6 reasons support resistance is important; why support resistance is tricky
The concept of support and resistance is so important to trading because support resistance:
- Is created by human psychology
- Levels are associated with greed and fear
- Support and resistance makes prices go zig zag
- Leads to emergence of chart patterns
- Deal with entry levels, target price, stop loss
- Is elusive
On hindsight, it is always easy to spot support resistance levels yet identifying the right one ‘at-the-moment’ requires a lot of experience and some leap of faith.
In this article, we will zoom into one aspect of support resistance levels:
- Should levels be taken as a single value or should they be treated as a zone?
- Which is better?
- What are the trading psychologies associated with which.
Are support resistance zones or levels better? Inviting participation
I am inviting students to participate by logging in to comment. In this relatively straight forward quiz, three(3) qualifying participants# (to be decided by me based on clarity and correctness of answer) will receive one(1) voucher worth $40/- each to attend 4M or BP class. Cut-off 12 September 2pm.
UPDATE: Treating support resistance as a zone best approach
- Because of differences analysing, trading the market as well as different price feeds, tools available, each trader arrives at one value for support resistance level.
- Stitch these values for the millions of people trading in the forex market together, even a level that most traders consent to becomes a contiguous zone.
4 tips to trade support resistance zones
- Instead of drawing support resistance levels with 1 line only, draw a zone with two lines: first line based on line chart (which gives closing price) second line based on highest or lowest price tail of candlesticks.
- Associate the zone with congestion and increased price volatility. Until price moves out of zone decisively, it can go in any direction so refrain from any kind of ‘all in’ strategy.
- Never play ‘breakout‘. For each successful breakout, there are many other false breaks that mark stop hunting, bull/bear traps etc.
- When prices are caught inside support resistance zones, best strategies to employ include A) fade false breakouts B) trade reversal setup C) wait for retracement to enter if a real breakout is expected.
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.