Complete Explanation of Support & Resistance
How to Accurately Determine Support and Resistance
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As a researcher focused on market analysis, I often witness how traders—especially those just starting out—jump too quickly into complex indicators without understanding the primary foundation. Yet, this foundation is simple but powerful: Support & Resistance.
If you want to understand why price moves, when to enter, and when to exit, mastering the concept of Support & Resistance (S&R) is the first step you cannot ignore. This is one of the most fundamental, honest, and frequently used concepts by professional traders around the world.
In this article, we will thoroughly explore what Support & Resistance is, why these levels work, and how you can effectively use techniques on How to Determine Support and Resistance in your trading strategy. Prepare yourself for a clear and straightforward guide.
What Is Support & Resistance? A Simple Definition
To understand Support & Resistance, imagine market price like a ball bouncing inside a room.
1. Support Level (Floor)
The Support level is a price level where buying pressure (demand) is expected to be strong enough to overcome selling pressure (supply), thereby stopping or reversing a price decline.
- Analogy: This is the floor. When the ball (price) hits the floor (Support), it tends to bounce back up.
- Market Psychology: At this level, traders who previously missed a buying opportunity feel regret and enter the market. Additionally, many buy orders are already placed automatically at this level, creating a price "cushion."
2. Resistance Level (Ceiling)
The Resistance level is a price level where selling pressure (supply) is expected to be strong enough to overcome buying pressure (demand), thereby stopping or reversing a price increase.
- Analogy: This is the ceiling (or roof). When the ball (price) hits the ceiling (Resistance), it tends to drop back down.
- Market Psychology: At this level, traders who already hold buy positions start taking profits (profit-taking), while new traders see it as an ideal opportunity to open sell positions (short).
Important to remember: Support and Resistance are not rigid single price lines. These levels are more accurately described as zones or areas because price rarely bounces from the exact same number perfectly.
Why Is Support & Resistance So Effective?
The power of Support & Resistance lies in two main factors: market psychology and collective memory.
1. Collective Trader Memory
The market is driven by human emotions and decisions. When price reaches a certain level in the past and reverses, traders tend to remember that level. When price approaches the same level again, these traders will react in the same way (buying at past Support or selling at past Resistance).
2. Unfulfilled Orders
S&R levels often become places where many Stop Loss and Limit Orders are clustered.
- If price previously broke through Support, traders who sold might place their Stop Loss above that old Support (which has now become Resistance).
- Conversely, traders who failed to buy at Support the first time will try again when price returns to that level.
The interaction between these orders creates a critical moment where the market "decides" whether to bounce or break through the level.
How to Accurately Determine Valid Support and Resistance
Precise identification requires a keen eye and a clear understanding of market context. Before you can draw S&R, you must know how to determine the ongoing market trend, because these levels are strongest when opposing the main trend direction.
Here are the most common and reliable methods for how to determine effective Support and Resistance:
1. Swing Highs and Swing Lows
This is the most basic method. A Swing High is the highest point reached by price before turning down, and a Swing Low is the lowest point reached by price before turning up.
- The clearest Resistance levels form at Swing Highs.
- The clearest Support levels form at Swing Lows.
When you look at a chart, focus on points where price reverses significantly. A horizontal line connecting two or more of these significant turning points represents strong S&R.
2. Higher Time Frames (Multitimeframe Analysis)
S&R drawn on larger time frames—such as H4 (4-hour), Daily, or Weekly—is far more significant and valid compared to S&R on small time frames (M5, M15).
As an analyst, I always suggest you start your analysis on the Daily or Weekly chart to identify "major" S&R levels before switching to smaller time frames to look for precise entry points.
3. Round Numbers (Psychological Levels)
Round numbers like 1.20000, 100.00, or 1.5000 often act as S&R levels because the majority of traders, especially large institutions, tend to place orders around these psychological figures.
4. Chart Patterns and S&R
S&R is also a key element in recognizing popular chart patterns. For example, in a Double Top or Double Bottom pattern, the Support or Resistance line connecting the middle point of the pattern is called the Neckline, and its breakout is decisive for future price direction.
The Golden Rule: Role Reversal
One of the most important and frequently overlooked aspects of Support & Resistance is the concept of "Role Reversal."
When a Support level is convincingly broken by price, that level does not disappear; it transforms into new Resistance. Conversely, when Resistance is broken, that level changes into new Support.
Why does this happen? When Resistance is successfully broken to the upside, traders who sold at the old Resistance (who are now in a losing position) will wait for price to return to that level to exit with minimal loss. New buy orders will pile up from traders who believe the breakout is valid. This combination of actions creates strong Support at the newly broken Resistance level.
This phenomenon—Resistance now becomes Support or Support now becomes Resistance—is a highly reliable way to confirm level validity and find strong entry points.
Using Support & Resistance in Trading Strategies
Mastering how to determine Support and Resistance allows you to make smarter, data-driven trading decisions.
1. Entry
- Bounce Strategy (Reversal): Buy when price bounces from Support, or Sell when price bounces from Resistance. Always wait for candlestick confirmation or price patterns before entering.
- Breakout Strategy: Enter immediately after price breaks a significant S&R level (ideally with high volume), or safer yet, wait for a retest (price testing the S&R level that just changed roles) before entering in the direction of the breakout.
2. Risk Management (Stop Loss)
S&R is your best risk management tool.
- If you buy at Support, place your Stop Loss (SL) slightly below that Support. If the Support is broken, your strategy is wrong, and you must exit.
- If you sell at Resistance, place your SL slightly above that Resistance.
3. Profit Target (Take Profit)
Use the next S&R level as your Take Profit (TP) target.
- If you buy at Support, the next Resistance is your logical TP target.
- If you sell at Resistance, the next Support is your logical TP target.
This way, you keep your Risk/Reward (R:R) ratio healthy and structured.
To see how all these concepts apply in real-world scenarios, you can view examples of trade analysis using Support & Resistance.
Conclusion: Your Analysis Pillar
Support & Resistance is a simple tool, yet it possesses extraordinary predictive power because it is rooted in human psychology. It is not just lines on a chart; it is a visual representation of points where buyers and sellers have differing views and battle for market control.
Remember, mastering How to Determine Support and Resistance takes time and practice. Never expect instant riches. Focus on your precision in identifying zones, not just lines. Once you are proficient in Support & Resistance, you have built the strongest pillar in your technical analysis journey. Keep practicing, and keep your risk under control.
May this analysis empower you to view charts with a sharper eye.
By: FXBonus Team
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