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The Basics Of Support And Resistance

BitForex Editor
Oct 26, 2020

Every trader, at some point in approaching the market, needs to implement the concepts of support and resistance. Trading the financial markets requires more than instincts. Ideologies and strategic approaches like support and resistance are needed to demystify the market. Interestingly, mastering support and resistance makes a trader versatile in indices, cryptocurrencies, gold, and Forex markets, so it's a plus.

These concepts are pretty basic and easy-to-use, however, they could get quite technical to master. Spotting them out on charts could really get tricky even for traders with years of experience. As they do not follow the 'Textbook' analogy on live charts. However, we'd help you understand the basics of these concepts to help keep you informed when analyzing live trading charts. Let's get started!

What Are Support And Resistance?

Taking a look at support and resistance at the most basic level, they are easy-to-use concepts. Watch this; a price locates a level where it becomes slightly difficult to breakthrough. Now, this level acts as a mild, moderate, or strong barrier to which it bounces back after hitting the level. To picture this most perfectly, I like to use the 'floor and ceiling' analogy while explaining support and resistance.

On the other hand, if you toss a ball into the air in a closed room, it hits the ceiling irrespective of the number of times you make the throw. When a resistance level is spotted on a chart in the market, the price of such an entity respects that barrier. This means that provided the market hasn't set a cause for a new direction(often determined by a few factors), the price remains within that level. For short, the support level is the 'floor' while the resistance level the 'ceiling'.

For those who need a one-time definition to keep to memory; the support level is a zone of demand, while the area covered below the resistance is the zone of supply. If that's all there is to know about support and resistance, why then is it technical to master? This is because unlike the textbook analogy where they are indicated as a margin(lines), the real-world (live charts) aren't always as precise as that.

The laws to which the markets are driven are the reasons why traders should not expect the support and resistance levels to be on a straight margin. Instead, they are considered as an area of the price range. Simply put, they are areas to which the current price obeys the barrier within certain a price range. When traders know to always view and perceive support and resistance as an area rather than a line, they can now leverage the strategy in making profits.  

Why Should Traders Master Support & Resistance?

To make this easier, there are two major approaches to trading any financial market. Traders either choose to be technical analytics or fundamental analytics. Using technical analysis is basically trying to decipher the chart by predicting the next market move from the trails the prices leave behind. Alternatively, traders who trade majorly from the updates and information on a commodity or entity trade using fundamental analysis.

That's not our area of study today. We needed to dive into that because support and resistance is a major instrument for technical traders. To know how effective and how important mastering these strategies are to your success as a trader, we'd share a few pointers;

Understanding Market Psychology

You should know that amongst the few world deadliest impossible things to do, understanding the financial markets is the top on that list. No one, even traders with decades of experience still have a grasp of how any financial market operates. This is mainly because of the diverse factors that determine the direction to which prices react every hour. Therefore, to make your decisions based on facts and also avoid lots of guessing around, you need a few strategies.

Understanding supports and resistance areas play an important role in building up the market psychology of a trader. Once you follow the price area trend from previous support and resistance areas, you can almost predict what range the current price lies between. Mastering these concepts is what separates profitable traders from those who incur more losses than profits.

Increased Liquidity

Like we mentioned earlier, support and resistance should be treated like an area, not a margin. When these areas are spotted by a good trader who has mastered the strategy, they can take advantage of the situation. Of course, since other traders can spot out these areas as you can, it's more likely to cause an increase in liquidity. With everyone having their stop losses and take profits within a range, the liquidity in such areas increases over time. Ideally, these are zones to which large investors and traders initiate trades or exit their positions.

Risk Management 

Trading is considered an investment with the most risks of all times. Aside from the fact that you can't predict the future price, there are just one too many factors determining the direction of an entity. This is why traders need to ensure they master risk management at all costs. Knowing when to initiate trades and exit a position differentiates you from the average 99% losers estimated in financial trading. Interestingly, support and resistance help traders manage market risks just fine.

When traders master these zones, they engage the market with minimal risk decisions which often leads to profits. Basically, one of two things is always predicted in the area of support and resistance. Either the price, of course, bounces back from the barrier area, or it breaks away heading towards the next support and resistance. With this prior knowledge, traders to large extent can now strategize around this basic theory while making more wins than losses.

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