Why are support and resistance levels important tools for traders? They are crucial for identifying entry and exit points as well as managing risk.

For those who are passionate about the world of currency trading, understanding the nature of resistance is one of the skills that must be practiced to mastery. Because when we can see the strengths of the price, it’s like having an advantage over half of the competitors. Not only does it help in finding convenient entry and exit points, but support and resistance also tell us which areas are worth risking and which areas are suitable for chasing profits.

Starting Point: The Deep Meaning of Support and Resistance

Support (Support) and Resistance (Resistance) are not just lines drawn on a chart for aesthetic purposes, but are zones where traders generally agree that the price should stop or that it’s an appropriate area for (Action Zone).

Support is a zone where the price is below the current movement. Here, buyers come in to support the price, preventing it from falling further. Conversely, Resistance is a zone above the current movement, where sellers push the price down, preventing it from rising further.

When resistance is broken and the price escapes, it often turns into a new, stronger support. Similarly, when support fails, it can become an effective resistance.

Why do support and resistance have power: An Economic Perspective

Fundamentally, the price of anything increases or decreases based on the balance between buyers and sellers.

When there is an excess of (Excess Supply), they push the price down until reaching a level where buyers see the price as cheap enough to buy in large quantities. Equilibrium is then established, and this is Support.

Similarly, when there is an excess of (Excess Demand), they push the price up until reaching a level where sellers see the price as high enough to sell. Demand then stops, and this is Resistance.

From a Human Perspective: Why do traders often make the same decisions?

Besides price levels, human psychology plays a crucial role in creating support and resistance. Traders fall into three categories:

1. Old Buyers – They wait for the price to bounce back to cut losses.
2. (Short Sellers) – They intend to buy back when the price reverses upward.
3. Waiting for Success – They have no position yet, waiting for a good opportunity.

When the price drops to a level that old buyers believe the price won’t go lower, all three groups exert buying pressure together, creating support. Conversely, when the price rises to a level everyone agrees is high enough, buyers rush to sell, short sellers sell more, and waiting traders open sell positions, increasing selling pressure until resistance forms.

Key Point: Round numbers (such as $100, $50) are often psychological support and resistance levels because humans tend to think of these figures first.

5 Ways to Find Support and Resistance: Practical Tools

Method 1: Use trendlines to capture movement (Trendline)

For an uptrend, draw a line through successive lows (Higher Low) → support; draw a line through successive highs (Higher High) → resistance.

For a downtrend, draw a line through decreasing highs (Lower High) → resistance; draw a line through decreasing lows (Lower Low) → support.

Method 2: Rely on moving averages (Moving Average)

The moving average reflects the average cost of traders over a certain period, e.g., 50 days = the average cost of traders over the past 50 days.

• In an uptrend, this line acts as support.
• In a downtrend, it acts as resistance.

( Method 3: Measure with Fibonacci retracement )Fibonacci Retracement###

The Fibonacci sequence (0, 1, 1, 2, 3, 5, 8, 13, 21…) reflects natural ratios. Traders use levels 23.6%, 38.2%, 61.8%, and 78.6% to predict support and resistance.

Example: An upward stock trend, when retraced 23.6% at $7.64 → first support.

( Method 4: Price gaps )Gap$10 are areas traders ignore demand.

Prices jump over due to major news. These gaps often become psychological support and resistance because people feel the need to fill the gap.

• Uptrend gaps that are not filled → strong support.
• Downtrend gaps that are not filled → strong resistance.

Method 5: Round numbers (Round Number) are universally perceived.

Prices like $100, $50, $1,000 are the first points traders think of, creating automatic support and resistance due to increased buying and selling interest at these levels.

Practical Application: Three Trading Styles Based on Support and Resistance

Scenario 1: Range Trading (Range Trading)

When prices move between support and resistance without a clear trend, the strategy is:

• Buy at support, sell at resistance.
• Warning: Be cautious of trend reversals during trading.

Scenario 2: Reversal (Reversal)

When prices are in an uptrend hitting resistance, signals may indicate a reversal to downtrend. Sell at resistance. When prices are in a downtrend hitting support, signals may indicate a reversal to uptrend. Buy at support.

Scenario 3: Breakout (Breakout)

When prices break through resistance with high volume:

• Old resistance becomes new support.
• Trading method: buy on breakout or buy on retest of new support without breaking it.

When prices break through support with high volume:

• Old support becomes new resistance.
• Trading method: sell on breakdown or sell on retest of new resistance without breaking it.

Three Common Mistakes When Using Support and Resistance

Mistake 1: Trade Against the Trend

The saying “Trend is your friend” is very true. When prices are in an uptrend, selling at the high point might miss higher prices. Buying in a downtrend might lead to further declines. Going against the trend gives market power to the market itself.

( Mistake 2: Beware of Fake Breakouts )False Breakout###

Often, prices spike above resistance without accompanying volume. The price then swings back. Those who buy on breakouts may suffer losses. Checking volume (Volume) is essential; high volume confirms breakouts. Low volume breakouts are suspicious.

Mistake 3: Don’t Forget to Set Stop Losses

No matter how strong support and resistance are, they can be broken. Always be prepared to exit a position at certain points. Knowing where to give up is key to good entry and exit points.