Support & Resistance with trend lines and horizontals
Support and resistance play an important role in successful trading. These technical levels can be defined by a variety of technical indicators and can be used to select potential good moments to open trades.
What is support & resistance
- The support level is a low price level where the price does not seem to be able to break through.
- The resistance level is a high price level where the price does not seem to be able to break through.
The interesting thing about support and resistance levels is the fact that once these levels are broken, they often change. An old support level can turn into a resistance level and a resistance level may turnin to a support level.
Using horizontal levels (horizontals)
Horizontal levels are very powerful. A horizontal level is a certain price line that has been touched multiple times without being broken. Horizontal levels are so powerful because many traders keep an eye on these levels and use them in their trading decisions; it is expected that the price does not break through this level and because so many traders and investors expect it, if often comes true. You can only draw a horizontal when there clearly have been multiple touches.
Only with a strong horizontal level in combination with the right candlestick is it wise to open a trading position. In the example below, the currency pair USD / JPY was in an uptrend for a longer period already, so in that case you should be looking for a good time to buy or to open along position on this currency pair. Chances of a bounce (the price bounces off a certain price level) are particularly high at a horizontal level. When this horizontal level was tested as a low and the price closed above the horizontal level there was enough reason to open a trade … a trade with a great result!
Wait for a re-test at a breakthrough
Horizontal levels can be very strong sometimes and a false breakthrough is therefore not unlikely. Before opening a position because of a breakthrough, it is therefore recommended to wait for the retest. A retest is a second touch of the horizontal level after which the price bounces from the horizontal level in the opposite direction.
After a breakthrough of a resistance level it is likely the old resistance level will now become a support level. Conversely, this is also the case: after a breakthrough of a support chances are big it will now become a resistance level. Below is an example of a breakthrough and a retest after which I opened a short position.
At first the price was clearly in a consolidation. The price broke the strong support level and now this level is tested by means of train tracks. The price closed below the line, a short position is therefore a good choice in this case!
Trend lines: additional confirmation
Trend lines may be used to determine the general direction of the trend. By drawing a trend line you can determine whether it is smart to buy or sell the currency pair. Furthermore, trend lines can be used for identifying a potential bounce which is a good moment to open a position.
In combination with other technical indicators trend lines are a strong basis for placing trades. Keep in mind that trend lines mainly indicate general price movements and that it is important to use other indicators as well. Trend lines on their own are not very strong, so you better use them in combination with a horizontal level!
Learn more about trends? Read the article about recognizing trends!