Support and Resistance - The Strategy
Test the support and resistance strategy
In foreign exchange trading and especially in charting, trading from or at support and resistance levels is a frequently used method. The basis for this are resistance and support levels in the chart pattern of the respective currency pairs or the generally traded values, such as stocks, indices, commodities, etc. As soon as the price reaches one of the levels, this can be interpreted as a sign for the break of a trend and an associated change of direction. Special indicators are not needed with this strategy. Just register an Exness personal area trading account and start using it. Instead, only imaginary lines are drawn in the respective resistance and support areas of the chart.
Advantages of the support and resistance strategy:
- good definition of stop-loss marks
- trading with resistances and supports offers a good success rate
Disadvantages of the support and resistance strategy:
- the take-profit marks cannot always be clearly defined
Application of the resistance and support strategy
- The trading of support and resistance areas is possible for all values and time ranges.
- One speaks of a support area when the price reaches its low at least twice without breaking through it. A horizontal line is formed from the lows. The more often the price reaches this area and bounces back, the more significant the support zone.
- Conversely, resistance zones are those areas where the price touches the high 2 times or more without making a new high. The highs also form a horizontal line.
- If the price does not follow a trend for a certain period of time, it is a consolidation. In most cases, resistance areas with rather small chart bars occur during this period. Here you can use the resistance and support strategy so that the trader trades within the price corridor.
- If the price breaks through a resistance area, this is considered a long signal.
- If the price breaks through a support area, this is a short signal.
- For short positions, the stop loss is set at the high of the last candle before the breakout.
- For long positions, the stop loss is set at the low of the last candle before the breakout.
The two charts show the consolidation. As can be seen, the supports and resistances are tested several times over a short period of time without being broken through. In this case, the stop loss is set as close as possible to the entry point. Although the take profit in both cases cannot be defined exactly, a profit ratio of 2:1 would be possible here without any problems. It is not always easy to find support or resistance in the chart. In this case, the MetaTrader offers indicators that take over this task.
Sometimes the resistance strategy is applied in such a way that the trader opens a short position as soon as the price approaches resistance. He assumes that the price will bounce off the resistance to the downside. Similarly, the support strategy is where the trader buys the underlying as soon as the price reaches the support. It is often called the support strategy.