Recognising support and resistance levels is a skill that every trader should master. Once you know how to identify these levels, you will see how the price performs near them and you will be able to enter in just the right moment to benefit from trade.
The price will behave differently around support/resistance levels. Sometimes it will bounce back and sometimes it will break out. In this particular guide, we will focus on identifying the breakout of the price and what a trader should do in such a case.
- 1 When will the price break out from the support or resistance?
- 2 When will the price momentum be sufficiently strong to break out from the support/resistance level?
- 3 False breakouts and how to avoid them
- 4 What to do in case of breaking through the support/resistance level?
- 5 Base your transactions on the price trend in order to avoid false breakouts
When will the price break out from the support or resistance?
Just a quick explanation to have a clear situation that everybody knows what are the support and resistance levels. The price seems to fluctuate within some limits. It reaches a specific point and bounces back afterwards. When you will draw a line connecting the lowest price points you will get the support line. If the line will connect the tops, it will be the resistance level. It is not uncommon that the previous support line becomes resistance.
Both levels can be strong or weak. The strength is expressed by the number of times the price reaches the support/resistance level and bounces back. If this number in a certain period of time is high, it will signify the strong support/resistance. If the price bounces just once or several times before breaking through, the levels are weak. To break out from the strong support/resistance level, the price momentum has to be really strong.
When will the price momentum be sufficiently strong to break out from the support/resistance level?
You need to determine the dominant trend first. Use a candlesticks chart to do that. You will know the trend is strong when the candles are large and two or more consecutive candles are of the same colour.
You have every right to anticipate the strong price momentum when some news or economic event are expected. Observe the price just before the news’ announcement and you will see it runs in a specific direction often breaking through the support or resistance levels.
The other signal the price might want to break through the support or resistance is when it fluctuates within a quite limited range. After such a consolidation it has enough power to break out from the support/resistance. Be careful with this one because the price often comes back into the range for a moment and only then breaks through.
Look at the example below.
False breakouts and how to avoid them
False breakouts are the traders’ nightmare. They brought losses to many. We can talk about a false breakout when the price drops back to the range after crossing the support/resistance.
In order to avoid losing money on the false breakouts, you will need to analyze the charts attentively. Notice which trend is developing when the price strikes strong support or resistance level.
Take a look at the example below. The price hits the resistance level but continued in downtrend afterwards. When you see the price’s breakout but it remains beyond the support/resistance (the resistance in our example), it can signify the false breakout.
Look at the solid reddish candle that breaks a newly created support level (before it was resistance). It indicates a downtrend and this is the right moment for you to enter a short position cause it was an only false breakout of resistance line.
What to do in case of breaking through the support/resistance level?
If the price breaks through a weak support/resistance you can expect the trend to continue in the same direction. In the case of a strong support/resistance consider how the price behaves when it touches this level.
If you look at our snapshot above, the price usually develops a downtrend. If the breakout occurs, wait until the market behaves like it did when prices hit the support/resistance. That is the time to enter the trade based on the developing trend.
False breakouts happen and there not too much you can do about. There is a theory which says that they occur when big market players want to sell high or buy low. To do that they need to push the price to break resistance or support. So when price breaks the resistance and then goes back with a strong move, you can try to join sellers.
Base your transactions on the price trend in order to avoid false breakouts
As it was said before, it is important to know how the price moves when it reaches the support/resistance level. It will help you to make a good transaction when it happens again.
To gather this knowledge, you have to read the chart carefully. My advice is to use a larger timeframe chart than your trading interval. Let’s say you are trading 5-minute candles. I would recommend using at least a 30-minute chart. It may be a 1-hour chart as well.
Sometimes the price breaks out from the support/resistance level often. It could be a good idea to use extra help of some additional tools and indicators. Like this, your trades will be more appropriate.
You may, for example, try the Olymp Trade Bollinger Bands indicator or one of the well-known oscillators to help you to determine oversold and overbought areas. It can improve the performance of your market decisions.
It is crucial to identify the support/resistance level and act accordingly. But it does take a lot of patience to master this skill. Your goal is to define the right moment to enter the trade after the breakout of the price.
To learn is to practice. Do not hesitate and open an Olymp Trade demo account. There you can check for yourself how the price behaves after the breakouts, when the false breakouts occur and what you should do next. Tell us all about it in the comments section below.
Have a good trading experience!
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