Trading Support and Resistance is one of the fundamental techniques and concepts of technical analysis. The common approach using this concept is to go long at a close above resistance and to go short at a close below support.
Support and Resistance will begin to make sense of selling at a low and buying at a high when we define it. It is one of the basis tenements of the saying ‘the trend is your friend’. Trading Support and Resistance is one of the simplest technical trading approaches.
So what is Support and Resistance?
On a pricing chart, the troughs are known as support, as they represent a point at where the buying demand is greater than the selling pressure and the decline in pricing recedes.
The peaks on a pricing chart are known as resistance, where the price rise is halted – buying demand has reduced to the selling pressure meaning the price increase trend reverses.
The most obvious support and resistance levels on a pricing chart are previous highs and lows. The inability of an uptrend to exceed a previous price high, or for a downtrend to go below a previous price support level, can be a important sign the trend may be about to change.
Strangely round numbers can often form points of support and resistance. This is most likely due to psychological factors as humans often see them as price targets.
Also, interestingly support and resistance levels can be interchangeable. Once a resistance level is breached, it can form a level of support. Conversely, once a support level is breached, it can form a level of resistance.
Buying and Selling Signals, entry points and Profit targets
A close above a resistance level can mean there has been a change in market sentiment, and that buyers now see value in the price level. The more times a resistance level is tested, then breached, normally means that a larger price move is going to follow. As such, a close above resistance is seen as an entry point.
With the trend of a breakout from support or resistance the idea is to ride that trend until the next level of support or resistance is reached. From this you can form a profit target.
Double and Triple Bottoms and Tops
These are classic forms of support and resistance. Double and triple bottoms are typically seen as a buying signal for an uptrend, and double and triple tops as you might expect a signal for a downtrend.
Trading Support and Resistance is a well tried method for predicting a change in a price trend, which can only help your CFD trading strategy toolbox. Remember, the trend is your friend!