The significance of support and resistance levels is huge for traders who depend a lot on technical analysis. Lines of support/resistance levels help to determine when the price fluctuates over a certain period of time.
Thanks to knowing these two levels, a trader can easily recognize the potential points of trade entry. Also, he can predict the trend reversal.
Support/resistance levels have yet one more advantage. They may be smoothly used together with other indicators. Thus, the likelihood of opening a successful trade increases.
And last but not least, it is really effortless to use them in trading. I will demonstrate this to you in the present guide.
Key Takeaways🔑
| →Support and resistance levels are crucial in technical analysis, providing potential points for trade entry and trend reversal prediction. |
| →These levels can be effectively combined with other indicators, enhancing the likelihood of a successful trade. |
| →Applying support/resistance levels is uncomplicated, making them a handy tool for traders at all levels of experience. |
Contents
A review of Support and Resistance
Let’s start with the support level. It will be showing the lowest price performance on the chart over a given period of time. If you take, for example, 1-hour period, you will be able to distinguish the lowest level reached by the price before its rebound. You need to connect at least two lows to get a proper support line.
Now, let’s move to the resistance level. In the opposition to the latter, it will show the highest performance of the price during a certain period of time. In the 1-hour period, you will notice a level which the price reaches repeatedly until it rebounds again. Like in the previous case, you have to join at least two highs.
Please note that the price points don’t need to be precisely the same. It is enough if they are in the same price range. Moreover, sometimes the support/resistance line might not be horizontal. It is possible to draw support/resistance lines during an uptrend or downtrend and then, they will join the higher lows or lower highs. But let’s not focus on this now.
Drawing lines at Olymp Trade
The most effortless method of drawing the support/resistance lines at Olymp Trade is through ready graphical tools. Take a look at the picture above.
First, you click on the graphical tools feature (1). Then, select the “Horizontal Line”. The line will appear on your chart. Now you only have to place it in the right spot. Connect at least two lows if you are drawing the support line, or two highs if you want the resistance line. Click and it will stay there.
You can change the color and the width of the line if you wish. To do that, click on the pen icon first, then change the parameters.
The other way is to use a trend line. You choose it the same way, which means you click the graphical tools feature and then select “Trend line”. You choose the place where you want your line to start and then, you extend it horizontally until the point where you want your line to end. That is the difference between using the “horizontal line” and “trend line”. The first one is infinite in both directions on the chart. The second one is limited.
Things to keep in mind while trading support and resistance levels
The support/resistance is said to be strong if your line connects more than two price points. And when eventually the price breaks from the support/resistance level, the emerging trend will typically be strong.
When you encounter support or resistance that is strong, so the line touches many lows or highs, it will probably continue for a while within boundaries. And therefore, price action trading is a solid technique in this phase.
We would say the support/resistance is weak when the price breaks often from the drawn lines. The predictability of the market is thus low and consequently, price action trading won’t be the best choice here.
What does happen after the price breaks out the support/resistance levels? Well, the new support/resistance is created. Usually, the former support level turns into the resistance or the resistance change into support.
Pros and Cons of Using Support and Resistance Levels in Trading😃😞
Pros:
- Helps to determine potential trade entry points and trend reversals.
- Can be easily combined with other technical indicators.
- Useful for traders of all levels due to their simplicity.
Cons:
- Market unpredictability can sometimes result in breaches of these levels.
- In case of frequent breaches, these levels can become weak, leading to lower predictability.
- They require practice and experience to be used effectively.
Trading with Support and Resistance Levels vs Trading without Them
| Trading with Support/Resistance Levels | Trading without Support/Resistance Levels |
|---|---|
| Potential points for trade entries and trend reversals are easier to spot. | Determining entry points and trend reversals may be more challenging. |
| Can increase the likelihood of successful trades when combined with other indicators. | Might need to rely more heavily on other indicators or market analysis methods. |
Using support and resistance during trading at Olymp Trade
When you look at the above chart, you will surely notice that the support and resistance level is pretty strong. This is why the odds of breaking a price from these levels are low. The time to place a position is at the moment when the price is touching the support/resistance line.
The levels are strong so you can enter the long-lasting position (about 5 minutes.) Whenever we are talking about price reaching the support line, you enter a buy position. When the price meets the resistance, you ought to enter a short position.
To summarize, the skill of recognizing and then drawing the support and resistance lines is of great importance. Every trader should learn it. Especially that as you could see, it is not a complicated task. On the other hand, the benefits from trading with support/resistance levels are incredible.
Train drawing support/resistance lines on the free Olymp Trade practice account. Trade with them. See, what profits it will bring. Then, move to the real Olymp Trade account. Share your experience with us in the comments section.
We wish you high profits!
Common Questions about Using Support and Resistance Levels on Olymp Trade
- Q: How accurate are support and resistance levels in predicting market trends? A: While these levels can provide useful insights into potential market trends, they are not infallible, especially in highly volatile markets.
- Q: Can these levels be used for both short-term and long-term trades? A: Yes, but keep in mind that their effectiveness may vary depending on market conditions and the timeframe of your trades.
- Q: How can I practice using support and resistance levels effectively? A: Olymp Trade’s demo account is a great place to practice without risking real money.
- Q: Do I need any special tools to use these levels? A: No, the Olymp Trade platform provides all the necessary tools to draw and use these levels.
- Q: Can I trade without using support and resistance levels? A: Yes, these are just tools to help you understand the market better. You can use other strategies or indicators depending on your comfort level and understanding of the market.