If you have a good understanding of how support and resistance works, your trading results will become excellent.
A trader cannot be successful without support and resistance, whether you trade currencies, stocks, commodities or any other financial instrument.
Support and resistance trading is a strategy that is been implemented by millions of traders all over the world.
Before I talk about these challenges. Let us define what support and resistance is.
What is support and resistance?
Think of support and resistance as jumping on a trampoline.
The trampoline acts as a support level which exerts an upward force on you while gravity acts as the resistance level that exerts a downward force on you.
Anything that goes up, comes down right?
Support is an area on your chart where there is buying pressure. It is expected that when price reaches a support level, buyers will shoot the price up just like a trampoline will shoot you up whenever you jump on it.
Resistance is an area on your chart where there is selling pressure. As price approaches a resistance level, it is expected that sellers will push the price down just like gravity will bring you back down whenever you jump up.
Why you should start trading with support and resistance now?
Support and resistance is where all the trading opportunities lies. If you are looking to buy any financial instrument, your eyes should be on the support level or if you are looking to short the market you should be focusing on the resistance level.
These support and resistance levels are liquid zones. A trader needs liquidity to profit consistently from trading the markets. When you position yourself to trade these different types of support and resistance (liquid levels) you stand to make a lot of money from the market.
What are the limitations of these support and resistance levels?
Support and resistance tells you a lot about buyers and sellers because it is where buyers and sellers are lined up.
But these levels will not tell you whether to buy or sell. In order trade support and resistance effectively. You need to understand price action concepts such as market structure, market psychology, chart patterns, candlestick patterns and implementing multiple timeframe analysis.
There are 3 things that can happen when price reaches a support and resistance level.
- Price changes direction
- Price consolidates around support or resistance level
- Price breaks the support or resistance level
It is expected that you buy at a support level and you sell at a resistance level but it is not a guarantee that when price reaches a support or resistance level, it will change its direction.
The limitations of trading support and resistance is that price might consolidate around the level or price will break the level.
However, these limitations lead to other trading opportunities such as breakout trading, range trading and trading a false breakout.