Trading based on Support and Resistance levels

by Vivek Bajaj on Basic Technical Analysis, Technical Analysis, Trading Terms, Rules & Strategies

— 3 minutes read—

One day someone had told me that one cannot trade based on Support and Resistance levels.

But this is not true at all.

One can definitely trade based on support and resistance levels.

Support is an area where the prices of any types of assets tend to stop falling.

Resistance is an area where the prices of any types of assets tend to stop rising.

But knowing just these definitions will not help you in your trading.

Traders need more information than these definitions for making trading decisions based on support and resistance.

In order to use support and resistance effectively, one needs to understand how does the prices move of a particular asset for interpreting support and resistance from this framework.

One should also need to know about the major and minor support and resistance levels.

Minor support and resistance can be broken whereas strong support and resistance may stop the prices to move in the ongoing direction and cause reversals.

1. Minor and Major Resistance and Support levels:

Minor Resistance and support levels don’t hold the prices.

Suppose in the uptrend the price will be making higher high suddenly there will be a little pullback and then it will continue to make higher highs.

This pullback can be considered as the minor support area as the price bounced back from that area.

Also Read: A comprehensive study on Support and Resistance

These areas of minor support and resistance provide opportunities for increasing your holding.

Major Resistance and Support levels are those areas which create trend reversals.

When the prices are making higher highs and are in an uptrend, then reversed into a downtrend, the area at which the reversal took place can be considered as a major resistance level.

Also Read: Applying Mental Models to understand Support and Resistance

2. By using Trend lines:

You can identify support and resistance levels by using trend lines.

In an uptrend, the prices make higher highs and higher low whereas in the downtrend the prices make lower lows and lower highs.

To draw a trend line you need to connect the high and low.

Extend the trend line to see if there is a potentiality of prices to find support and resistance.

These trend lines provide visual flow whether the market is in downtrend or uptrend and in the future what could happen.

 Support and Resistance levels

On the charts of Tata Motors, we have drawn a trendline from the high to the low point and also plotted 100 and 200 Moving Averages.

We can see how the trendline is forming a resistance to the prices and eventually the prices break from the trendline as well as the 100 moving average along with volume signalling reversal.

3. Trading decisions based on new Support and Resistance levels:

When the prices are in an uptrend, then the last low and the last high prices are very important.

If the prices start making a lower low, then it indicates trend reversal may take place.

But if the prices continue to make higher high then the uptrend is confirmed.

One should mark the relevant and current major support and resistance levels as they may become important when the prices approach that level.

Also one should mark the relevant and current minor support and resistance levels which will help you in analysing the current trends, chart patterns and ranges.

You should keep drawing new support and resistance level and delete the old support and resistance levels which are no longer important as the prices have already broken through them.

Key Takeaways:

  • Minor Resistance and support levels don’t hold the prices.

  • These areas of minor support and resistance provide opportunities for increasing your holding.

  • Major Resistance and Support levels are those areas which causes trend reversals.

  • The trend lines provide visual flow whether the market is in downtrend or uptrend and in the future what could happen.

  • One should mark the relevant and current major support and resistance levels as they may become important when the prices approach that level.

  • One should also mark the relevant and current minor support and resistance levels which will help you in analysing the current trends, chart patterns and ranges.


Disclaimer

Elearnmarkets.com wants to remind you that all our content is created solely for the purpose of education. No strategy, stock, commodity, fund or any other security discussed here is any way a recommendation for trading or investing. Elearnmarkets.com will not be any way responsible for trading losses incurred by any individual or entity for trading with real money. Please take advise of certified financial advisers before trading or investing.

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