Support and Resistance is one of the most familiar and used concepts among Price Action traders. It is considered an important factor in the trading process.
New Price Action traders often misidentify support and resistance levels. They don’t even know which resistance level is really important to open trades safely. So today we will go into an extremely important topic, which will serve as the basis for all future Price Action articles. It is Price Action trading with support and resistance levels.
- 1 Why is support and resistance trading so important to Price Action?
- 2 Using Swing High and Swing Low as support and resistance levels in Price Action
- 3 Congestion and price zone with many rejections
- 4 Using Moving Averages as dynamic levels
- 5 Fibonacci
- 6 Identify support and resistance on large timeframes
Why is support and resistance trading so important to Price Action?
Support and resistance are levels where the price is likely to slow down or reverse. When the trend is down, support levels are created where sellers temporarily (or forever) cannot push the price lower. Conversely, in an uptrend, where the bulls cannot push higher are the resistance levels.
Thus, support and resistance are price zones where buyers or sellers are outnumbered. They are willing to buy more or sell more to benefit themselves. Therefore, that price zone will be able to stop the previous uptrend or downtrend. When entering orders at these price zones, your chance of winning will increase a lot compared to a random place on the chart.
If you know how to combine with Price Action pattern at these price zones, you will have a very good trading strategy with an extremely attractive rate of return.
Here are a few effective ways to accurately identify support and resistance.
Using Swing High and Swing Low as support and resistance levels in Price Action
Swing High and Swing Low are some of the first and most basic concepts of price movement analysis that any Price Action trader should know. From Swing High – Swing Low, traders have developed famous trading methods such as trend follower, Price Action trading with support and resistance, price patterns trading. Due to this fundamental and extremely important characteristic, the way Swing High and Swing Low are determined can greatly affect our trading results.
Swing High and Swing Low are the reversal points of the previous market. So they are essentially potential support and resistance levels. Connecting the horizontal Swing High/Swing Low, we get the support and resistance levels.
Congestion and price zone with many rejections
Crowds in the market execute a lot of buy and sell orders at the congestion. Since then, a trading habit has been formed at this price zone. So when the price has the opportunity to retest the resistance levels in the future, they will become strong support and resistance levels reliably.
Or you can find support and resistance based on price zones with many rejections. When it comes to price rejection, you must immediately think of candles with long lower shadows like Doji Pin Bar, Long Tailed Candles, Long-Legged Doji. These tails show that the price tried to break out of that zone but it is pushed back. This proves that these are very strong supply and demand levels.
Using Moving Averages as dynamic levels
Moving Averages (MA) are useful for predicting price movement. MA signals price trends on the chart when they are clearly up or down.
Which are moving averages the best dynamic levels? You can use the MA5, 10, and 20 to get started with intraday price action trading strategies. As for medium and long-term traders, MA50, 100, and 200 are reasonable choices.
Note: The larger the moving average, the stronger the support and resistance there.
When using Fibonacci to find support and resistance levels, we need to pay attention to the most important level of 61.8%. However, depending on the case and the strong/weak retracement of the price, it is flexible to use other levels such as 38.2% or 50%.
At this important level, traders usually expect the price to bounce back. They see it as a support and resistance zone to look for safe entry signals. The most common are reversal patterns like Pin Bar, Engulfing…
There are two important notes for everyone when deciding to use Fibonacci to trade.
Firstly, the core point of using Fibonacci is to find resistance and support levels. Therefore, it is advisable to choose zones of confluence with price movement for the best result.
Secondly, don’t trade with the same Fibonacci level multiple times. As the number of times being tested increases, the possibility of Break Out increases.
Fibonacci retracement is also a good way to identify the support and resistance conveniently. The important supports and resistances you need to watch out for are 61.8, 50, and 38.2.
Identify support and resistance on large timeframes
The support and resistance levels in large timeframes are known as Key Levels by professional traders. Therefore, they should be marked when trading on smaller timeframes. At these key levels, the price reaction is extremely strong offering the best opportunities for you to trade. This is a top-down analysis, looking at the whole forest and then the trees. If you trade H4, identify the support and resistance on D1. If trading H1, identify the support and resistance on H4 first.
In the next section, I will go deeper into how to trade using Price Action in combination with support and resistance. Remember to stay tuned.
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