Drawing support and resistance is dependent on the market structure.
So, the question is are you using the right support and resistance in a certain market?
Support and resistance plays a big role in your success as a trader. As a trader you can’t do without support and resistance.
You can’t just stare at your chart and buy when you see a bullish candle and sell when you see a bearish candle. If you do that, you will loose money consistently. Support and resistance are key levels. They are liquid levels where buyers and sellers are lined up.
They are willing to trade their money at these levels because these levels are opportunities to make profit.
Market structure works hand in hand with support and resistance. Sometimes the market is trending, sometimes its volatile or ranging. These different market behaviors call for certain types of support and resistance.
You don’t want to apply these levels to the wrong structure. That will lead to bad analysis and loosing trades.
Types of support and resistance.
- Traditional support and resistance
This type of support and resistance is applied in a volatile market. A volatile market is a directionless market. You can’t really say the bulls are in control neither the bears are in control.
There are so many up and down swings in the market. There are a lot of unnecessary highs and lows forming in the marketplace. When applying traditional support and resistance, you want to pick the significant high and lows.
- Stepping support and resistance
Stepping support and resistance is applied in a trending market. It could be an uptrend or a downtrend. In an uptrend the market forms higher highs and higher lows. These previous highs and lows becomes a level of importance. In a downtrend the market forms lower lows and lower highs. The previous lows and highs becomes key levels.
- Containment support and resistance
This type of support and resistance is simply when a support and resistance are both drawn to contain a price consolidation. The price moves up and down within an area.
This consolidation market can be utilized by using the range trading strategy. This type of support and resistance are utilized by range traders.
- Moving average
A moving average is an indicator that shows the average of price within a given time limit. These moving averages can be used to tell the behavior of the market( if it is trending or ranging).
It is also used for support and resistance in trending markets only. This time limit is the traders choice. The mostly used averages are 20, 50, 100 and 200 day moving average. Your choice is depending on what you want. The 20 MA is for a short term analysis. The 50 MA is for a medium term analysis while the 100 MA and 200 MA is for a long term analysis.
Trend-lines are almost similar to moving averages. They act as support and resistance. They work in only trending markets.
In an uptrend, you draw an upward trend-line to connect the obvious lows. In a downtrend, a trend-line is drawn to connect the significant highs.
In a down-trend, you draw an downward trend-line to connect the obvious highs.