction. Second, as the asset’s price moves downward, note each low point it reaches before it reverses direction. Do this in 3-minute intervals over the course of an hour.

Eventually, you’ll begin to see support and resistance levels form. Each time the price hits the high or low level and rebounds from it, the levels grow stronger. This doesn’t mean the price cannot break through. In fact, you can count on it doing so at some point. But the stronger a support/resistance level is, the more likely a “breakout” will signal the formation of a new level rather than mere happenstance.

Be careful to avoid falling for fake support and resistance levels. Prices often bounce up and down within small regions found between the actual high/low points of an asset’s price range. If you wrongly identify these mini-bounces as forming support and resistance levels, you’ll make bad trades with unpredictable results.

Don’t scoff. This problem doesn’t merely trap beginning traders. A lot of experienced traders fall for it, too. Our advice is to learn how to plot and use candlestick charts (learn how here), and treat them with the respect they deserve. If you plot an asset’s price action carefully, there should be no excuse for misidentifying its support and resistance levels.

A Few Last Tips For Using Support And Resistance Levels

As we’ve mentioned in the past, there’s no better teacher than experience when it comes to learning how to trade binary options profitably. There’s a lot of valuable insight to gain by placing trades that is not available in any other way.

Having said that, it’s important to be prepared. Here are a few last tips for getting the most out of support and resistance lines:

#1 – Watch for breakouts. As we noted above, prices can and do cross their support and resistance levels on the way to forming new trendlines. Use the current levels as guides, but realize they will change over time. Think of the changes as opportunities to make a profit.

#2 – When charting the price action for an asset, expect to see at least two price bounces before considering a given high or low to be a resistance or support level (respectively). Preferably, you want to see three bounces, since each one strengthens the signal.

#3 – Asset prices tend to test support and resistance levels without breaking through them. You’ll likely become nervous when this happens. It’s normal. Calm your nerves and learn to trust your charts. When a breakout occurs, it usually does so in the context of forming a new price trend. Your charts should give you a heads-up about that in advance.

#4 – Don’t get lazy with your charts. The more you trade a particular asset, the more you’ll feel as if you know how its price will move. Be warned that binary options have a way of surprising even the most experienced traders. Intuition is important. But tracking price action, keeping accurate charts, and collecting reliable data are much more so.

If any of the above concepts seem complex and confusing, don’t worry. With time, you’ll find that they are actually simple to understand and apply. Most of the complexity is due to a lack of familiarity.

Bonus tip: we recommend setting up a few accounts at reputable binary options brokers that offer free demo accounts. TradeRush, 24Option, and Banc De Binary are great places to start. Get some experience by using the demo accounts to place risk-free trades. Then, jump in with a small bit of your own cash. Don’t be surprised if your binary options expire in the money.

The 7 Types of Support and Resistance You Need to Know

Markets ebb and flow; they go up, they come down and they move sideways. The primary ways we make sense of these movements are analyzing the price action as well as the levels in the market where price bounced higher or rotated lower, we call these levels support and resistance.

Support and resistance levels form the foundation of technical analysis and they help us build a framework from which we can understand the market. For price action traders, support and resistance levels help us plan our stop loss placements and profit targets, but perhaps more importantly, these levels give us a way to make sense of the market in terms of what it has done, what it is doing and what it might do next.

As I teach in many of my lessons, my overall trading approach can be summed up by the acronym T.L.S or Trend – Level – Signal. This lesson is primarily about the L (levels), I discuss the Trend and Signal portion of T.L.S. in other lessons, here are a couple:

In this lesson, we will not just be showing you how to draw support and resistance levels, but we will delve deeper and discuss how to use these levels to find high-probability trades in range-bound markets, determine trends, define risk & targets and more. I hope you enjoy this lesson and refer back to it often, as it is jam-packed with helpful explanations and examples…

The 7 Most Important Types of Support and Resistance & How to Use Them…

  • Traditional swing highs and lows

Perhaps the most important support and resistance levels are traditional swing highs and lows. These are levels that we find by zooming out to a longer time frame, typically the weekly chart or possibly even monthly. This is where we get a ‘bird’s eye view’ of the market and the major turning points within it. What we want to do is simply identify the obvious levels that price either reversed higher or lower at and draw horizontal lines at them. These levels do not have to be ‘exact’, they may intersect price bars or they may be zones rather than exact levels. You can consider this the first step in regards to support and resistance levels and it’s the first thing you should do when analyzing any chart.

Notice the ‘bird’s eye view’ we get by zooming out to the weekly time frame. Here we can identify major support and resistance levels, trends and trading ranges…

Next, we want to zoom down a time frame, to the daily chart, to ‘fine tune’ our levels some more. The daily chart is the primary time frame for finding trade setups, so it’s important we understand the broader picture on the weekly chart but also that we have identified the shorter-term levels on the daily. I have a good video on this topic of mapping the market from higher time frames to lower, be sure to check it out. One key point to remember is that when you zoom into the daily or even the 4 hour or 1 hour, you always leave the higher time frame levels on your chart as they are very important.

Notice, by zooming into the daily chart from the weekly example above, some of the same weekly levels are still in play as well as some new shorter-term daily chart levels we couldn’t really see on the weekly…

  • Stepping swing point levels in trends

Have you heard the saying “Old support becomes new resistance and old resistance becomes new support”? This is referring to the phenomenon of a market making higher highs and higher lows or lower highs and lower lows, in an up or downtrend. We should mark these ‘stepping’ levels as they form, then when the market breaks down or up through them we can look to trade on retracements back to those levels, also known as trading pull backs. This also gives us a way to map the trend of a market – when you see this stepping phenomenon you know you have a solid trend in place.

These levels are good entry points as well as points to define risk or stop loss points. You can place your stop loss on other side of these levels.

For example, in the chart image below, we see a clear downtrend in place. As price broke down past the previous support level, that level ‘flipped’ to resistance levels that act as high-probability entry levels if price retraces back up to them.

  • Swing point levels as containment and risk management

We can look to sell or buy at swing points even if they are not part of a trend. Markets spend much of their time consolidating and in trading ranges, so we should be able to find trades within those market conditions, not only in trends.

We can simply use the most recent swing high or low as a risk point to define our next trade, which you can see in the chart example below.

In the image below, notice that price broke lower, down through support, then it stayed contained under that level, which was then acting as resistance. We could look to sell at that level or just below if price stayed contained below it. In this way, that level is defining where we will look to take our next trade and we know if price moves beyond that level our trade idea is invalid, so placing our stop loss just beyond that level is obvious. We can also use recent swing points as profit targets. In the example below, notice how we could use the recent swing lows as profit targets.

  • Dynamic support and resistance levels

Next, let’s talking about dynamic support and resistance levels. What I mean by dynamic is moving levels, in other words, moving averages. A moving average moves up or down according to what price is doing, and you can set it to consider a certain number of bars or time periods.

My personal favorites are the 21 and 50 period EMA or exponential moving averages. I like to use them on the daily chart time frame mostly, but they can also be useful on the weekly charts. These ema’s are good for quickly identifying the trend of the market and for joining that trend. We can watch for price to test the moving average after breaking above or below it, and then look to enter at or near that moving average. Ideally, the market will have proven itself by testing the level and bouncing previously, then you can look to enter on that second retrace.

Here is an example of the 50 period EMA being used to identify a downtrend as well as find entry points within it. Ideally, we will look for a 1 hour, 4 hour or daily chart price action sell signal as price nears or hits that level on a retrace back up to it in a downtrend like this…

The 21 period EMA can be used in a similar manner as we see below. Keep in mind, the shorter the EMA period the more frequently price will interact with the EMA. So, in a less volatile market you may wish to use a shorter period ema like the 21 rather than a longer one like the 50.

  • 50% Retracement levels

Whilst I don’t use traditional Fibonacci retracements and all their many extension levels, there is a proven phenomenon that over time, markets often hold the halfway point of a swing (circa 50 to 55% area), where market makes giant moves, retraces, then bounces in original direction. This is partly a self-fulfilling event and partly just a result of normal market dynamics. To learn more, checkout this lesson on How I Trade 50% Retracements.

Look at this example chart showing a large up move that retraced approximately to the 50% level on two different occasions, providing a very high-probability entry scenario, especially on the second bounce…

  • Trading range support and resistance levels

Trading range support and resistance levels can provide many high-probability entry opportunities for the savvy price action trader. The main idea is to first identify a trading range, which is basically just price bouncing between two parallel levels in the market, and then look for price action signals at those levels or look to fade the level on a blind entry. By fade the level, I mean if the market is moving up and at the key resistance of the range, look trade the opposite way, i.e. sell. Or, you look to buy the support of the range. You can literally do this until price clearly breaks and closes outside of the range. This is a MUCH better approach than the one most traders take in trading ranges – trying to predict the breakout before it happens and constantly getting whipsawed as price reverses back into the range.

Note, in the example image below, we had a large trading range as price was clearly oscillating between resistance and support. We could have entered on the second test of resistance (short) or on the second test of support (long) either blindly or on a price action signal like the pin bar signals we see at the support below.

  • Event area support and resistance

The final type of support or resistance we are going to discuss today is event areas. Event areas are a proprietary form of support and resistance that I expand on in detail in my price action trading course, but, for now, let’s make sure you have a good basic understanding of them.

Event areas are key levels in the market where a major price action event occurred. This can be a big reversal or clear price action signal either of which led to a strong directional move.

In the example chart below, you can see a clear event level that was formed after a strong bearish reversal bar on the weekly chart (there was also a large daily chart bearish pin bar there). As price approached that level on a retrace some months later, we would have wanted to be sure to have that level on our charts as it was a strong level to look to sell at either on a blind entry or on a 1 hour, 4 hour or daily chart sell signal.

Conclusion

I hope you have enjoyed this support and resistance tutorial. We have gone over the major types of support and resistance and how I use them as indications of market condition (trending or range bound), levels to look to buy or sell from, levels to define risk and as a framework to understand what the market has done, what it is doing and what it might do next. When you combine a solid understanding of support and resistance levels with price action and market trends, you have the triumvirate of trading: T.L.S, which you can learn much more about in my Price Action Trading Course.

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