How to trade Support and Resistance levels?
BTCUSDTPERPSupport and resistance levels - are price areas on the chart where the price has ever changed its direction. This place always attracts traders, because near the levels there are obvious places for setting stop losses and entering a trade. Also, there are always limit orders of large buyers or sellers near the levels.
We can say that the level is the price area in the market, where traders consider the price to be too high or too low, depending on the current market dynamics. Therefore, it is always important to pay attention to key levels at which support and resistance have reversed roles or there has been a strong price rebound. We can designate support and resistance levels as the place in the market where traders are more willing to buy or sell, depending on current market conditions. This creates a collision zone between buyers and sellers, which often causes the market to change direction.
What are levels?
Support level is an area on the chart with the potential strength of buyers. The moment when buyers enter the market. The resistance level is an area on the chart with the potential strength of sellers. The moment when sellers enter the market with a large volume, which allows them to take advantage of the buyers and stop the price increase.
When the price breaks the support level, the support becomes resistance.
Conversely, if the price breaks through the resistance level, the resistance becomes support.
- On higher timeframes, support and resistance levels gain more strength. It is important to pay attention to the nature of the price movement from the level:
- If the price immediately turned from the level into the opposite trend, then this level can be considered significant.
- If the price tests a certain area several times, making a small pullback, most likely, this level will be subsequently broken.
How to draw levels on the chart?
Support and resistance levels are not lines on the chart, but areas or zones. No need to try to draw them exactly according to the shadows or bodies of the candles. Strive to achieve the maximum possible number of price touches of the levels. This will usually require you to move the level up and down until you find a spot where the market touches that level the maximum number of times.
You do not need to rewind the chart far to mark all the important levels. Most often, traders look only at the current monitor screen. Therefore, 100-150 candles will be enough. Most of the levels you will need will be based on price action over the past six months.
Focus on key levels that are immediately visible. Don't draw too many levels on the chart. Try to keep only the main ones and discard the secondary ones. If you find yourself wasting too much energy looking for levels, you are probably drawing more levels than you really need.
How to use support and resistance levels in trading?
A level is a place for a possible entry into a trade. If an additional confirming signal appears at the level, you can think about opening a position. Stop losses are placed by levels and possible targets for profit fixation are determined.
In books on technical analysis and on the Internet, you can often read that the more often the price tests the level, the stronger it is. But this is a gross mistake. In fact, the more the price touches the level, the weaker it becomes.
Imagine that we have a support level. The price bounces from this level because there are buyers in the market. If the price often returns to the level, this means that buy orders are gradually being executed. And when they are fully executed, then who will buy? Therefore, when there are no buyers at all, the price breaks through the level.
It is important not to forget that support and resistance levels are, first of all, zones, and not exact lines on the chart. Otherwise, you may encounter two problems in your trading: the price does not reach the level and the price goes beyond it.
When the market gets close enough to the level without hitting it, you may miss the trade because you were expecting a trading setup to appear exactly at the level you chose.
In a situation where the price goes beyond the level, you think that the level has been broken out and you try to trade the breakout, but this often turns out to be a false breakout.
How to solve these two problems? Very simple. Always treat support and resistance as zones on your chart, not exact lines.
How to find out what will break the level?
As we already know, support is an area with potential buying pressure. Therefore, when the price approaches the support level, it should turn into the opposite trend. But what if this does not happen and the price starts consolidating at the support level?
This is a sign of weakness as the bulls are unable to forcefully push the price up. Or there is strong selling pressure in the market. In any case, this situation does not look optimistic for the bulls and the support will probably not be able to resist.
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